Public Information Notice: IMF Concludes 2002 Article IV Consultation with Turkey
IMF News, April 19, 2002
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- Published: April 19, 2002
Background
- Turkey faces decades-long weak performance characterized by downward trend in growth since the 1970s, upward trend in inflation, and increasing volatility due to pervasive structural rigidities, weak public finances, and low policy credibility.
- Structural problems noted: banking sector weaknesses, social security issues, inefficient public sector, barriers to private sector development, high public debt burden.
- Three major attempts to address weaknesses:
- 2000 Standby Agreement (initiated December 1999): strong fiscal adjustment, preannounced exchange rate crawl, structural reforms in banking, social security, privatization, and agriculture; initially achieved some successes but led to a liquidity crisis and large loss of reserves in late 2000 and speculative attack in February 2001, forcing a currency float amid high interest rates and accelerating inflation.
- May 2001 strengthened program with additional IMF support: fundamental banking sector restructuring, commitment to a floating exchange rate, continued disinflation, substantial fiscal adjustment, enhanced private sector role; progress hampered by September 11 market deterioration and persistent structural inefficiencies.
- 2002–04 intensified IMF-supported program: continuation of the float, financial sector reform, corporate sector restructuring, continued fiscal discipline, and a strong structural reform agenda intended to set the stage for sustained growth once macro stabilization is achieved.
Developments under the 2002 Program
- Financial market and macro improvements:
- Benchmark bill rate fell sharply; Turkish lira appreciated by more than 20 percent to around TL 1.3 million to the U.S. dollar.
- Trend toward dollarization diminished and showed signs of reversal.
- Stock market rose by over 50 percent in lira terms since mid-September.
- Roll-off of external interbank credits ceased.
- Short-term public debt rollover concerns abated; domestic debt maturity lengthened; strong demand for new Eurobond issues.
- Inflation started to decline; Central Bank of Turkey (CBT) reduced the overnight rate by 14 points (to 66 percent) in three steps over the past two months.
- Program implementation and performance criteria:
- In January, authorities met more than ten prior actions in fiscal and structural areas required for SBA approval.
- All quantitative performance criteria relevant for the first review were met.
- Base money came in below the end-February ceiling; Net International Reserves and Net Domestic Assets targets met comfortably.
- Public sector primary surplus target of 5.5 percent of GNP for 2001 was exceeded by an estimated 0.4 percent of GNP; in January the consolidated government sector exceeded its primary surplus target comfortably.
- Solid progress reported on meeting structural conditionality.
Executive Board Assessment — Findings and Recommendations
- Directors welcomed decisive efforts and ambitious reform program to lay basis for sustainable growth and reduce vulnerability to shocks.
- Key findings:
- Past obstacles included fiscal laxity, governance deficiencies, lack of a nominal anchor, inefficiencies and nontransparencies in public sector, damaged banking sector, and barriers to private sector development.
- Macroeconomic policies remained prudent; continued structural reform efforts noted (identification of public sector staffing redundancies; adoption of legislative basis for improved public debt management).
- Results: substantial decline in interest rates; stronger balance of payments and appreciation of the lira; drop in inflation and inflation expectations.
- Risks emphasized:
- Downside risks to strength and timing of output recovery; financial markets remain alert to possible shocks.
- Concern that prolonged slow growth would adversely impact debt sustainability.
- Policy recommendations and priorities:
- Boost growth via structural reforms to raise private investment and productivity and to lower real interest rates.
- Government coalition must provide undivided support for successful program implementation.
- Maintain strict budget implementation to ensure sustainable debt position.
- Authorities committed to public sector primary surplus target of 6.5 percent of GNP in 2002; remain ready to take offsetting measures if downside risks materialize to safeguard the target and maintain external debt sustainability.
- Decisive reforms needed to underpin overall budget targets: improve expenditure management, streamline tax policy, strengthen revenue administration, simplify the tax code, downsize state economic enterprises, and pursue civil service reform.
- Monetary policy role: use increasing scope to promote disinflation and enhance confidence; introduction of inflation targeting could further anchor expectations (some Directors thought preconditions could be in place by midyear; others called for a longer track record on disinflation).
- Reserve management: CBT urged to build up foreign exchange reserves using better-than-expected balance of payments developments; welcomed pre-announced foreign exchange purchase auctions.
- Develop money and foreign exchange markets to support floating exchange rate regime; plan to lower distortionary taxes and reform reserve requirements welcomed.
- Closely monitor external competitiveness in light of recent lira appreciation.
- Banking sector: welcome progress including bank recapitalization plan implementation; call for rapid movement on corporate debt restructuring; preserve integrity, transparency, and timetable of recapitalization process; maintain independence of regulatory institutions.
- Accelerate privatization while market conditions are favorable; address inefficiencies in state economic enterprises as core factor behind disappointing growth.
- Improve investment environment, promote transparency and efficiency of public administration at central and local levels.
- Continue measures to combat money laundering and the financing of terrorism.
- Commended recent moves to improve transparency and data provision; noted remaining deficiencies in fiscal statistics but welcomed extensive improvements in fiscal transparency.
Turkey: Selected Indicators, 1999–2004 (key figures as reported)
- Real Sector (In percent)
- Real GNP growth rate: 1999 -6.1; 2000 6.3; 2001 -9.4; 2002 3.0; 2003 5.0; 2004 (blank)
- GNP deflator: 1999 55.8; 2000 50.9; 2001 57.8; 2002 53.2; 2003 24.4; 2004 13.1
- Nominal GNP growth rate: 2000 ...; 2001 60.4; 2002 42.9; 2003 30.7; 2004 18.8
- WPI (12-month, end-of-period): 1999 62.9; 2000 32.7; 2001 88.6; 2002 31.0; 2003 16.2; 2004 12.0
- CPI (12-month, end-of-period): 1999 68.8; 2000 39.0; 2001 68.5; 2002 35.0; 2003 20.0
- Average nominal treasury bill interest rate: 1999 106.2; 2000 38.0; 2001 99.1; 2002 65.6; 2003 46.0; 2004 38.1
- Average ex-ante real sector interest rate 1/: 1999 32.0; 2000 -9.5; 2001 31.1; 2002 30.8; 2003 27.5
- Central government budget (In percent of GNP)
- Primary balance 2/: 1999 1.5; 2000 4.2; 2001 4.6; 2002 5.3; 2003 5.6
- Net interest payments 3/: 1999 15.8; 2000 21.8; 2001 19.0; 2002 17.3; 2003 13.5
- Overall balance: 1999 -11.6; 2000 -17.2; 2001 -13.7; 2002 -11.7; 2003 -7.8
- Consolidated Public Sector
- Primary balance: 1999 -2.0; 2000 2.3; 2001 5.9; 2002 6.5
- Net Interest Payments 4/: 1999 22.1; 2000 21.9; 2001 23.5; 2002 17.6; 2003 15.6; 2004 12.5
- PSBR (including CBT profits): 1999 24.1; 2000 19.6; 2001 11.1; 2002 9.1; 2003 6.0
- Operational balance: 1999 -12.4; 2000 -6.9; 2001 -1.2; 2002 -3.5; 2003 -4.4; 2004 -3.0
- Net debt of public sector: 1999 61.0; 2000 57.4; 2001 93.3; 2002 77.2; 2003 69.7; 2004 65.7
- Net external: 1999 20.1; 2000 18.3; 2001 36.8; 2002 33.4; 2003 29.2; 2004 27.1
- Net domestic: 1999 40.9; 2000 39.1; 2001 56.5; 2002 43.8; 2003 40.6; 2004 38.6
- Net debt of public sector (in percent of centered GNP) 5/: 1999 48.6; 2000 51.3; 2001 75.7; 2002 68.6; 2003 65.1; 2004 61.7
- External sector
- Current account balance: 1999 -0.7; 2000 -4.9; 2001 -1.0; 2002 -1.1
- Gross external debt: 1999 55.1; 2000 59.4; 2001 80.2; 2002 67.5; 2003 65.4
- Net external debt: 1999 33.7; 2000 39.2; 2001 54.5; 2002 44.4; 2003 42.7
- Short-term external debt (by remaining maturity): 1999 20.8; 2000 23.0; 2001 22.7; 2002 18.2; 2003 17.5; 2004 17.4
- Monetary aggregates
- Seignorage 5/: 1999 3.2; 2000 1.8; 2001 1.0; 2002 0.7
- Nominal growth of M2Y broad money (in percent): 1999 98.7; 2000 39.6; 2001 88.3; 2002 40.2; 2003 27.4; 2004 17.1
- In billions of U.S. dollars, unless otherwise indicated
- Privatization proceeds: 1999 0.1; 2000 3.3; 2001 2.8; 2002 2.5
- Net external financing of central government: 1999 1.4; 2000 4.1; 2001 -3.7; 2002 0.0; 2003 -1.7
- Amortization: 1999 6.2; 2000 8.2; 2001 8.4; 2002 8.0
- Gross borrowing: 1999 7.4; 2000 10.3; 2001 4.5; 2002 6.7; 2003 7.0
- Of which: Eurobond issues: 1999 7.5; 2000 2.2; 2001 4.7
- GNP: 1999 187.4; 2000 201.3; 2001 146.5
- GNP (in quadrillions of Turkish lira): 1999 78.3; 2000 125.6; 2001 179.5; 2002 283.2; 2003 370.1; 2004 439.5
This PIN summarizes the views of the Executive Board as expressed during the April 15, 2000 Executive Board discussion based on the staff report.