IMF Mission for the 1999 Article IV Consultation Discussions and Third Review of the Staff Monitored Program--Turkey

IMF News, July 2, 1999

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• Published: July 2, 1999

A. Introduction

• Turkey launched a program aimed at reducing inflation described in the authorities' Memorandum of Economic Policies of June 26, 1998, monitored under an 18-month staff monitored program (SMP).
• Authorities intend to implement a comprehensive macroeconomic and fiscal adjustment program with the goal of lowering inflation to 10 percent by end-2001.
• The authorities requested IMF resources to support a program to be implemented over the next three years; a framework for an IMF-supported program was agreed in principle pending implementation of immediate steps and agreement on more detailed 2000-2001 aspects.
• The SMP will serve as a bridge toward a Fund-supported program; quarterly quantitative targets for revenues, expenditures, the primary surplus of the central government, and net domestic assets (NDA) of the Central Bank of Turkey (CBT) are specified and will be monitored under the SMP.

B. Recent Economic Developments — Key Findings and Indicators

• Inflation:
  • WPI dropped to 48 percent by early 1999 (its lowest level this decade).
  • CPI and WPI inflation dynamics: CPI inflation expected to continue edging down in 1999; WPI inflation could remain broadly unchanged at current levels.
  • Incipient increase in inflation since early 1999 reflecting primarily the increase in international oil prices.
• Fiscal balances and public finance:
  • Primary balance of the central government improved from 0.1 percent of GNP in 1997 to 4.2 percent of GNP in 1998.
  • Fiscal policy relaxed starting in late 1998; primary surplus projected to decline to 1 percent of GNP in 1999 absent offsetting measures.
  • Without corrective measures, overall deficit projected to widen from 7.7 percent of GNP in 1998 to about 11 percent of GNP in 1999.
• Monetary and external:
  • CBT met quantitative benchmarks for NDA for end-March 1999 and end-June 1999 by comfortable margins.
  • CBT protected external balance and maintained an adequate level of foreign exchange reserves following capital outflows after the Russia crisis.
  • External current account swung into surplus of about 1 percent of GNP in 1998; projected to weaken somewhat in 1999 but remain close to balance.
• Output and activity:
  • GNP growth fell to 3.8 percent in 1998.
  • Staff expects GNP growth for 1999 to be around 0.5 percent.
  • Latest indicators suggest recessionary forces eased in the second quarter of 1999 with rebounds in industrial production, exports and imports.

C. The Policy Agenda — Goals and Recommended Measures

Fiscal Policy

• Immediate objective: offset implementation slippages of late 1998 and early 1999.
• Medium objective: move the primary balance of the public sector into surplus to ensure fiscal solvency and low inflation.
• Authorities intend immediate steps to achieve a primary surplus of the central government of over 2 percent of GNP (excluding privatization proceeds) in 1999.
• Government identified measures aimed at yielding some 1 percent of GNP during the second half of 1999; these measures will be enacted over the next few weeks.
• Despite the 1999 measures, the primary balance of the public sector is projected to remain in deficit (about 1.3 percent of GNP) in 1999.
• Fiscal correction for 2000:
  • Improve the primary balance of the public sector by about 5 percentage points of GNP with respect to the expected outcome in 1999.
  • Authorities committed to raise the primary surplus of the public sector to 3 ¾ percent of GNP in 2000.
  • Depending on distribution, the primary surplus of the central government will range from 4¼ percent to 5½ percent of GNP in 2000.
• Emphasis on revenue and expenditure measures that are mostly long-lasting and structural to avoid temporary adjustments.
• Fiscal tightening is expected to reassure markets, strengthen confidence, attract foreign capital, and bring down interest rates.

Structural Reform

• Fast implementation schedule for a far-reaching structural reform agenda.
• Financial sector:
  • New Banking Law passed, establishing an independent bank regulatory and supervision agency.
  • Ceiling on banks' net foreign exchange positions to be lowered to 20 percent of net worth by end-September 1999; regulations to be rigorously enforced.
  • Regulatory authority to be made operational with full independence and adequate operational resources.
• Social security:
  • Deficit of the social security system will reach 3 percent of GNP in 1999, almost TL 2 ½ quadrillion.
  • Government proposes far-reaching reforms of pension system parameters (retirement age, length of contributing period, length of reference period for calculating pension base, indexation system) to ensure medium-term financial viability.
  • Approval of strong reform is presented as essential and a key test to markets.
• Privatization:
  • Authorities determined to resume privatization program after a hiatus in late 1998 and first half of 1999.
  • Intend legal and regulatory measures, including those to allow for international arbitration, to accelerate privatization in energy and telecommunication sectors.
• Agricultural support policy:
  • Shift toward replacing existing agricultural subsidies with direct income support over time to reduce accumulated stocks, reduce fiscal burden, and achieve net savings for public finances.

Monetary and Exchange Rate Policy

• CBT has managed monetary policy independently in recent years, helping to alleviate costs of external shocks.
• CBT will continue flexible monetary and exchange rate management to contain inflationary pressures while protecting foreign exchange reserves.
• Negative fiscal developments forced monetary policy to remain tight recently; renewed fiscal consolidation should allow a more balanced macro mix and declining nominal and real interest rates.
• Quantitative benchmarks on NDA of the CBT established under the SMP.

Incomes Policy

• Incomes policy essential to contain inflation in the immediate future and to anchor expectations in 2000 and 2001.
• Public sector wage growth signals authorities' commitment and affects private sector wages.
• Forward-looking indexation focused on targeted inflation is needed to bring inflation down rapidly.
• Private sector encouraged to set up arrangements to allow rapid deceleration of wage growth in 2000 and 2001.

D. Concluding Remarks — Expected Outcomes if Program is Implemented

• Coordinated monetary, fiscal, and structural policies are required to win the battle against inflation.
• IMF staff view authorities' program as capable, if fully implemented, of producing:
  • Sharp decline of nominal and real interest rates.
  • Rapid pick-up of economic activity.
  • Deceleration of inflation to 25 percent during 2000, and 10 percent by end-2001.
• The mission emphasizes the need for national cooperation across government, workers, and entrepreneurs to achieve the goals.

Table 1 — Quantitative Indicators for the Staff Monitored Program for 1999 (Trillions of Lira, unless otherwise indicated)

• Fiscal indicators (Cumulative flows from January 1, 1999)
  • Total revenues
  • March-99 Target: 3,005
  • March-99 Outcome: 2,874
  • June-99 SMP Target (September): 7,280
  • December: 12,700
  • (Yearly) 18,700
  • Total non-interest expenditures
  • March-99 Target: 3,140
  • March-99 Outcome: 3,066
  • June-99 SMP Target (September): 6,700
  • December: 11,800
  • (Yearly) 17,000
  • Primary surplus (excl. privatization proceeds)
  • March-99 Target: -135
  • March-99 Outcome: -193
  • June-99 SMP Target (September): 580
  • December: 900
  • (Yearly) 1,700
  • Privatization proceeds for debt reduction
  • March-99: 270
• Monetary indicators — Net Domestic Assets of the Central Bank of Turkey (end-of-period stocks)
  • Average daily figures during the week of April 5 through 9 used for March-99: (800-900)1
  • March-99 Outcome: 96
  • June-99 SMP Target (September): 1,000
  • December: -899
  • (Yearly) -1,000
  • (Yearly) -1,100
• Memorandum items:
  • WPI (12-month change)
  • March-99: 48
  • June-99: 45
  • SMP Target (September): 50-55
  • CPI (12-month change)
  • March-99: 64
  • June-99: 55

IMF Mission for the 1999 Article IV Consultation Discussions and Third Review of the Staff Monitored Program—Turkey, July 2, 1999.

References

• Republic of Türkiye and the IMF
• Mission Concluding Statements
• PRESS CENTER
• Article IV
• 2005
• 2004
• 2003
• 2002
• 2001
• 2000
• 1999
• 1998
• Turkey
• https://www.imf.org/en/home