Press Release: IMF Executive Board Completes Seventh and Final Review Under the Stand-By Arrangement for Turkey and Approves US$3.65 Billion Disbursement
IMF News, May 9, 2008
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- Published: May 9, 2008
Review completion and disbursement
- The Executive Board completed the seventh and final review under the three-year SDR 6.66 billion (about US$10.8 billion) Stand-By Arrangement for Turkey, approved on May 11, 2005 (see Press Release No. 05/104).
- Completion of the review enables Turkey to draw immediately the remaining balance under the arrangement, equivalent to SDR 2.25 billion (about US$3.65 billion).
Waivers and performance criteria
- The Board approved Turkey's request for waivers of non-observance of the end-December 2007 quantitative performance criteria in the fiscal area:
- primary balances of the consolidated government sector including and excluding state economic enterprises,
- overall balance of the social security institutions,
- consolidated primary spending of the central government and social security institutions.
Assessment of economic developments (Managing Director Dominique Strauss-Kahn)
- Macroeconomic performance and risks:
- The Turkish economy "has continued to perform reasonably well despite a challenging external environment," with economic activity showing resilience and foreign direct investment inflows remaining buoyant.
- Supply shocks raised inflation, and turbulence in global credit markets heightened Turkey's external financing risks.
- Recent domestic political developments have weighed on investor sentiment, and Turkish financial markets recently unwound some of last year's large gains.
- Policy responses and structural measures:
- Authorities have taken steps to bring the economic program back on track, including adoption of social security reform, actions to strengthen tax administration, reform the energy sector, and enhance bank prudential requirements.
- Adoption of the social security reform is described as a "major achievement" that will contribute to the long-run sustainability of public finances.
Policy guidance and targets
- Fiscal policy:
- Short-run macroeconomic policies should balance support for growth with containing inflation and the current account deficit.
- Authorities should adhere closely to updated plans for the year to target an unchanged primary surplus relative to 2007 of at least 3½ percent of GDP.
- The revised target is intended to create room to decompress infrastructure spending and bring forward a costly cut in labor taxes.
- New initiatives that erode the structural fiscal position should be resisted to preserve the downward path of public debt and avoid additional pressure on monetary policy.
- It is important to make the envisaged reform of subnational governments' finances fiscally neutral.
- To anchor fiscal policy expectations, authorities announced a new medium-term fiscal framework aiming to cut gross public debt by some 10 percentage points of GDP within five years.
- The medium-term framework is underpinned by a policy commitment on the primary surplus, targeted to decline from 3 percent of GDP in 2009 to 2½ percent of GDP in 2012.
- Achieving these targets will require continued efforts to enhance revenue collection and significant discipline in restraining current spending.
- Authorities are encouraged to formalize their medium-term fiscal framework by adopting an explicit fiscal rule.
- Monetary policy and inflation:
- The central bank revised upwards its inflation forecasts in response to shocks to food and energy prices and a weakening in the lira, while reaffirming its medium-term target of 4 percent.
- The central bank has "appropriately adopted a tightening bias."
- Entrenching credibility of the inflation targeting regime requires the central bank to respond promptly to broadening price pressures by tightening monetary policy and to avoid lifting prematurely its tightening bias once inflation is on a declining path.
Outlook and strategic priorities
- Turkey has achieved considerable success by adhering to the Fund-supported program that is now drawing to a close.
- The key challenges going forward:
- Press forward on the reform path to further entrench macroeconomic stability.
- Decisively lift potential growth to facilitate convergence toward EU income levels.
International Monetary Fund — Press Release No. 08/106 (May 9, 2008).