Press Release: IMF Executive Board Completes Third and Fourth Reviews Under the Stand-By Arrangement for Turkey and Approves US$1.85 Billion Disbursement

July 28, 2006

Press Release No. 06/167

The Executive Board of the International Monetary Fund (IMF) today completed the third and fourth reviews under the three-year SDR 6.66 billion (about US$9.87 billion) Stand-By Arrangement with Turkey approved on May 11, 2005 (see Press Release No. 05/104). The Board also approved Turkey's request for the waiver of the nonobservance of performance criteria pertaining to the parliamentary approval of administrative and social security reforms, the parliamentary approval of the pension reform legislation, the submission to parliament of the legislation to reform personal income tax as well as the continuous performance criterion on grants of amnesties of arrears on public sector receivables.

The completion of the reviews will enable Turkey to draw immediately an amount equivalent to SDR 1.25 billion (about US$1.85 billion).

Following the completion of the Board's discussion, Mr. Rodrigo de Rato, Managing Director and Chairman made the following statement:

"Turkey's economic performance has been strong. Rapid growth was accompanied until recently by record-high capital inflows, declining debt ratios, and lira strength. In tandem with a number of adverse supply shocks, these outcomes also led to a widening of the current account deficit and a pick up in inflation. Against this backdrop, the rise in global risk aversion since last May had a larger impact on Turkey than on many other emerging market countries. The authorities have responded appropriately to these challenges by tightening macroeconomic policies and reinvigorating structural reforms. The recent lira adjustment should help reduce the current account deficit, but it also makes for a more challenging inflation outlook.

"The central bank's commitment to rein in inflation is welcome. The recent interest rate hikes and the accompanying active withdrawal of lira liquidity have helped restore stability to financial markets and should re-anchor inflation expectations. The authorities' continued adherence to the floating exchange rate regime is also appropriate, as this has acted as a helpful safety valve, including during the latest episode of market turbulence. Looking ahead, the central bank stands ready to adjust its policy stance, should this be needed, to keep the medium-term inflation targets within reach.

"The authorities have risen to the challenge of tightening fiscal policy so as to reduce debt ratios, resume disinflation, and rein in the current account deficit. They have taken measures to reverse spending overruns and have committed to save revenue overperformance so as to achieve a primary surplus in excess of the 6.5 percent of GNP target. To achieve these objectives it will be essential that the authorities maintain their resolve to keep nominal spending in line with the program and preserve the tax base. Continued efforts to improve the composition of the public debt will also be important.

"Prompt actions on the authorities' structural reform agenda will help sustain growth, maintain market confidence, and reduce vulnerabilities. Timely implementation of the recently passed administrative and pension reform laws will be key to safeguard the medium-term fiscal position. The commitment to improve the personal and corporate tax regime is welcome, but more efforts are needed to strengthen tax administration, including through the establishment of a large taxpayer unit by end-2006. On the financial sector side, the authorities' emphasis on accelerating reforms of the bank supervisory framework is appropriate in light of rapid credit growth. This should be accompanied by progress in privatizing state banks to help enhance the efficiency of the financial system and strengthen the investment climate.

"Close adherence to these policies will be key to ensuring high growth with low inflation, and reducing the vulnerability of the economy to any shift in market sentiment. The authorities' efforts to regain investor confidence by tightening monetary and fiscal policies and renewing their commitment to structural reform deserve the support of the international community," Mr. de Rato said.


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