Transcript of a Conference Call on Turkey
April 16, 2004
International Monetary Fund
Friday, April 16, 2004
MS. LOTZE: Thank you very much. Welcome, everyone. I'm Conny Lotze of the External Relations Department, and this is a conference call on Turkey with Mr. Reza Moghadam, Mission Chief to Turkey and Assistant Director in the European Department.
As you know, the Executive Board today completed the Seventh Review under the Stand-By Arrangement with Turkey, and you should have received the press release right now, which just went out a few minutes ago.
Mr. Moghadam has some introductory remarks, and then we'll open the floor to questions.
Mr. Moghadam, please.
MR. MOGHADAM: Thank you. I will be very brief given that all of you should have received the press release by now. I'll just perhaps highlight a few key areas.
As you are aware, the Executive Board of the Fund met to discuss the Seventh Review of the Stand-By Arrangement and approved that review today.
A number of issues were touched upon, and I am sure the Letter of Intent for this review should have been released or will be released very shortly. So you will see many of the details there.
As you know, the economic performance in Turkey has been very impressive. The Fund-supported program has been very successful. Economic growth has exceeded program targets--this is for the second year--in 2003, and growth prospects are promising at the moment. Interest rates, both nominal and real rates, have declined sharply. The outlook for debt sustainability has improved, and inflation, importantly, has seen a very impressive decline and has reached its lowest level in a generation.
In terms of policy issues, obviously the fiscal policy has played a key role in terms of underpinning macroeconomic indicators and confidence. And the commitment to the 6.5 percent of GNP in 2004 and the measures that have been taken to ensure that it is delivered this year, despite slippages early in the year, as you are aware, because of the decision to increase the minimum wage and the pensions and the associated fiscal costs of those, despite those policy slippages, measures have been taken to put the primary surplus back on track for the 6.5 this year.
As you know, the surplus last year was over 6 percent, the highest ever achieved in Turkey, and that has been an important component of ensuring the success in the overall economic variables that we have seen.
Another part of the strategy in the current Letter of Intent that the Executive Board approved today is underpinning that fiscal performance with a comprehensive structural fiscal reform in 2004 in order to lay the basis for sustainable fiscal adjustment and maintenance of the primary surplus in the medium term. And that has three components: reform of the tax administration, social security reform, and also a review of public expenditure policy. And during the coming year, there are actions that the Turkish authorities intend to take in support of those areas. And timely implementation in those areas would be important to help maintain and boost policy credibility.
Another area of importance to the program and a major success has been the central bank of Turkey's handling of monetary policy. The central bank needs to be commended for the successful handling of monetary, exchange rate, and reserve management policy, which have enabled both large accumulations of reserves and stability of the currency and, importantly, a sharp decline in inflation. And one has to also mention that the government's determination to maintain fiscal policy discipline has also played a key role here.
Let me briefly turn to banking policies. The Letter of Intent for the review does include the authorities' commitment to a number of reforms in the banking area. First among those is the reform of the banking act to bring it more closely in line with EU standards and practices. The Imar inquiry has now been launched, and that should help to come up with ideas and proposals to strengthen banking supervision. There is also intention of the government to reinvigorate the reform of the state banking sector and also asset disposal by SDIF. I think perhaps I would leave it at that and respond to questions as you wish.
QUESTIONER: Mr. Moghadam,a couple of things.
First, in the first IMF statement, it says, "The Executive Board also granted Turkey's request for waivers and approved the rephasing of the remaining program reviews and an extension of the arrangement through February 3, 2005." Could you elaborate on this matter, especially on waivers?
And the second thing is: After this program is over at the beginning of 2005, what kind of a relationship would you like to have with Turkey? Would you want some monitoring action that would be more than Article IV consultations? What are the options? Thank you.
MR. MOGHADAM: Thank you. Let me just take the question on the decision for waivers. There were three waivers.
One was for the base money target being above the program target. This had been explained by the central bank that the demand for money, because of the confidence in the economy, the confidence in the Turkish lira, and the lower inflation that has been achieved, the demand for Turkish lira has been higher than we had expected a few months ago. This is a good thing, and we have wholeheartedly supported the authorities' request for a waiver exceeding the monetary target. And we have reset the monetary target for the rest of the year with the central bank, taking into account the prospective developments. And we would have no hesitation to review these targets again. And so here I would say it was a technical waiver for a very justifiable reason.
Secondly, there was a waiver for not meeting the number--the elimination of redundant positions at state enterprises. Here, again, the way the targets were defined were very strict. They were defined enterprise-by-enterprise. Whereas, the overall number of elimination of redundant positions actually exceeded what was in the program. So that gave a good justification for not meeting the more detailed targets which were in the program, but the overall targets were exceeded. So, again, here we supported the Turkish authorities' request for a waiver.
Finally, there was another waiver for what we call waiver of non-applicability for the government budgetary target for end-March. The reason for that is that although we have a good idea of where the central government target fiscal surplus was by the end of March, the overall number for the entire government is not available. And so this number, this target has been temporarily waived because the data are not available, but it will be applicable for the next purchase.
And in granting this waiver, the Board also noted that unfortunately the end-2003 fiscal target had not been met, however, it had come very close to the 6.5-percent target, and it was the highest primary surplus on record, and despite deviations from the fiscal program in the first months of this year, the Turkish authorities had taken measures, seven quadrillion of measures, almost 1.34 percent of GNP, to put the budget back on track, and that gave the Board comfort in believing that the targets for this year were, at this stage, achievable, and therefore they granted a waiver for the fiscal target.
Now, in terms of the request for extension of the arrangement, again, this is technical. Let me explain. Stand-By Arrangements in the Fund can only last three years. The original decision of the Board was about one month short of three years, and the target, because there have been some delays in completion of reviews, the Board agreed to reduce the number of reviews. It is just not practical to have four reviews this year. The Board agreed to reduce the number of reviews from four to three, and the targets for the last review are targets for end of 2004.
And to enable the Turkish authorities to make a purchase based on those targets, the program was extended to its maximum limit of three years, to the beginning of February, in order to allow time for the final purchase to take place. So that explains the technicalities that you asked for.
In terms of relations with the Fund next year, I think this is a decision for the Turkish authorities. Ultimately, what matters is the policies that are pursued, whether within or outside the Fund program. As you know, Turkey has been a funding member of the IMF, and under any circumstances, there will be very close cooperation. And in any case, at a minimum, even if there is no program, there will be post-program monitoring because Turkey's access to Fund resources are very high.
The decision on future relations with the Fund, the authorities have said that they will try and make a decision by the middle of the year. So that was not a focus of this review. Thank you.
QUESTIONER: Mr. Moghadam, you mentioned the word "success" a lot of times. How much of that success belongs to the Turkish Government and how much belongs to the IMF, please?
MR. MOGHADAM: Thank you for the question. I think this is a very subjective issue. I think this is a program of the Turkish authorities. It is a program which has been adopted by the previous government and continues by the current government. It has provided overall framework for economic policy, and it is primarily a Turkish program which the Fund is supporting as long as the components of it are, the policies are supportive of delivering the results that the targets of the program. The central bank, the independent institutions, like BRSA, SDIF, I think the success is due to all of the agencies, the central bank, all of the government agencies, the BRSA, other independent agencies cooperating and delivering on the policies needed.
So I think they all need to celebrate the success, and the success ultimately I must say is the success of the Turkish people that are seeing the results of the program. The lower inflation ultimately protects people's income and improves their standard of living.
So, in terms of I think answering your question, as I said, it's a subjective issue, but I hope that was adequate to put it into perspective.
QUESTIONER: My question was, is the IMF worried about Turkey's privatization program? We have seen officials push back deadlines for the Turkish conglomerate for the purchase of TUPRAS, the state oil refiner, and the initial tender for the cigarette monopoly, TEKEL, was canceled. I was wondering what are your views on that one.
MR. MOGHADAM: I think at the beginning of this year, we have seen an acceleration in a privatization process, which has been positive. The TEKEL alcohol-wing was--after a lengthy court process--was finalized. The auction for TUPRAS was successful. As you point out, the deadline has now been extended. We understand from the privatization agency that some of the details of the agreement are not yet in place, and they have extended the deadline in order to provide more time. And they are hopeful that it will be completed, and we certainly hope that they are correct in that thinking.
And I think one needs to look at some of the other privatization issues. There are some important privatization issues that are supposed to take place this year, and particularly Türk Telekom, and a number of others like PETKIM, et cetera. And it is important to build on this momentum that has been initiated early this year.
I think it is understandable that some of the major privatizations take time, and I know the authorities are working on some of the impediments which caused the failures of last year. But, in conclusion, I would say that our impression is that the government is committed to the privatization process. The question here is ensuring its success by having a realistic, but at the same time ambitious, program which they have formulated, and it is stated in the current LOI.
QUESTIONER: I have another one, if that is possible. I want to find out if you are overall satisfied, or if you think that investor confidence has been renewed in this process. Where does that stand?
MR. MOGHADAM: I think whenever I have talked to investors, the top priority they see is economic stability. And I think under the Fund-supported program, there has been major strides in that process.
For example, if you look at the very successful conclusion--the press release of the very successful Investment Advisory Council which took place on March 15th under the chairmanship of the Prime Minister and with the attendance of a dozen or so major potential investors in Turkey, you will see, for example, that the issue of economic stability and predictability is at the top of their agenda. And they also highlight the importance of economic stability in variables such as inflation.
So, again, the success in bringing down inflation should help in that regard. But, of course, it goes beyond that, and I think investors see two other areas of importance. One is the importance of an adequate institutional framework, and this refers to independence of agencies like the central bank, like the supervisory agency, as well as having laws and regulations which are in line with international, European in particular, standards.
And the third area is not simply having those rules and institutions but implementing the rules in a predictable and fair fashion. So creating a climate, if you like, for business investment.
And so I think the Investment Advisory Council is an important forum to hear those investors, to receive ideas from them on how to make progress in each of those areas. And I think it is very positive that that work has begun, but it needs to be maintained. The momentum of it needs to be maintained.
QUESTIONER: Any concerns expressed and on which areas? For example, what about unemployment rate, Mr. Moghadam?
MR. MOGHADAM: Actually, this issue was also highlighted during the Board meeting. I think--and it was an issue that was discussed, a concern that was discussed.
The unemployment rate has come down a little bit, but it is still quite high. But it is also difficult to gauge the exact level of unemployment in Turkey for two reasons. One, there is a discouraged worker effect, and some people drop out of the workforce, which means that there may be some higher underlying unemployment than it appears. And, secondly, the unregistered economy, everybody points out, is very large in Turkey, which means there may be factors the other way. There may be people who are employed but that does not show in the official statistics.
Now, because the population growth rate of Turkey is high and Turkey also has a very young population, and creating jobs is a major challenge, it requires maintaining a high rate of growth in Turkey. Now, maintaining a high rate of growth in Turkey then comes back to some of the critical policies of the program.
One needs to continue with the disinflation policy. One needs to continue with having a strong fiscal policy and fiscal surplus, primary surplus, in order to ensure that debt continues to decline and, therefore, policies are seen as sustainable in the long run to provide the environment for investment--for interest rates to come down and for investment to increase. Ultimately that is what would create more jobs.
QUESTIONER: Mr. Moghadam, I was wondering if you think that Turkey would be able to withstand coming off this program or, at this stage? From what your judgment now is, do you think that Turkey will be able to afford to come off the IMF program at the end of year or after it was extended, actually?
MR. MOGHADAM: You know, unfortunately, I do not have a crystal ball. Let me just make a couple of points. Obviously, the recent track record under the Fund-supported program has been very good, but also somewhat uneven. Earlier this year, we have had delays in terms of completion of reviews, and they reflect delays in terms of putting the necessary policies in place.
So I would say that what is important, when you look ahead, is maintaining the agreed policies, the announced policies on track, avoiding ad hoc policy initiatives that undermine confidence or are not in accordance with the qualities that had been earlier announced and agreed in order to have a track record of, if you like, impeccable policy implementation because ultimately that is what matters. Policy implementation is what matters. Whether that is under the Fund-supported program or outside is a secondary issue.
So what is needed is the continuation of the strong fiscal policy, the maintenance of the high primary sector. What is needed is the continued implementation of monetary policy in the same manner that central bank has done. What is needed is continued cooperation between the central bank, Treasury and other agencies to ensure that policy implementation is timely and in accordance with the agreed parameters.
And as you know, the authorities have indicated that they will make a decision on follow-up program or their relationship with the IMF after the end of this program by the middle of this year. And I think we just have to wait and see what their decision is. But whatever the decision, the points I made on policy implementation remain the same.
QUESTIONER: My question is have you seen any effects from Iraq spilling over into Turkey's economy?
MR. MOGHADAM: That's a very good question. And if you go back about a year, just before the Iraq conflict, there was a lot of concern. And if you go back and look at the various economic indicators, for example, you see that inflation and interest rates came under pressure.
I think, again, if you go back and if you judge the success of the Fund-supported program, one issue which strikes you is the resilience of the Turkish economy this time around in view of the Iraq conflict.
The economic variables were resilient, and they recovered very quickly. For example, if you look at the exchange rate strengthened very rapidly after last March, and the data has now been released for growth, for example, last year which was very resilient. There was some effect in the second quarter of last year when the conflict was at its height, but the growth resumed strongly after it. And the decline in inflation and the decline in interest rates continued strongly after that.
So, in a way, the resilience of Turkey to the Iraq conflict has been rather reassuring in terms of illustrating how the economy can now cope with shock. Thank you.
QUESTIONER: You said the Turkish Government is supposed to make its decision on what will happen after this arrangement ends in the summer of this year. And you said we will see whether there will be a request for a follow-up or a monitoring process.
What do you mean by "follow-up" process? Is there a possibility that the Turkish Government could ask for a follow-up stand-by program and ask for some additional money from the IMF? Also, after this program ends, do you think Turkey will need additional money from the IMF or international financial organizations to reimburse its debts to creditors? Thank you.
MR. MOGHADAM: Let me just reiterate again that it is premature to speculate about the relations with the Fund after this program. Turkey is a member of the IMF. It can request access to fund resources like any other member can, and it is too early to speculate about the exact form of the relationship. And I think all of the possibilities are open regarding the form of the relationship. It is a decision they need to consider, and it is the government which needs to make that decision not the IMF.
And in terms of the financing situation, I think you can see now that the reserve situation is much more comfortable in Turkey. The debt refinancing operations of the Treasury are much more comfortable than they used to be.
There have been two significant improvements: One, the reserve buildup has been very successful. As you know, the central bank purchased US$10 billion last year and they have continued to make purchases and add to its reserves this year.
The Treasury has been able to reduce its exposure to affect denominated debt, and it has been able to increase its maturity profile of the debt.
So significant improvements have been made in that regard which, in a way, reduce the vulnerabilities of the country, and the access to international markets has been good. As you probably know, Turkey has secured more than half of the planned borrowing from the international market for this year already, and we are only three months through the year.
Obviously, these situations can change, but at the moment, Turkey is in a strong financing situation. Thank you.
MS. LOTZE: Thank you very much for participating, and this will end the conference call. Thank you.
[Whereupon, the press conference was adjourned.]