Turkey and the IMF
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The Executive Board of the International Monetary Fund (IMF) today completed the first and second reviews under the three-year SDR 6.66 billion (about US$9.46 billion) Stand-By Arrangement with Turkey approved on May 11, 2005 (see Press Release No. 05/104). The Board also granted Turkey's request to waive the nonobservance of end-September performance criteria pertaining to base money and the primary balance of the consolidated government sector, as well as end-June structural performance criteria relating to passage of the banking and pension reform laws.
Completion of the review will enable Turkey to draw immediately an amount equivalent to SDR 1.11 billion (about US$1.58 billion).
Following the Board's discussion, Ms. Anne O. Krueger, First Deputy Managing Director and Acting Chair, made the following statement:
"Turkey's economy continues to perform well. Growth has moderated in line with program assumptions, inflation is in single digits, and the public debt burden is being reduced steadily. The authorities' adherence to prudent macroeconomic policies has played a key role in supporting these developments. The main challenge to the economic outlook is the widening current account deficit, which has been driven by increasing oil prices and strengthening of the lira.
"The authorities' response to the current account developments—a strong 2006 budget, a gradual easing of monetary policy, and stepped-up reserve accumulation—has been appropriate. Given uncertainties to the external outlook, the authorities should ensure that fiscal policy implementation remains consistent with achieving the public sector primary surplus target of 6½ percent of GNP and that revenue overperformance is saved. Should the current account deficit not stabilize as expected, the authorities will need to respond with an appropriate set of policies, including fiscal tightening.
"The authorities' structural reform agenda will complement these prudent macroeconomic policies and should help sustain economic growth and reduce vulnerabilities. In this regard, efforts to rein in the rising social security deficit will be key. In the short run, priorities are to address growing health spending and implement in full the agreed framework for strengthening social security collections. Ensuring the long-run viability of the social security system will require fundamental changes to the pension system. While delays in this area are unfortunate, the authorities' commitment to accelerating social security reforms is welcome. Elsewhere, progress on improving both the personal and corporate income tax structures is commendable, but greater efforts are needed to strengthen tax administration. On the financial sector side, while steady progress is being made to strengthen bank supervision and resolve Saving Deposit Insurance Fund assets, state bank privatization needs to keep pace.
"The central bank's cautious approach to interest rate cuts is appropriate given next year's more challenging inflation outlook. In this context, the central bank's adoption of formal inflation targeting is welcome. The central bank should also continue to take advantage of favorable market conditions to augment further its international reserves, while remaining fully committed to a flexible exchange rate.
"The authorities' commitment to implementing the revised program in full is welcome and should help sustain Turkey's current good economic performance. However, taking into account Turkey's still high public debt and its relatively short maturity, the authorities should continue to take advantage of the current benign global environment to lengthen borrowing maturities further and ensure that policies are consistent with attracting foreign direct investment. The authorities' strong efforts deserve the continued support of the international community," Ms. Krueger said.
IMF EXTERNAL RELATIONS DEPARTMENT