Press Release No. 08/106

Press Release: IMF Executive Board Completes Seventh and Final Review Under the Stand-By Arrangement for Turkey and Approves US$3.65 Billion Disbursement

May 9, 2008

The Executive Board of the International Monetary Fund (IMF) today completed the seventh and final review under the three-year SDR 6.66 billion (about US$10.8 billion) Stand-By Arrangement for Turkey, which was approved on May 11, 2005 (see Press Release No. 05/104). The completion of this review enables Turkey to draw immediately the remaining balance under the arrangement, equivalent to SDR 2.25 billion (about US$3.65 billion).

The Board also approved Turkey's request for waivers of non-observance of the end-December 2007 quantitative performance criteria in the fiscal area (primary balances of the consolidated government sector including and excluding state economic enterprises, overall balance of the social security institutions, and consolidated primary spending of the central government and social security institutions).

At the conclusion of the Executive Board's discussion on Turkey, Mr. Dominique Strauss-Kahn, Managing Director and Chairman, stated:

"The Turkish economy has continued to perform reasonably well despite a challenging external environment, with economic activity showing resilience and foreign direct investment inflows remaining buoyant. However, supply shocks have raised inflation, and turbulence in global credit markets has heightened Turkey's external financing risks. Recent domestic political developments have also weighed on investor sentiment. In response to these external and domestic developments, Turkish financial markets recently unwound some of last year's large gains.

"The authorities have responded to these challenges by taking important steps to bring their economic program back on track. Adoption of the social security reform is a major achievement that will contribute to the long-run sustainability of public finances. Recent actions to strengthen tax administration, reform the energy sector, and enhance bank prudential requirements are also welcome.

"Short-run macroeconomic policies will need to balance carefully the desire to support growth with the need to contain inflation and the current account deficit. From this perspective, it will be essential that the authorities adhere closely to their updated plans for this year to target an unchanged primary surplus relative to 2007 of at least 3½ percent of GDP. This revised target creates room to decompress infrastructure spending and bring forward a worthy but costly cut in labor taxes. New initiatives that further erode the structural fiscal position should be resisted to preserve the downward path of public debt and avoid further unwarranted pressure on monetary policy to stem inflationary pressures. From this perspective, it is important to make the envisaged reform of subnational governments' finances fiscally neutral.

"The central bank has revised upwards its inflation forecasts in response to a series of shocks to food and energy prices as well as a weakening in the lira, while reaffirming its medium-term target of 4 percent. It has also appropriately adopted a tightening bias. Entrenching the credibility of the inflation targeting regime requires that the central bank respond promptly to broadening price pressures by tightening monetary policy and avoid lifting prematurely its tightening bias once inflation is back on a declining path.

"To anchor fiscal policy expectations, the authorities have announced a new medium-term fiscal framework that aims to cut gross public debt by some 10 percentage points of GDP within five years. This objective is underpinned by a policy commitment on the primary surplus, which is targeted to decline from 3 percent of GDP in 2009 to 2½ percent of GDP in 2012. Achieving these targets will require continued efforts to enhance revenue collection and significant discipline in restraining current spending. The authorities are encouraged to formalize their medium-term fiscal framework by adopting an explicit fiscal rule.

"Turkey has achieved considerable success by adhering to the Fund-supported program that is now drawing to a close. Looking ahead, Turkey's challenge will be to press forward on the reform path to further entrench macroeconomic stability and decisively lift potential growth to facilitate convergence toward EU income levels," Mr. Strauss-Kahn said.