Statement to the press by IMF First Deputy Managing Director Anne O. Krueger on Turkey

Press Release No. 06/147
June 29, 2006

Ms. Anne O. Krueger, First Deputy Managing Director of the International Monetary Fund (IMF), issued the following statement today at a press conference following the conclusion of the Turkish Investment Advisory Council in Istanbul:

"First, let me thank Prime Minister Erdoğan for inviting me to today's Investment Advisory Council meeting. I am also grateful to the World Bank and the Turkish Treasury for helping organize today's event.

"We have been meeting at an important moment for the Turkish economy. The economic reforms that have been implemented in recent years have already brought significant benefits. This is an economy which has grown on average by over 7½ percent a year for the past four years, with labor productivity increasing by a cumulative 23 percent. Inflation had fallen to 8 percent by the end of last year—the first year for three decades that it had been in single digits. Sound monetary and fiscal policies—including a primary surplus of more than 6 percent for three consecutive years—have transformed the economy.

"There have been important reforms to the banking system. Remarkable progress has been made on privatization, raising more than US$20 billion in proceeds for debt reduction. And most recently we have seen passage of landmark social security reform legislation that is expected to put the finances of the social security system on a sustainable footing for the long term.

"The cumulative impact of these reforms has been to raise Turkey's growth potential and to make it more resilient to outside shocks. In recent weeks, conditions in global financial markets have become distinctly less accommodating for emerging markets. In reality, the extended period of remarkable calm we experienced in global markets in recent years, buoyed by plentiful liquidity, has been the exception rather than the rule. We are now witnessing the return, I believe, of more normal cyclical conditions, where markets can move sharply in response to perceptions of relative risk and inflation expectations. The implication for all countries, especially those like Turkey that are reliant on external financing, is that the continuation of strong and balanced growth will depend critically on steadfast policy discipline.

"Against this background, I have been reassured by the stance the Turkish government and central bank have adopted in the face of evolving market conditions. The government has reaffirmed its commitment to fiscal prudence. It has taken decisive measures to keep public spending firmly in line with its approved budget. Given the expectations that revenue may over perform, these measures should result in a primary surplus above 6½ percent of GNP.

"The central bank, for its part, has acted forcefully in response to the recent pick-up in inflation, and indicated its determination to adhere to the medium-term inflation targets. This coherence and resolve in macroeconomic policy is vital for the continued success of the Turkish economy, for foreign investors, and for the Turkish people as a whole.

"From a medium-term perspective, the prospects for Turkey's economy remain bright, especially in view of the government's commitment to continuing economic reforms. There is much work still to be done, of course, to continue to modernize and improve the competitiveness of the Turkish economy. Many good ideas in this respect have been discussed during our meeting today. Let me emphasize just two from among the key priorities as we see them.

"First, is the need to take further steps to make Turkey's tax system more efficient. Considerable progress has been made here over the past year, with the broadening of the corporate income tax base and a 10 percentage point reduction in the CIT rate, to a level—at 20 percent—that is quite competitive by international standards. The personal income tax regime has also been streamlined and further reform is planned for later this year. But high tax rates in several areas, especially on employment, remain a drag on competitiveness. A principal reason is that roughly half the economy is evading the tax net altogether. To create room for tax rates to be reduced and make for a more equitable system, it is essential that compliance be improved and that no further sectoral tax breaks are extended. Strengthened administration and enforcement should therefore be a top priority.

"Second, the economy needs further relief from the burden of regulation. The labor market is an important case in point, as evidenced by the persistence of high unemployment in Turkey. Greater flexibility on aspects such as severance pay, fixed term contracts, and temporary employment would encourage job creation as well as higher productivity, and I would encourage the government to consider new reforms in this area.

"The recent market turbulence has been a timely reminder both of the benefits of the commitment to the policies that will deliver macroeconomic stability and of the importance of continuing the economic reform program. The more rapidly progress can be made, the more resilient the Turkish economy will be."



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