IMF Executive Board Approves US$10 Billion Stand-By Arrangement for Turkey
May 11, 2005
Letter of Intent and Memorandum of Economic and Financial Policies
April 26, 2005
Turkey and the IMF
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Transcript of a Teleconference Call on Turkey|
By Reza Moghadam, Senior Advisor in the IMF's European Department and Mission Chief for Turkey
International Monetary Fund
Washington, DC, May 11, 2005
MODERATOR: Good afternoon ladies and gentlemen.
Mr. Moghadam, you have the floor for your opening remarks, please.
MR. MOGHADAM: Good afternoon or good evening if you are joining us from Turkey. Thank you.
I just will be very brief and allow time for questions and answers. I believe our press release is about to be released, and that will of course provide you with information and direct quotes.
Let me just say at the outset that the Executive Board of the IMF today approved a new three-year standby arrangement to support Turkey's economic and financial program. The arrangement is for about $10 billion, and today the Board released the first tranche which is about $837.5 million. The rest of the financing is expected to be disbursed in eleven equal tranches over the course of the three-year program.
Let me just have a few words of explanation about the logic of the program and some of the issues raised by the Board today, and then I can take Q&A.
First of all, the new arrangement is being approved against a background of remarkably successful economic outcome in Turkey over the course of the last three years. And in a way two key macroeconomic results are very stark. One is inflation which is the lowest it has been for over 30 years, and the second is output, which by the end of last year was already 10 percent above pre-crisis levels.
The other key achievement I would say is the very sharp decline in debt. Debt declined by some 30 percent, and it now stands at just below 65 percent in terms of net debt.
Against this successful outcome of the last program, the aim of the new program is to create conditions for sustained growth to continue to raise living standards in Turkey, reduce unemployment, and facilitate convergence towards EU economies.
Let me highlight a few specific goals. One obviously is to secure permanently lower inflation through retaining the floating exchange rate regime, preserving the Central Bank independence, and importantly, by the Central Bank now adopting a formal inflation targeting system as we move forward during the current program.
Another objective is obviously to continue to make progress in reducing government debt. The main instrument here is continuation of the large primary surpluses, the 6.5 percent that the authorities have been able to deliver in the last couple of years, and through shifting debt maturities and underpinning fiscal adjustment with structural fiscal reforms to improve the quality of the fiscal adjustment and make it more sustainable.
Now, the other objectives include building up the reserve position in order to strengthen the resilience of the Turkish economy to external development. As you know, the last program made great strides in terms of improving the health of the financial sector, and the new program aims to achieve further improvements in the supervisory and regulatory framework, and to accelerate asset recovery.
There are of course also short-term challenges, which the program tries to address through the right mix of macro policies. And by those short-term challenges, I mean in particular the current accounts deficit which reached over 5 percent of GNP last year. And we can discuss some of that in detail later.
Now, as I said, you will receive, if you have not already, the summary of what the Managing Director said, at the conclusion of the Board. Let me just highlight a few points very quickly. The Board was particularly pleased with the authorities' commitment to maintain the 6.5 percent of GNP primary surplus. It is viewed that this has been critical in achieving the successes of the last few years, and the Directors were encouraged that this will continue.
The structural components of the program also received particular attention, namely, tax administration reform, which has recently been passed by Parliament, and the very ambitious Social Security reform which is now in Parliament. The comprehensive banking reform was commended by the Board, and the Board also encouraged the authorities during the life of the current program to embark on tax reform to simplify taxes and broaden the base and eliminate distortions.
The Board was also encouraged to see that the new Letter of Intent, which also I believe will be released today—if it has not been already released, it will be shortly released, both on our website and also in the Turkish Treasury's website—includes expenditure reforms, particularly public expenditure, review and also civil service review to look at ways where the quality of public spending in Turkey can be improved.
The Board was particularly commending of the excellent job that the Turkish Central Bank has done in facilitating lower inflation, in building up reserves, in putting in place a credible plan on inflation targeting and a very successful pre-announced foreign exchange intervention strategy.
In conclusion, perhaps I should say that there was consensus, in fact, unanimity at the Board that this policy strategy which is in the new LOI is the right recipe for continuing the success. But the Board underlined in particular that to continue this success, it was critical for the Turkish authorities to implement the new program both in full and in a timely manner.
Thank you. I think I will stop there and take questions as you wish.
QUESTIONER: Thank you. Mr. Moghadam, I would like to ask you about the one component of today's decision regarding the repayment of the debt. I understand there is a rescheduling or there is a scheduling so as the repayment will be done in 2007 instead of 2006. Could you explain that a little bit?
And also, another quick question on the information on targeting. Minister Babacan was quoted today as saying that inflation targeting will only begin after 2008. Is that also your understanding, and why so late?
MR. MOGHADAM: First of all, thanks for reminding me on the one-year extension. Let me just give a little bit of detail on that. You are correct that you will see in the press release that the Board also approved a one-year extension of Turkey's repurchase expectations for about $3.8 billion or 2.52 billion SDRs, which were due in 2006. Now, under the IMF rules, the member, in this case Turkey, has the right to pay on obligations basis, which is usually one year later than the expectations. Now, this amount was due in 2006, but given the spike in repayments that Turkey has in 2006, the authorities asked—they wanted to exercise the possibility of delaying that repayment by one year, which would basically achieve a more smooth debt repayment schedule.
Now, if you go back to the December announcement and in particular Minister Babacan's presentation, he gave a very good explanation of how this would smooth their debt repayment profile, and the Board approved that because that possibility exists within our rules.
Secondly, on inflation, I think you will see from the letter of intent that the CBT, the Central Bank of Turkey, has already announced a detailed plan to move to formal inflation targeting by January 2006. So I think your information is probably not accurate or there has been some misunderstanding. It will be January next year.
And in preparation for that, as you will see in the LOI and also in the announcement made by the Central Bank, there are stages building up to that process whereby the Monetary Policy Committee plays an increasing role in the decision making process on monetary policy.
QUESTIONER: Dr. Moghadam, first congratulations for your new post. And I'd like to remind you about remarks by First Deputy Managing Director Anne Krueger in Turkey last week about unemployment, and at some point she qualified the minimum wage as quite high, and this has led to public reactions in the country. Do you want Turkish Government to reduce the minimum wage or what exactly you would like to see to be done on this matter? Thank you.
MR. MOGHADAM: Well, thank you very much first for your comments.
The unemployment issue obviously is an important one, for the Turkish people and in terms of the success of the economic program being shared more widely in Turkey and being felt more widely.
Now, let me just make a few words of explanation. Last year the Turkish economy grew by almost 10 percent, truly remarkable rate of growth, while inflation was declining, so I think that's a double success in any economy.
Now, the unemployment rate stayed almost flat. Why is that? There are two reasons for that. One, the labor force growth in Turkey is very, very high, roughly on average about a million people enter the labor force each year. Secondly, the participation rate of the working population, those who actually decides to work, is rather low in Turkey. It is about just under 50 percent at the moment. And you would expect that to increase over time, and indeed it has declined since the crisis and you are now seeing signs that it would pick up. So, more people who are already in the working age population decide to seek employment. Now, for Turkey to keep unemployment basically constant it means it has to create a lot of jobs each year. Now, if you look at the employment growth in Turkey last year, it was actually quite impressive. As you'll see, after a few years of stagnation, employment actually grew, and obviously from what I told you in terms of the labor force growth, for unemployment to even stay steady you need a large increase in employment, and that did take place.
Now, obviously the decline in unemployment also usually lags the recovery of the economy, so my expectation is that more jobs will be created this year and as we move forward. So that bodes well. But of course, the challenge for Turkey is quite a difficult one because of the high labor force growth. This is from a labor supply point of view.
Now, from a labor demand point of view, labor costs also matter, and we do know that the evidence is that the gray economy, the unregistered economy is quite large in Turkey, and it has—it does create problems in terms of those who pay taxes tend to pay more than one would do in an economy where the gray zone, the unregistered part, is smaller. But for employers to take on any workers, obviously labor costs and the minimum wage is also a factor. Employment payroll taxes are also a factor, and the hiring and firing, the labor market regulations are all important.
So I think as the economy grows, for the economy to create more jobs, one also needs to look at how labor market flexibility could be enhanced, and if there are impediments to that, one needs to look at it. The new program does not have anything on minimum wage. The LOI, our reports, of course do talk about labour market rigidities, how to make it more flexible, and these are the issues that of course need to be considered carefully, and need discussion within Turkey and need consensus to move forward on, but it's a complex issue which has many facets.
IMF EXTERNAL RELATIONS DEPARTMENT