Turkey and the IMF

News Brief: IMF Approves US$1.15 Billion Tranche to Turkey under Stand-By Credit

Country's Policy Intentions Documents

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile

Turkey—Letter of Intent

Ankara, June 19, 2002

The following item is a Letter of Intent of the government of Turkey, which describes the policies that Turkey intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Turkey, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. Turkey has kept up the determined implementation of the economic program. We met the end-March performance criterion for the consolidated government sector primary surplus and the end-April performance criteria for base money and net international reserves (Annex A). We have also continued to make progress in structural areas, including toward meeting prior actions and structural benchmarks (Annex B).

2. The program has continued to deliver positive results, increasing our confidence that both the 3 percent growth target and the 35 percent inflation target for 2002 will be met. Helped by our implementation of strict fiscal and monetary policies, structural reforms, and the increased credibility of the program, inflation outturns for the past several months have been favorable, leading to a steady decline in inflation expectations. As a result, we are now fully on track to meet our 35 percent end-year target. Real GNP in the fourth quarter of 2001 turned out weaker than expected, because of the negative impact of September 11 on expectations in Turkey and worldwide. Over the last few months, however, indicators have increasingly signaled the start of an economic recovery. Capacity utilization, industrial and agricultural production indicators, and the performance of exports and tourism in the first four months of 2002 all indicate that our target of 3 percent real GNP growth is attainable.

3. We remain determined to stay the course, recent uncertainties notwithstanding. Financial indicators improved substantially and beyond program projections in the six months to early May, but have since deteriorated somewhat, reflecting market perceptions of political uncertainty. We are confident that these disturbances will not derail our three-year program: interest rates are still markedly lower and the currency stronger than we envisaged at the start of the program; the strong balance of payments position and the favorable financial market conditions have allowed the Central Bank of Turkey (CBT) and the Treasury to boost both foreign exchange reserves and government deposits to well above the program assumptions; and the floating exchange rate and our efforts in banking, agriculture, and other structural areas have made Turkey's economy more robust than before. Broad support for the economic strategy from public opinion and civil society will facilitate its continued strong implementation, even if there were to be uncertainties in the political sphere. We remain fully committed to the economic program, which we believe is the best way of realizing Turkey's true growth potential and further increasing the resilience of the economy. At the same time, we stand ready to take additional measures if necessary to keep the program on track, in close consultation with the Fund.

4. Against this background, we request that the second review under the stand-by arrangement be completed. Our targets and policies remain as set out in the January 18 Letter of Intent and its April 3 update. This letter further updates on policy developments, and describes additional steps we plan to take to achieve the program targets.

Fiscal policy

5. We remain on track to achieve our public sector primary surplus target of 6.5 percent of GNP in 2002. We met the end-March 2002 performance criterion on the consolidated government sector primary surplus, with higher-than-envisaged central government revenues offsetting a shortfall in state economic enterprise (SEE) performance, partly due to delayed price increases. To ensure that we continue to meet our fiscal targets, we will bring these prices back on track with program plans. In most cases these plans envisage increases during the year in line with annual WPI inflation, although in the energy sector we will continue to pass through world prices. We will also continue to audit SEEs on a quarterly basis to ensure that all cost-cutting and efficiency measures envisaged under the program are fully implemented. Looking forward, we will change the legal framework for SEEs, with effect from 2003, to help strengthen their governance structure, including by increasing the power of their Boards, clarifying their financial relationship with the government, and publishing details about their accounts.

6. For 2003, we remain committed to maintaining the public sector primary surplus at 6.5 percent of GNP. With real interest rates declining and growth resuming, debt dynamics have improved further. We need to maintain the primary surplus to ensure further downward movement in interest rates and continued positive debt dynamics in 2003. In the budget call, to be issued in June, we will take the first step toward achieving this fiscal stance. In particular, we will hold the overall ceiling for investment spending, the wage bill, and other current and transfer spending constant in real terms. Public sector wage policy will continue to be geared toward narrowing the difference between wages and civil servants' salaries.

Monetary and exchange rate policies

7. The main focus of monetary policy is the achievement of the inflation target. With all monetary performance criteria and indicative targets having been met in both February and April, inflation and interest rates have fallen sharply, bringing our end-year inflation target of 35 percent well within reach. We are making progress toward introducing formal inflation targeting later in the year, as planned. To this end, in cooperation with the Fund and with other central banks implementing inflation targeting, the CBT has been working intensively to develop: (i) economic databases and reporting packages; (ii) a near-term forecasting system incorporating a wide range of available information; (iii) a core quarterly macroeconomic model; (iv) a process for putting together a medium-term projection; and (v) procedures for presenting the results to the Monetary Policy Council.

8. Depending on the strength of the balance of payments and on reverse currency substitution, the CBT will continue to accumulate foreign exchange reserves through the daily auction mechanism. While adhering to the floating exchange rate regime and exchange rate policy as outlined in previous letters of intent, in April we introduced daily auctions to purchase foreign exchange, to boost our international reserve holdings. In the coming months, we will continue the daily purchase auctions to the extent the balance of payments remains stronger than expected.

9. We are making progress in improving the efficiency of the money and foreign exchange markets. In April, the CBT introduced one-month deposit auctions, which is helping to define the yield curve. Effective May 24, the CBT has lengthened the averaging period for banks' required reserves from one to two weeks, raised the proportion of reserve requirements that are subject to the longer averaging period, and linked the remuneration rate more closely to market interest rates. In addition, in mid-June parliament passed legislation that : (i) eliminates stamp duty on forward contracts, both foreign currency and Turkish lira denominated; (ii) reduces segmentation in the interbank market through extending the withholding tax for interest payments to Takasbank; and (iii) removes the tax on interbank foreign exchange transactions. These measures reduce intermediation costs in the financial system, and help reduce spreads and enhance bank profitability. We will continue to consult with all interested parties on measures to further develop these markets, including through further meetings of the multi-agency working group established in this area.

Financial sector reform

10. We are moving ahead with the strategy for recapitalizing private banks, with public support if needed. The original timetable for implementing the recapitalization scheme was intentionally ambitious, with the understanding that there might be some delays in implementation. After a slight delay in the completion of the first and second audits, on June 12, 2002 the Banking Supervision and Regulation Agency (BRSA) informed 24 banks (out of 26) of the amount of capital they need to raise. For these banks, the amount of capital shortfall has been estimated at TL 1,326 trillion, of which TL 1,102 has already been raised. As regards the remaining two banks (which shared the same owner), on June 19, 2002 the BRSA Board approved the takeover by the SDIF of the deeply insolvent medium-size one, and suspended shareholders' rights in the larger one, as the owner no longer legally qualifies as fit and proper for bank ownership. On June 19, the BRSA also sent a letter to the latter bank, which meets the capital requirements. With all these actions, we have met a prior action for completing the second review. The BRSA will hold a seminar later in June to inform banks, media, and market participants how the audit exercise was carried out, and the considerations BRSA made in determining banks' capital needs. Similar seminars will be held abroad in July. Banks are now expected to initiate the process of raising capital by calling shareholder meetings for no later than early July. Any public capital injections, which we expect to remain within the existing contingency, would take place soon thereafter. The BRSA expects the recapitalization to be completed by end-August 2002, by which time the results of the recapitalization exercise will have been fully reflected in the banks' balance sheets.

11. The SDIF is making progress in ensuring the transparency of its operations and resolving the remaining intervened banks. The external audit of the SDIF's accounts for end-2001 was completed on May 3, meeting a structural benchmark, and the SDIF has prepared monthly balance sheets starting end-March 2002. The SDIF has published the audit results, together with monthly financial statements, on its website. Turning to the four remaining intervened banks, no acceptable bids were received for one of the banks (Toprak) by the April 9 deadline, but new bids have been invited by July 3. On the two banks under court proceedings, a ruling has been made about Tarisbank which was subsequently put up for sale on May 30, while a ruling on the other bank (Türk Ticaret) has yet to be made. The fourth bank (Bayindir) is acting as a bridge bank until a strategy has been developed for the resolution of assets of intervened banks that are being liquidated.

12. The SDIF is also working on a strategy for the resolution of assets in intervened banks, including through setting up an asset management company (AMC). The SDIF is exploring the options for establishing an AMC, and discussions are being held to involve potential participants and investors, since the existing legislation limits the SDIF's ownership in an AMC to 20 percent. Work is also going on to identify assets held by the Collection Department suitable to be repackaged and sold or restructured. The BRSA will host a seminar on the possible use of an AMC for interested banks and market participants in June , with a final decision on creation of an AMC to be made in August.

13. The implementation of International Accounting Standards is proceeding as envisaged. The BRSA expects to publish the final regulation on its website in June (meeting a performance criterion for end-June 2002) to ensure that the new accounting standards are fully reflected in banks' balance sheets end-2002. In addition, by the end of the year the Treasury will send to the Council of Ministers a new draft law to regulate the insurance sector in line with applicable EU Insurance Directives and IAIS Core Principles.

14. The reform of state banks is proceeding apace. The operational restructuring of Ziraat and Halk is proceeding as envisaged, with 581 branches closed as of May 20, 2002, according to the criteria established by the Council of Ministers. Since potential investors in Vakif requested that the bank should be subject to the same audits as private banks under the recapitalization exercise, the privatization process for this bank has been slightly delayed. Potential investors were requested to submit bids by June 28, and the winning bid is to be selected by July 14.

15. To complement the strengthening of the banking system and to support the real sector, we have launched the "Istanbul Approach" to encourage corporate debt restructuring. In early June, financial institutions signed a Framework Agreement which will be used as the basis for the debt workouts. In addition, the BRSA has approved regulations regarding provisioning requirements for restructured loans according to international best practices, to ensure the transparency and integrity of the bank recapitalization exercise. These regulations were issued in the Official Gazette on June 13. We are working closely with the World Bank in all areas of corporate debt restructuring, and have requested World Bank financing for a credit line to banks to provide additional long-term financing to corporates restructured under the Istanbul Approach. We hope that the credit line will become operational by year end.

16. Also in support of corporate debt restructuring, we are taking steps to improve bankruptcy and foreclosure procedures. The Ministry of Justice established a law reform commission in October 2001 to consider reforms to the Execution and Bankruptcy Act. This commission produced proposals at the beginning of 2002. In April 2002, the Ministry of Justice established another law reform commission focused on laws to support rehabilitation of viable firms in tandem with the out-of-court restructuring process. This latter commission will complete its work by end-June 2002. Based on the work of the commissions, together with the recommendations of the forthcoming World Bank Report on Standards and Codes on Turkey's insolvency regime, the Ministry of Justice will produce by September 31, 2002 a package of comprehensive reforms of the Execution and Bankruptcy Act (a new structural benchmark). To ensure broad input into these important reforms, the Ministry of Justice proposals will be made available for comment by the public and private sectors. After this comment period, the proposed reforms will be submitted to parliament and enacted by end-January, 2003 (a new structural benchmark).

Other structural reforms

17. We are making progress with the overhaul of the tax system. On June 6, parliament enacted the Special Consumption Tax Law, meeting a structural benchmark. This Law consolidates various excises (including the two highest rates of VAT) and provides the Council of Ministers the power to set the earmarking of excise proceeds. To further streamline indirect taxation, by end-August the Council of Ministers will issue a decree setting the earmarking of excise proceeds at zero, starting with the 2003 budget, with commensurate appropriations made to the relevant agencies (a new structural benchmark). We have also designed a new functional structure for our tax administration, including an audit coordination unit, and a unit for tax policy. We expect to put this structure in place by end-July. Our work on direct tax reform and on an annual audit plan has begun, and we expect to make rapid progress with the help of technical assistance which we have requested from the World Bank.

18. We are moving ahead with the rationalization of staffing in state economic enterprises and in other parts of the public sector. With the assistance of the High Auditing Board, we have completed a detailed accounting of redundancies in each state enterprise. A total of 45,800 positions have been identified as redundant as of end-January 2002. We remain committed to reducing two thirds of these positions by end-October 2002 and all of them by mid-2003. To accomplish this, we have agreed a protocol with unions, and issued an implementation circular indicating how these positions will be eliminated. The individuals occupying them will be (i) voluntarily retired, (ii) transferred to other open state economic enterprise positions, (iii) transferred to open civil service positions, or (iv) they will have their contracts ended. Any transfer of employees would be within the existing program cap for the hiring of new public and civil service workers, and subject to the individuals being qualified for the positions already identified in SEE and line ministry hiring plans. We have already begun to work toward our targets for reducing overstaffing. Between end-January and end-April, we eliminated 12,443 redundant positions (including individuals notified by end-January 2002), largely by voluntary retirement. We are also considering changing regulations on compulsory retirement to streamline the civil service.

19. We are continuing our efforts to update Turkey's fiscal legislation and fiscal management. On June 12, parliament approved several amendments to the Public Procurement Law, including reducing thresholds in real terms to international norms, and extending the minimum time period for procurement in cases falling below the thresholds (meeting prior actions for completing the second review). The amendments also aim to improve the operational and administrative efficiency of the procurement agency. We have also drafted a new budget systems law (the Public Financial Management and Internal Control Law) which extends accounting reforms, reorganizes internal audit, simplifies budget execution procedures, and broadens the coverage of the budget document to be presented to parliament for approval. We are currently revising this draft law, and will send it to parliament after consulting with the relevant domestic agencies and the World Bank, IMF, and EU.

20. We will advance the sale of key companies, building on the improved market conditions. The shallowness of the stock market has not allowed us to make the intended third public offering of TÜPRAS (petroleum refinery) in the second quarter of 2002, as intended. However, we are exploring alternative strategies to lower the public share below 50 percent and will announce the chosen strategy by mid-July 2002. For the remainder of the year, the Privatization Agency has a portfolio of companies ready for tender, as outlined in the Agency's plan for 2002 issued last December. We expect that this, and the sale of assets outside the Agency's portfolio, will bring total privatization proceeds of US$700 million in 2002. To underpin this target, we have set new indicative floors on cumulative cash privatization proceeds (Annex C). Moreover, by mid-July 2002 we will reduce the public share in ERDEMIR below 50 percent. The Agency is also achieving savings through merging companies in its portfolio. We estimate that the mergers already decided will generate operational savings of about US$100 million annually.

21. We are also pressing ahead with the preparation for sale of other companies. A privatization road map for ŞEKER has been submitted to the Privatization High Council for approval by mid-July. On June 4, the board of Türk Telekom (TT) approved a far-reaching corporatization plan for this company, prepared with the help of international consultants. This plan envisages the restructuring of TT into a holding company with subsidiaries organized around lines of business (such as basic infrastructure, fixed line services, and mobile services). Given that the corporatization plan is more ambitious and complex than originally envisaged, adoption of the privatization plan by the Council of Ministers (a prior action for completing the second review) has been delayed, but will take place by end-November 2002 (a new structural benchmark). In support of this, on May 31, TT's Tender Committee approved a detailed road map of events leading to the adoption of the privatization plan. This road map envisages that (i) a new valuation for the company is established (in late May, the Council of Ministers already issued a decree cancelling the old valuation and facilitating a revaluation), (ii) international consultants for the revaluation and for developing the privatization plan are hired by end-August, and (iii) the Telecommunications Law is amended by end-October 2002 to allow the sale of shares in the holding company and the subsidiaries. We expect that the holding company and the subsidiaries will be established by end-2002, allowing their privatization either separately or in combination.

22. Finally, we are taking additional steps to improve the business climate. On June 13, we submitted to parliament a new Law on Foreign Direct Investment (FDI), meeting a structural benchmark. This Law, which was drafted with technical assistance from the Foreign Investment Advisory Service, will provide a broad legal framework for FDI in line with international best practice. Among the significant improvements in the new Law is the removal of the minimum capital requirement and the approval condition for foreign investors. Details will be spelled out in implementing regulations. We have also established nine technical committees, each with private sector representation, under the Coordination Council for Improving the Investment Climate (CCIIC) established by the Council of Ministers in December 2001. The technical committees are reviewing progress, identifying obstacles to investment, and proposing ways to remove these obstacles, with the aim of creating a more suitable climate for both local and foreign investment. The progress made by the CCIIC's technical committees and the prioritization of follow-up action will be discussed at the inaugural meeting of the high-level Investor Council on July 18. Other actions being taken to foster private business include reducing red tape in obtaining work permits and investment incentives, implementing an employee code of conduct for customs officials, and strengthening the Turkish Patent Institute. We are also improving the business climate through enhancing transparency in the use of public resources. To this end, on May 23 we appointed a Ministerial Steering Group and on June 11 a supporting subcommittee for implementation of our anti-corruption strategy, meeting a structural benchmark. This committee will now press ahead under the Ministerial Steering Group with the various initiatives envisaged under the action plan, including improvements in the public sector personnel system and enhanced public access to information about state organizations.

Very truly yours,

Kemal Derviş   Süreyya Serdengeçti
Minister of State for Economic Affairs   Governor of the Central Bank of Turkey


Turkey: Quantitative Performance Criteria and Indicative Targets for 2002
January 31,
March 31,
May 31,
August 31,
November 30,

I. Performance criteria1                            
1. Floor on the cumulative primary balance of the consolidated government sector (in trillions of Turkish lira)2,3 9,718 12,985   2,847 2,903   4,700     9,600     14,900  
  February 28,

  April 30,
  June 30,
  September 30,

  December 31,

2. Ceiling on contracting or guaranteeing of new external public debt with original maturities of more than one year (in millions of US$) 6,500 1,645   10,000 2,402   11,100     14,300     17,500  
3. Ceiling on the stock of external public debt with original maturities of up to and including one year (in millions of US$) 1,000 0   1,000 0   1,000     1,000     1,000  
4. Floor on level of net international reserves of CBT and Treasury combined (in millions of US$) -6,500 -4,907   -7,200 -4,926   -7,800     -8,500     -9,700  
5. Ceiling on base money (in trillions of Turkish lira)4 8,250 7,823   8,900 8,680   9,250     10,600     10,850  
II. Indicative targets                            
January 31,

  March 31,

  May 31,

  August 31,

  November 30,

1. Floor on the cumulative overall balance of the consolidated government sector (in trillions of Turkish lira)3 -32,382 -36,809   -12,453 -10,611   -17,500     -28,250     -39,750  
  February 28, 2002
  April 30,
  June 30,
  September 30,
  December 31,

2. Floor on the Cumulative Primary Balance of Other Public Entities sector (in trillions of Turkish lira) . . .     . . .     550     . . .     1,100  
3. Ceiling on the stock of net domestic assets of the CBT and Treasury combined (in trillions of Turkish lira)4 26,100 24,318   27,700 25,197   28,900     31,300     33,300  
4. Privatization proceeds
(in millions of US$)
. . .     . . .     . . .     220     700  

1The figures through June 30, 2002 are performance criteria. The remaining figures are indicative targets.
2For January 31, 2002, the ceiling applies to the cumulative primary balance of the consolidated government sector since January 1, 2001. For the other test dates, the starting date is January 1, 2002.
3Targets for end-January and end-March have been adjusted for expenditure arrears outstanding at Bag-Kur (a social security fund).
4Target calculated as four working day average of February 11-12 and March 11-12, 2002, to take account of the transitory impact of the Bayram religious holiday on currency demand.


Structural Policies, 2002–04
Action Type LOI Para1 StatusJune 19, 2002

Fiscal policy      
1. Implement all further measures to reach the 6.5 percent primary surplus target that are technically feasible to put in place in January: PA for SBA 13
   (i) Council of Ministers to approve a reduction in the share of central government tax revenues accruing to metropolitan municipalities to 4.1 percent     Done.
   (ii) issue a circular to implement attrition rules     Done.
   (iii) the Minister of Finance to approve a reallocation of spending to ensure adequate funding for DIS for agriculture     Done.
2. Increase the PCT (on items excluding natural gas) by 1 percent in real terms in early February   14 Not done. Increase was equal to January WPI inflation.
3. By end-March (i) the Ministry of Finance to identify savings from closing regional administrations and other regional line agency offices, and block relevant budget appropriations in the budget, and (ii) SEEs to approve budgets in line with the cost reductions mandated BM 14 Underway. (i) In March, a decree regarding closure of regional administrations and other regional line offices was issued. Subsequently, line agencies were asked to block relevant appropriations. However, the measure did not yield the expected amount of savings.
(ii) Most SEEs have approved budgets in line with cost reductions mandated and others have been instructed to correct their budgets.
4. Keep investment expenditure in SSK at the level originally planned in the investment program for 2002, implement generic drug purchase program in ES by end-April, and receive profit transfer of TL 180 trillion from Ziraat Bank   5 of April 2002 LOI Not fully complied with. SSK's investment is not expected to fall, since several of its projects fall outside of the annual investment program and are not subject to the limits therein. The Ministry of Health now aims to finalize the generic drug purchase program by end-2002. The profit transfer from Ziraat was received in April 2002.
5. Refrain from introducing any new tax exemptions or incentives, except those specified in the tax reform plan   14 Not fully complied with. Payroll and personal income tax deferments were introduced in March 2002 as part of an effort to stimulate employment.
6. Refrain from introducing any new discounts or exemptions for SEEs, except those pursued for commercial reasons by enterprises' managements   14 Done, but partially reversed. The president approved Law No:4736 on January 18, 2002 preventing any new discounts or exemptions for SEEs. However, discounts for electricity were reintroduced in May, for phase out by end-2002.
7. Change the legal framework for SEEs, with effect from 2003, to help strengthen their governance structure, including by increasing the power of their Boards, clarifying their financial relationship with the government, and publishing details about their accounts.   5 of June 2002 LOI  
Public debt management      
8. Continue to lengthen average maturity in Treasury bill auctions and public offerings to the extent demand allows and encourage a diverse range of investors   18 Being implemented.
9. Resume in January 2002 the program of FRN auctions. Before the first issue publicize a revised standard method of price and yield calculations, in line with international practice   19 Done.
10. Reintroduce a primary dealer program by end-September 2002 BM 19 Discussions with candidate primary dealers are taking place.
11. Continue to issue, subject to market conditions, domestic FX denominated and FX indexed bonds, as well as international bonds   19 Taking into account redemptions and market conditions, FX denominated and FX indexed securities will be issued.
12. The Treasury to complete a study by end-June 2002 of its operational mechanisms, procedures, and structure to improve its risk and debt management, including through closer coordination between domestic and international borrowing. The recommendations of this study will be implemented during 2002   19 As an interim step the new Debt Management Law calls for the establishment of a middle office in the Treasury in charge of developing the overall debt strategy and managing risk. A workshop with the participation of international experts was held in May 2002 in cooperation with the World Bank, and will provide the basis for the study.
13. Issue in June government communiqué that spells out details of the operations of the middle office that will formulate overall public debt strategy   6 of April 2002 LOI General strategy is expected to be determined in June.
14. The Treasury to develop its cash management operations, acting in coordination with the CBT   19 The new Debt Management Law includes a clause calling for the preparation of technical infrastructure for cash management operations in coordination with the CBT.
15. The Treasury to intensify its dialogue with the full range of investors, including bilateral contacts and group discussions with institutional investors and intermediaries, and enhanced retail outreach   19 With the target of broadening the investor base, discussions are ongoing on the conditions of a security which is planned to be issued for insurance companies. A series of meetings has been started with private banks, which will provide feedback about market developments and specific concerns banks have.
Monetary and incomes policy      
16. Ensure that any new laws or regulations do not undermine the independence enshrined in the CBT law   21 Done. All new laws and regulations are consistent with CBT independence.
17. CBT to continue its technical preparations for the introduction of inflation targeting, including improved modeling and forecasting of inflation   22 Work ongoing at the CBT covers short- and near- term forecasting, and development of the data base.
18. Move to inflation targeting   22 In addition to progress in establishing the necessary technical infrastructure, favorable developments in disinflation and inflation expectations, fiscal policy, and the banking sector are expected to allow the pre-conditions to be met to allow a move to formal inflation targeting during 2002.
19. Seek a significant reduction of the ex-post indexation element contained in current wage contracts during the next public worker collective bargaining round and civil service salary adjustment, and use the Economic and Social Council as a forum for incomes policy discussions with the private sector   23 An exploratory meeting between labor unions and the authorities to achieve this goal was held in February.
20. a. Consider the possibility of reducing backward indexation of administered prices without compromising SEEs' financial conditions   23 Partially done. Most SEE prices have not been changed from January to mid-May 2002, weakening the SEEs' financial conditions. Price increases resumed in late May and June. Changes at discrete intervals, in line with the WPI, are expected in the second half of the year.
     b. In the ongoing negotiations on new two-year private sector wage contracts the government to stress to labor unions and employers the need to reduce backward indexation   14 of April 2002 LOI
21. Encourage a successful conclusion by end-February 2002 of banks' discussions to establish interbank borrowing reference rates in Turkish lira out to at least three-month maturity to enhance money market liquidity and transparency, and to provide accurate reference rates for financial instruments   25 A working group established under coordination of the Banks Association is discussing proposals, and measures are being introduced to deepen the interbank money market.
22. The CBT to gradually end its practice of acting as a blind broker during 2002   25 The phasing out by end-2002 has been announced by the CBT.
23. Working group to facilitate the development of financial markets to identify concrete actions by end-January 2002 in the areas of taxation, accounting, and regulation. The first measures will be put in place by end-February 2002   25 Interagency committee chaired by CBT with membership from Banks Association of Turkey, BRSA, MOF and ISE, established and has held two meetings. Taxation of revaluation profits clarified in February, and prudential rules on market risks effective since January 2002.
24. The Privatization Agency to authorize companies in its portfolio to transact their foreign exchange business at the market rate (not at the CBT official rate). The oil and gas companies (TÜPRAŞ and BOTAŞ) to work with state banks to improve their foreign exchange practices, to minimize lumpy transactions in the foreign exchange market   25 Done.
25. To encourage development of the foreign currency market, eliminate stamp duties on forward contracts and remove the tax on interbank foreign exchange transactions by end May 2002   9 of April 2002 LOI Done.
26. Require as of end-May withholding of interest earned through transactions intermediated through Takasbank   9 of April 2002 LOI Done.
27. To rationalize the system of reserve requirements the CBT, effective from May 2002, to (i) increase the scope and length of the averaging of reserve requirements, and (ii) increase the remuneration of both Turkish lira and foreign currency reserves, linking remuneration to market rates   9 of April 2002 LOI Done.
28. Multi-agency working group to continue to identify measures to ensure the successful development of money and foreign exchange markets   9 of April 2002 LOI Multi-agency working group chaired by the CBT with the participation of Banks Association of Turkey, BRSA, MOF, ISE, IGE, Treasury, and CMB has held meetings related to the development of the derivatives markets and TL reference rate fixing. Taxation and accounting problems of the futures transactions have been solved by the MOF and BRSA, respectively.
Banking reform      
29. Pass necessary legal amendments, and issue a Council of Ministers Decree for staff reductions in state banks PA for SBA 28 Done.
30. By end-June 2002, reduce the number of state bank branches by 800. In this context also reduce staffing correspondingly PC 28 640 branches of state banks have been closed and staff reduced by 12,000
31. For Vakif Bank privatization, bids to be invited from potential investors in May   28 Four potential bidders have expressed interest and are conducting due diligence; potential bidders are waiting for the audit results being carried out under the new public support scheme. Bids are expected by end-June, and privatization is expected to be completed in mid-July.
32. BRSA to issue guidelines for targeted evaluations of private banks in preparation for the public support scheme for private banks PA for SBA 30 Done.
33. The targeted evaluation of loan portfolios, collaterals, and certain other exposures to be performed by banks' existing external auditors to be completed by end-March   30 Done.
34. Third-party auditing firms to be appointed by the BRSA by end-March 2002 to verify that the guidelines have been followed, and to ensure the integrity of the process BM 30 Done.
35. a. The BRSA to (i) complete the final interpretation of the evaluations by end-April and (ii) send letters to banks stipulating required actions on the basis of this interpretation by May 15 PA for second review (action # (ii)) 30, 31 a. Done. (i) Auditing reports submitted to the BRSA by late May
(ii) Letters to 24 banks sent on June 12. Of the remaining two banks, one was intervened on June 19, and a letter was sent to the other bank the same day.
   b. Evaluation results to be fully incorporated into banks' end-June 2002 financial statements     b. Evaluation results expected to be incorporated by end-August 2002.
   c. Banks to apply for participation in the scheme before end-May 2002     c. Banks expected to apply by July 5, 2002.
   d. Recapitalization scheme to be completed before end-June 2002     d. Completion expected by end-August 2002.
   e. The BRSA to prepare prototype contracts to be signed between the Saving Deposit Insurance Fund (SDIF) and the majority shareholders on the pledging of shares, share buy-backs, and the conversion of Tier-2 capital into Tier-1 capital   10 of April 2002 LOI e. Done.
36. The legal framework and related regulations for the public support scheme for private banks to become effective in January 2002 PA for SBA 32 Done.
37. The BRSA to undertake legal consultations, as necessary, to ensure implementation of the public capital support scheme as planned   32 Done.
38. Resolve by end-2001 all banks taken over by the SDIF before November 2001, with the exception of two banks whose resolution has been halted by courts PA for SBA 33 Done.
39. Determine final resolution method for the medium-size bank taken over in November 2001 by February 2002   33 Done. After no acceptable bids were received by the original sale deadline of April 9, the bank was reoffered for sale in mid-May. The new deadline for bids is July 3. Two potential buyers are performing due diligence.
40. The SDIF to prepare a monthly balance sheet starting end-March 2002 and become subject to annual external audits; the external audit for 2001 will be completed by end-April 2002 BM (the latter action) 34 Done.
41. Laws and regulations regarding loan classification, loan loss provisioning, and collateral valuation will be amended as necessary following the portfolio reviews by end-June 2002   35 Done.
42. Pass legal amendment in January 2002 to eliminate with immediate effect the existing four-year transition rule for loan loss provisioning PA for SBA 35 Done.
43. Start trial implementation of new accounting system (for banks) in line with IAS in January 2002 PA for SBA 35 Done.
44. Following the trial implementation the BRSA to evaluate the experience and issue by end-June 2002 a revised regulation on the new accounting standards to ensure that banks' end-2002 balance sheets comply with IAS PC for end-June 35 Underway.
45. Improve reporting requirements based on the findings of the independent assessments, and strictly enforce the quality and timeliness of the reporting as of end-June 2002   35 Underway. Quality and timeliness of reporting expected to be improved as of end-August 2002.
46. a. Off-balance sheet repos to be included on balance sheet as of February 1, 2002   35 Done.
     b. Capital charges for market risks to be calculated on a solo basis as of January 1, 2002 and on a consolidated basis as of July 1, 2002      
     c. Regulation on monitoring of internal control and risk management systems to become effective January 1, 2002      
47. By end-2002 the Treasury to send to the Council of Ministers a new draft law to regulate the insurance sector in line with the applicable EU Insurance Directives and IAIS Core Principles   13 of June 2002 LOI  
Corporate debt restructuring      
48. Introduce in January 2002 a voluntary market-based framework (the "Istanbul Approach") for dealing case-by-case with multicreditor exposures to large and medium-size borrowers   36 Done.
49. Create in early 2002 a multiagency Coordination Committee with private sector participation under the Treasury, responsible for facilitating and monitoring the corporate debt restructuring process, as well as identifying and proposing the removal of impediments that may exist   36; 13 of April 2002 LOI Not done. Work to be carried out by the Production and Finance Committee chaired by the Treasury.
50. Establish secretariat to the Production and Finance Committee in April   13 of April 2002 LOI Although the Committee has not been established yet, the BRSA is coordinating the process.
51. Production and Finance Committee to develop further measures consistent with preserving the transparency and integrity of the bank recapitalization exercise, to catalyze banks' and corporates' participation in the "Istanbul Approach"   13 of April 2002 LOI Although the Committee has not been established yet, the BRSA is coordinating the process.
52. Production and Finance Committee to work with the relevant government agencies to establish by June 2002 a database to monitor corporate debt   13 of April 2002 LOI The CMB has issued the regulation on the reporting requirements. Firms are expected to start reporting in June 2002.
53. A private asset management company will be set up by end-August 2002, with the SDIF owning a minority share   13 of April 2002 LOI The authorities have requested technical assistance for the drafting of a proposal for potential investors.
54. a. The Ministry of Justice to prepare an action plan based on the findings of a World Bank Report on Standards and Codes (ROSC) on Turkey's insolvency regime and form a Commission to prepare necessary amendments to the Bankruptcy Law   37 A commission to prepare necessary amendments to the Bankruptcy Law has been established. Draft World Bank report received in May.
   b. The Ministry of Justice to produce a package of comprehensive reforms of the Execution and Bankruptcy Act by September 31, 2002 BM 16 of June LOI  
   c. Enactment of the reforms of the Execution and Bankruptcy Act by end-January 2003 BM 16 of June LOI  
55. Support the upgrading of administrative procedures in the judiciary to improve the capacity of the courts   37 Underway.
56. The CMB to introduce international accounting standards, including inflation accounting provisions, by January 1, 2003.   38 The CMB has issued the regulation. Firms are taking steps to adopt the new accounting framework.
57. Starting end-March 2002, the CMB to require corporate groups to provide consolidated financial statements and to set up a dedicated group to monitor their finances   38 Done. The CMB has issued the regulation.
58. Starting end-March 2002, the CMB to require corporate groups with financial affiliates to provide consolidated group statements and share those statements with the BRSA   38 Done. The CMB has issued the regulation. The Accounting Standards and Corporate Finance departments of the CMB are monitoring the accounts.
Public sector reform      
59. Parliament to approve Public Procurement Law in line with UN (UNCITRAL) standards in January 2002 PA for SBA 40 Done.
60. Establish an independent procurement agency by end-March 2002 BM 40 Done.
61. Change laws and regulations to make them consistent with the new public procurement framework   40 See below.
62. Parliament to amend the Public Procurement Law by end-May 2002, to (i) bring the real value of the thresholds toward those in line with international best practice and (ii) extend the minimum time period for procurement applicable for cases below the thresholds PA for second review 40 Done. Parliament passed the required amendments on June 12.
63. Compile a comprehensive list of public investment projects to be phased out in time to make decisions for the 2003 budget   40 Rationalization of public investment program will continue in 2003 within the framework of a High Planning Council Decision. The Decision will be communicated to spending agencies with 2003 Investment Circular in June 2002. Then the list will be compiled concurrently with 2003 investment programming process that will be finalized by end-2002
64. Approval by Council of Ministers in January 2002 of plan to reform the tax system PA for SBA 40 Done.
65. a. Enact the first phase of the tax reform plan by end-April 2002 BMBM 40; 15 of April 2002 LOI Done. Special Consumption Tax Law (implementing indirect tax changes) was approved by parliament on June 6.
    b. Issue a decree by end-August 2002 setting the earmarking of SCT proceeds at zero, starting with the 2003 budget   17 of June LOI  
66. Submit to parliament legislation for the second phase of the tax reform plan by end-October 2002 BM 40 A World Bank technical assistance mission is expected in July.
67. Reorganize tax administration in line with the study carried out with the World Bank:   40 and 15 of April 2002 LOI Underway. The GDR has designed a new functional structure that includes a tax audit coordination unit. However, some work remains to fully flesh out the details, and an internal audit unit will need to be added.
    a. By end-July, institute an audit coordination unit in the Ministry of Finance, and require that it produce a coordinated audit plan by end-November each year BM
(first such plan by Nov 2002)
    b. By end-September, the Minister of Finance to adopt a strategy to strengthen the collection of outstanding public sector tax arrears BM  
    c. In the budget for 2003, include resources to increase the number of auditors by 400 (for October 17) to move toward OECD standards BM    
    d. To help overhaul the revenue administration in the medium term, implement a functional reorganization, beginning at end-June      
68. Council of Ministers to adopt a civil service reform strategy by end-2002   40  
69. As part of the preparatory work for #68, by end-March 2002 establish a ministerial committee to carry out a functional review of government, which will be completed by end-September 2002   40 Done. CoM decision dated February 4, 2002 has been issued.
70. By end-September, have in place an integrated system to monitor total general government and SEE employment levels on a quarterly basis BM 40 A circular (dated December 14, 2001, No. 94997) has been sent to SEEs; monitoring of SEE employment levels has started on a quarterly basis as of March.
71. 15,000 individuals (public sector workers) to have been retired or notified of their retirement by mid-January 2002 PA for SBA 41 Done.
72. By end-January 2002, PAs for first review (i) and (iii)    
(i) identify all redundant workers and positions in SEEs   41 (i-ii) Done. A total of 45,800 positions have been determined as redundant in SEEs.
(ii) sharpen tentative estimate based on aggregate analysis, by using company-specific information and by end-May produce final estimates   15 of April 2002 LOI
(iii) eliminate all open, unfilled redundant positions   41 Done.
73. Extend voluntary retirement offers to the recently identified redundant workers in Türk Telekom and in the Privatization Agency portfolio of companies; for those who accept, provide payments, and allow them to retire, no later than end-March 2002   41 Underway. The retirement offer remains open.
74. Through voluntary retirement offers, and layoffs only when necessary, reduce the number of redundant workers by one-third by end-June, and cumulatively by two-thirds by end-October 2002 PC (the Oct action) 41 Underway. As of end-April, 12,443 redundant positions had been eliminated (including individuals notified of their impending retirement as part of the prior action for the program-see item 71).
75. By end-June 2003, phase out the remaining redundancies   41  
76. The Ministry of Finance and the Treasury to formulate by end-September 2002 an action plan to address redundancies in the central government   15 of April 2002 LOI Underway. The modalities of extending the staff reduction program to the civil service are under consideration.
77. Audit SEE compliance with this program on a quarterly basis   41 Underway. Treasury Controllers audited all SEEs (except Türk Telekom) in April-May.
78. To strengthen the legal framework for fiscal policy pass the Law on Public Debt Management and issue two supporting communiqués PAs for the first review 42 Done.
79. Submit to parliament by end-June 2002 a Law on Financial Management and Internal Control consistent with best international practices BM 42 A draft law has been prepared and will be provided to IFIs and the EU for comments in June. To be submitted to the parliament subsequently.
80. Close, by end-March 2002, 548 additional revolving funds BM 42 Done.
81. Incorporate in the draft budget for 2003 the revenue and expenditures under Law 3418 BM for Oct 17, 2002) 42  
82. Eliminate the earmarking under Law 3418 and Law 4306   42  
83. Amend by July 2002 the governing legislation for the remaining EBFs to require passage of their budgets by parliament, external audit of their accounts (reported to parliament), and monthly reporting of their accounts, on a consolidated basis, with the central government's accounts BM 42 To be handled in the context of the Law on Financial Management and Internal Control.
84. Eliminate the remaining budgetary fund (the Support Price and Stabilization Fund) in three years, when the World Bank's Agricultural Reform Implementation Project ends   42  
85. In the draft 2003 budget to be submitted to parliament (i) include net lending as an appropriation, and (ii) extend accounting and coding reforms to all consolidated budget agencies, and to general government units on a pilot basis BMs for Oct 17, 2002) 42 To extend coding reforms to general government units on a pilot basis, the MoF has prepared a budget implementation circular. Studies regarding accounting reform are progressing as planned.
86. Complete, by end-March 2002, a survey of end-2001 commitments in excess of appropriations BM 42 Done.
87. To monitor and address [expenditure] commitments on a regular and timely basis, conduct surveys of commitments in excess of appropriations twice a year (as of end-June and end-December), with the aim of having the results available within six weeks after the end of each period   15 of April 2002 LOI  
88. Address the impact of public sector retrenchment through the labor redeployment and reinsertion program and through unemployment insurance   42 As per the circular (No.1087, 2002/3) issued on January 21, 2002, services for counseling and training have started to be tendered. Unemployment insurance payments started in March 2002.
Enhancing the role of the private sector      
89. The Privatization Administration (PA) to proceed with the public offerings of POAŞ by end-March 2002 and the public offering of TÜPRAŞ by end-June 2002 and launch the initial public offering for THY as soon as market conditions allow   45 The second public offering of POAŞ was completed in March 2002 with a 16.5 percent stake sold to foreign and domestic investors. New privatization strategy will be determined for TÜPRAŞ by mid-July 2002. The privatization of THY depends on market conditions.
90. a. CoM to adopt a privatization plan for Türk Telekom in April 2002 PA for the second review 45 Not met because of change in strategy. The corporatization plan approved on June 4, 2002 requires a more complex privatization strategy than originally envisaged. Deadline changed to end-November.
    b. CoM to adopt a privatization plan for Türk Telekom by end-November 2002 BM 21 of June LOI  
91. Parliamentary approval of Tobacco Law PA for SBA 45 Done.
92. Prepare and adopt a privatization plan for TEKEL by end-September PA for fourth review 45 A restructuring study is being undertaken to provide a basis for the privatization plan.
93. Proceed with the privatization of ŞEKER, with the first step being the adoption of a privatization plan by May 2002   45 A privatization road map for ŞEKER has been submitted to the Privatization High Council for approval by mid-July.
94. a. In the electricity sector, in January 2002, subject to legal clarification, the Council of Ministers to adopt a government decree annulling with immediate effect all the projects for which transfer of operating rights (TOOR) contracts are pending   45 Changed. See item b.
    b. Following the Constitutional Court decision regarding the pending transfer of operating rights (TOOR) contracts, determine which, if any, investors are eligible for Treasury guarantees and inform by end-June 2002 those eligible of the amendments needed to bring the contracts in compliance with the license regulations of the Energy Market Regulation Agency and the Electricity Markets Law. With the exception of these eligible projects, transfer all state-owned thermal generation and electricity distribution assets under the scope of privatization by end-July 2002. Moreover, the eligible contracts for which the financial arrangements have not been finalized by end-January 2003 will be cancelled, and the related assets transferred under the scope of privatization by end-February 2003   16 of April 2002 LOI  
95. By March 2002, the Ministry of Energy to inform the PA which electricity assets will be privatized, and by April 2002 the prequalification tenders for the distribution companies will be launched   45 Changed. See item 94 above.
96. Complete the transfer of gas distribution companies to the PA by March 2002   45 High Planning Council Decision is about to be finalized after which a Privatization High Council Decision will be sought.
97. The PA to go forward with the divesting of ETI Krom AŞ, ETI Elektrometalurji AŞ, ETI Gümüs AŞ, which are in the PA portfolio, as soon as licenses are transferred from ETI Holdings   45 A High Privatization Council decision (No: 2002/29) was issued on April 30, 2002 for the transfer of licenses of ETI Krom AŞ., ETI Elektrometalurji A.Ş., ETI Gümüs A.Ş., ETİ Bakır A.Ş. to these companies from ETİ Holding.
98. The PA to continue its divestment of ERDEMIR, and of tourism and fertilizer assets in its portfolio. The PA also to continue divesting its portfolio of small and medium-size companies   45 Preparations underway.
99. Build on efforts made in 2001 (including legal amendments and simplified procedures) to increase the sale of government land. Initiate a study to evaluate how the remaining obstacles to government land sales could best be removed   45  
100. The Council of Ministers to adopt in January 2002 follow-up actions to FIAS study to make Turkey more attractive for domestic and foreign investors PA for SBA 46 Done.
101. Submit to the parliament by end-May 2002 a new draft Law on Foreign Direct Investment in line with the findings of the FIAS study BM 46 Done. Law submitted to parliament on June 14.
102. Submit to the parliament by end-March 2002 a draft law on work permits prepared by Ministry of Labor and Social Security, and issue a communiqué by end-April 2002 on the implementation procedures for employing foreign personnel employed by foreign capital companies as soon as the new law is approved by parliament   46 A draft law on work permits has been submitted to parliament and is currently with the relevant commission.
103. Complete by end-February 2002 legislation reducing the number of documents needed to obtain investment incentives   46 Done.
104. Establish and implement by end-February 2002 an employee code of ethical conduct for proceedings at customs   46 Being implemented. A communiqué was issued on September 11, 2001.
105. Submit to the Council of Ministers by end-January 2002 legal amendments to strengthen the Turkish Patent Institute   46 Draft law has been submitted to the Prime Ministry and is expected to be submitted to CoM for signatures soon.
106. The Council of Ministers to adopt a strategy by end-January 2002 for increasing transparency and combating rent-seeking activities BM 47 Done. Decree signed on February 13
107. Define and include as program conditionality concrete follow-up actions for the remainder of the 2002-04 program period based on the plan in #106:   47 and 18 of April 2002 LOI Done.
    a. Establish by end-April 2002 a Steering Group for public sector reform, as well as a subcommittee to provide support to the Steering Group in implementing the plan to enhance transparency and good governance      
    b. Publish (i) the above-mentioned action plan to enhance transparency and good governance, and (ii) the Report on the Observance of Standards and Codes (ROSC) on the quality of economic data, carried out in consultation with the IMF BM   Done.
    c. Improve the public sector personnel system, including passage of legislation to establish a code of ethical conduct for civil servants and public administrators by end-2002     Done.
    d. Increase access to information, through the preparation of an Information Act, defining the rights of citizens to request information and the obligation of public organizations to provide information by end-2002 BM    
108. Establish an Investor Relations Office by February   48 Done.
109. Establish an Investor Council consisting of prominent business representatives from Turkey and abroad   48 Inaugural meeting scheduled for July 18
110. Further strengthen the efforts of the Treasury, the CBT, and the BRSA to explain policies under the economic program in their respective areas, including through the arrangement of regular (bimonthly) press conferences by the Treasury   48 Ongoing
Safeguards Assessment      
111. Follow-up measures in the context of Safeguards Assessment:   19 of April 2002 LOI  
    a. With effect from 2001 financial statements the CBT to publish audited financial statements consistent with IAS     Done
    b. Starting with the 2002 financial statements, the CBT to clarify disclosures of the Fund position and the relationship with the Treasury, and limit the amount of profits available for distribution to realized profit, less unrealized losses     Ongoing
    c. CBT to expand the role of its existing audit committee     The Audit Committee will meet twice a year with the external audit firm and, once established, with the internal audit department. It will also review the CBT's overall risk management practices and systems of internal control.
    d. Include among the duties of the external auditor to issue a report reviewing the consistency between program data reported to the IMF (specifically covering base money, net international reserves, and net domestic assets) and the audited financial statements     Done
    e. By May 15, 2002 the CBT to ask the existing audit firm to prepare such a report, to be issued by July 15, 2002 PC (issuance of report)    
    f. By May 15, 2002, the CBT to issue a Memorandum of Understanding to clarify the Treasury/CBT relationship with the Fund.     Done. Memorandum of Understanding was signed between Treasury and CBT on May 6, 2002.
    g. The CBT to reorganize by end-2002 the internal audit function. To this end, it will (i) adopt a new charter, which will detail the mission, scope, accountability, independence, responsibility, and authority of the audit function in line with the Standards for the Professional Practice of Internal Auditing of the Institute of Internal Auditors, and (ii) formulate an implementation plan identifying staffing levels, reporting lines, scope of audits, risk assessment methodologies, and developing an internal audit manual and training programs PC (measure (i) and (ii))    
    i. Internal audit department to conduct an audit of foreign exchange management and program data as of end-2002 by May 15, 2003 BM    

1Unless otherwise noted, paragraph numbers refer to January 18, 2002 Letter of Intent.


Table 1. Turkey: Indicative Target on Cumulative Privatization Proceeds of the Consolidated Government Sector

(In millions of U.S. dollars)

Cumulative privatization proceeds from January 1, 2002, to:


   September 30, 2002


   December 31, 2002


  1. The consolidated government sector is defined in Annex D of the January 18, 2002 Letter of Intent for the Stand-by Arrangement.
  2. Privatization proceeds are measured in cash terms, except in the case of conversion of an exchangeable bond (proceeds exclude amounts realized from the sale of convertible bonds).
  3. Privatization proceeds exclude sales of immovables and movables, and any other items already captured in the performance criteria for the consolidated public sector (see Annex D, referenced above).
  4. Privatization proceeds exclude any sale of assets to entities in the consolidated government sector, to the local governments, or to state economic enterprises not captured in the program definition of the consolidated government sector.
  5. Privatization proceeds exclude receipts from the sale of transfer of operating rights (TOORs).