## Press Release: IMF Approves US$4 Billion Stand-By Credit for Turkey

_IMF News, December 22, 1999_

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## Bibliographic details
- Published: December 22, 1999

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### Approval and Financing
- The IMF approved a three-year Stand-By credit for Turkey equivalent to SDR 2,892 million (about US$ 4 billion) to support the government's 2000-2002 economic program.
- The first installment, available immediately, is equivalent to SDR 221.7 million (about US$300 million).
- Turkey joined the IMF on March 11, 1947 and its quota is SDR 964.0 million (about US$1.323 billion).
- Turkey's outstanding use of IMF financing currently totals SDR 437 million (about US$599 million).

### Executive Board Statement — Key Messages (Stanley Fischer)
- Turkey is embarking on a strong program to:
  - Free the country from the high inflation that had plagued the economy for two decades.
  - Restore macroeconomic fundamentals.
  - Address long-standing structural weaknesses in the economy.
- Elements emphasized as necessary for success:
  - Large adjustment in the primary fiscal balance to re-establish fiscal solvency and reduce inflation.
  - Rigorous implementation of the budget and mobilization of resources through privatization to lower domestic borrowing and support declining interest rates.
  - A preannounced path of the exchange rate to anchor inflation expectations and reduce interest rates.
  - An up-front fiscal adjustment, a strong commitment to the exchange rate path, and ambitious structural reforms as safeguards against unsustainable real appreciation.
  - A pre-announced exit strategy from the exchange rate regime to limit the risk of locking the exchange rate at inappropriate long-term levels.
  - Comprehensive structural reforms including an ambitious privatization program, major pension reform, and agricultural policy reforms to produce efficiency gains and limit fiscal costs.
- Implementation of structural measures is described as critical to medium-term fiscal sustainability and to increase economic efficiency and growth.

### Program Summary — Objectives and Pillars
- Central ambition: free Turkey from inflation and enhance prospects for growth and a better standard of living.
- Identified root cause of inflation: weakness of public finances driven by large and sustained primary deficits monetized over decades.
- The government's program rests on three pillars:
  - Up-front fiscal adjustment.
  - Structural reform.
  - A firm exchange rate commitment supported by consistent income policies.
- Rationale for each pillar:
  - Fiscal adjustment: necessary because weak public accounts are the ultimate factor behind high inflation.
  - Structural reform: needed to make fiscal adjustment sustainable, improve economic efficiency, and facilitate decline of public debt via privatization receipts.
  - Firm exchange rate commitment and consistent income policies: needed to bring inflation and interest rates down more rapidly, particularly in the first phase of disinflation.
- Exit strategy: transparent and preannounced exit strategy from the exchange rate regime to avoid long-term rigidities.

### Fiscal Strategy and Structural Measures
- Main fiscal goal for 2000:
  - Raise the primary surplus of the public sector (consolidated central budget, extrabudgetary funds, local government, nonfinancial state enterprises, central bank, and duty losses of state banks) to 2.2% of GNP in 2000 (or 3.7% excluding earthquake-related expenses, which are estimated at about 1½% of GNP).
- Fiscal policy complements:
  - More active and diversified debt management policy.
  - Acceleration of privatization to contain interest payment burden.
- Structural reforms aims:
  - Strengthen public finances and improve service provision over the medium term.
  - Reduce inequalities in the tax burden and waste in public expenditure.
  - Phase out existing indirect agricultural support policies over a two-to-three year period and replace them with a direct income-support program.
  - Further disengage the government from economic activity through privatization, raising sizeable receipts for debt reduction, including major operations in telecommunications and energy.
- Expected outcomes of structural reforms:
  - Make fiscal adjustment sustainable over the medium term.
  - Lower the burden of interest payments on public sector debt.
  - Improve transparency and economic efficiency.
  - Reduce contingent liabilities of the public sector.

### Monetary and Exchange Rate Framework
- Two guiding considerations:
  - Disinflation and a rapid decline in interest rates require more predictable monetary and exchange rate developments to reduce uncertainty for residents and nonresidents.
  - To avoid long-run rigidities, the program calls for a transparent and preannounced exit strategy from the exchange rate regime.

### Macroeconomic Projections and Key Indicators
- 2000 macroeconomic projections and goals:
  - Real GNP growth in 2000 is expected to be 5-5 ½%, with an expected rebound from negative growth in 1999.
  - CPI inflation is projected at 25%, compared to about 65% in 1999.
  - External current account balance is projected at -1.8% of GNP, against -0.5% in 1999.
- Selected historical and projected indicators (as presented):

Real economy (change in %)
- Real GNP: 1996: 7.2; 1997: 8.2; 1998: 3.8; Est. 1999: -2.1; Proj. 2000: 5.6; Prog. 2001: 5.2; 2002: 5.8
- Domestic demand: 1996: 10.0; 1997: 7.5; 1998: 0.6; Est. 1999: -2.3; Proj. 2000: 6.5; Prog. 2001: 5.0; 2002: 5.5
- CPI (end-of-period): 1996: 79.8; 1997: 99.1; 1998: 69.7; Est. 1999: 65.4; Proj. 2000: 25.0; Prog. 2001: 12.0; 2002: 7.0
- Unemployment rate (in %): 1996: 6.0; 1997: 6.4; 1998: 5.9; 1999: ...
- Gross national saving 1/ 2/: 1996: 18.9; 1997: 20.8; 1998: 23.2; Est. 1999: 20.0; Proj. 2000: 20.4; Prog. 2001: 19.5
- Gross domestic investment 1/ 2/: 1996: 23.4; 1997: 24.6; 1998: 23.9; Est. 1999: 22.8; Proj. 2000: 24.4; Prog. 2001: 23.3

Public finance (in % of GNP)
- Central government Primary balance: 1996: 1.2; 1997: -0.2; 1998: 3.6; Est. 1999: 0.9; Proj. 2000: 3.9; Prog. 2001: 5.3
- Central government Overall balance: 1996: -8.4; 1997: -7.6; 1998: -7.7; Est. 1999: -12.1; Proj. 2000: -12.6; Prog. 2001: -6.0; 2002: -2.2
- Central government debt: 1996: 48.0; 1997: 48.4; 1998: 48.5; Est. 1999: 60.5; Proj. 2000: 60.1; Prog. 2001: 58.8; 2002: 57.0
- Consolidated public sector Primary balance: 1996: -1.2; 1997: 0.5; 1998: -2.7; Est. 1999: 2.2; Proj. 2000: 3.7
- Operational balance: 1996: -7.1; 1997: -3.0; 1998: -4.9; Est. 1999: -13.6; Proj. 2000: -9.9; Prog. 2001: -4.6
- Consolidated net debt: 1996: 46.5; 1997: 42.9; 1998: 44.5; Est. 1999: 58.0; Proj. 2000: 57.9; Prog. 2001: 56.6; 2002: 54.6

Money and credit (end-year, % change)
- Broad liquidity 3/: 1996: 113.1; 1997: 117.6; 1998: 76.0; Est. 1999: 82.6; Proj. 2000: 41.1; Prog. 2001: 28.9; 2002: 22.0
- Credit to private sector: 1996: 120.5; 1997: 125.8; 1998: 81.7; Est. 1999: 58.3; Proj. 2000: 38.0

Interest rates (year average)
- Treasury bill rate 4/: 1996: 132.4; 1997: 105.2; 1998: 115.7; Est. 1999: 106.2
- Overnight money market rate: 1996: 115.8; 1997: 101.4; 1998: 111.9; Est. 1999: 107.0; 1999: ..

Balance of payments
- Trade balance 1/: 1996: -5.7; 1997: -8.0; 1998: -7.0; Est. 1999: -5.8; Proj. 2000: -7.2
- Current account balance (including shuttle trade) 1/: 1996: -1.3; 1997: -1.4; 1998: -0.5; Est. 1999: -1.8; Proj. 2000: -1.6; Prog. 2001: -1.5
- Reserves (US$ billions, end-of-period): 1996: 17,695; 1997: 19,575; 1998: 20,112
- Reserve cover (in months of imports of GNFS): 4.0

Notes from sources table:
- 1/ In percent of GNP
- 2/ Difference between balance of payments and the national income accounts comes from the treatment of shuttle trade and related services receipts.
- 3/ Includes foreign currency deposits and repos.
- 4/ Simple average across maturities ranging from three-months to one-year, net of tax.

### Policy Recommendations and Safeguards Highlighted
- Ensure full and rigorous implementation of the budget.
- Mobilize resources through privatization to reduce domestic borrowing and interest rates.
- Maintain commitment to the preannounced exchange rate path while implementing a transparent preannounced exit strategy.
- Accelerate structural reforms (privatization, pension reform, agricultural policy changes) to secure medium-term fiscal sustainability, raise efficiency, and reduce contingent liabilities.
- Complement fiscal consolidation with active and diversified debt management.

*International Monetary Fund — Press Release No. 99/66 — December 22, 1999.*

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## References

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