Press Release No. 07/304

Press Release No. 07/304

An IMF mission led by Mr. Lorenzo Giorgianni visited Ankara December 16-21, 2007 for discussions with authorities on the Seventh Review under Turkey's Stand-By Arrangement. The mission met with Economy Minister Şimşek, Treasury Undersecretary Çanakcı, Central Bank Governor Yılmaz, as well as other cabinet members. The following statement was issued today in Ankara by Mr. Giorgianni in the context of a press conference:

"I am pleased to say that we have reached ad referendum understandings with the authorities on a package of policies that should pave the way for the completion of the seventh review under Turkey's Stand-By Arrangement with the IMF.

"Discussions took place against the backdrop of an increasingly challenging external environment with financial uncertainty and inflationary pressures rising on a global scale. Turkey has so far managed to weather the storm. However, there have been recent signs that the pace of economic activity has moderated and that the disinflation process has slowed. There was consensus during the discussions that, to overcome these challenges and to preserve investor confidence—which is all the more important in light of Turkey's large current account deficit—the fiscal position needs to be strengthened and structural reforms energized. Let me describe what in my view are the main aspects of the authorities' proposed policies for the year ahead.

"First, central bank has indicated that the gradual easing cycle that started in September will remain strictly conditional on favorable developments and data. The disinflation process has recently slowed due to unanticipated spikes in volatile energy and food prices as well as increases in petroleum and tobacco taxes. These effects are expected to exert some upward pressure on headline inflation in the coming months. The central bank intends to monitor closely the extent to which these effects prove to be of a temporary or persistent nature, and accommodate the former but not the latter. We support this approach and look forward to continued progress on the disinflation front, as achieving a low and stable inflation rate is critical for reducing interest rate volatility and sustaining growth.

"Second, fiscal policy will be tightened by over 1 percent of GNP relative to 2007. This is important to create room for lower real interest rates while assisting disinflation and current account adjustment. As we have previously stated, we support the 2008 primary surplus target of 5½ percent of GNP. In this regard, we commend the authorities for restraining spending in the recently approved budget and stepping up tax collection efforts. These steps together with the authorities' commitments to restore the finances of energy enterprises and delay beneficial but costly labor tax cuts are very encouraging as they lend credibility to the 2008 primary surplus target.

"Third, wide-ranging fiscal reforms will be implemented in the coming months. The ultimate goal of these reforms is to create space to allow easing Turkey's heavy tax burden without jeopardizing the goal of further reducing public debt ratios to a safer zone. In this connection, we welcome the authorities' intention to restore the viability of the social security system and step up efforts to combat tax evasion. Simply put, containing fiscal pressures helps boost long-term growth by reducing financial risks and making tax cuts affordable down the road.

"Fourth, to anchor fiscal reform efforts and increase the predictability of fiscal policy, a medium-term fiscal plan has been adopted. In concrete terms, the authorities will target a path for the next 5 years for expenditures and the primary surplus, consistent with bringing the net public debt ratio below 25 percent of GNP by 2012. We fully support this plan. Indeed, in our view, Turkey would benefit from going a step further and anchoring this medium-term fiscal plan to an explicit fiscal rule that aims to restrain spending growth. If complied with, a rule can boost policy credibility and help reduce risk premia and interest rates.

"Fifth, energy sector reform will take center stage in the coming months. The energy sector faces a number of interrelated problems, including large losses and chronic underinvestment. As a result, there are now risks of power shortages in the near future, which could hinder economic activity. The authorities recognize this and intend to accelerate reforms in this area. Their proposed measures include adopting a mechanism that eliminates discretion in setting tariffs. The authorities also intend to increase private sector participation in the energy sector. We trust that the authorities will move expeditiously in this area.

"In conclusion, with these policies in place, Turkey stands a very good chance of overcoming the economic challenges it faces and successfully complete the Stand-By Arrangement expiring in May 2008. In the period ahead, the government intends to implement a number of actions to help underpin their policy package. Provided that these steps are taken in a timely manner, the IMF Executive Board is expected to consider the completion of the seventh review in February."