|Use the free Adobe Acrobat Reader to view Table 3.
January 30, 2001
Mr. Horst Köhler
International Monetary Fund
Washington, D.C. 20431
Dear Mr. Köhler:
1. The strict implementation of the strengthened policies
described in our Letter of Intent (LoI) of December 18, 2000—together
with the support of the international financial community—rapidly
restored market confidence after the financial turmoil in late 2000.
We remain fully committed to the strategy laid out in the December 18
LoI. That letter remains the main document outlining our policies for
2001-02, which are here updated in some specific aspects in light of
recent developments. This update relates to: (i) monetary policy implementation
within the existing framework; (ii) the reform of the tobacco sector;
(iii) the rolling out of tax identification numbers (TINs); and (iv)
banking. We hereby also request completion of the fifth review under
the Stand-by Arrangement.
2. We will continue to manage monetary policy within the
framework set forth in the December LoI. The preannounced exchange rate
path will remain the main monetary anchor of the program. Within this
constraint, the Central Bank of Turkey (CBT) will manage monetary policy
with the goal of maintaining an adequate level of foreign exchange reserves,
and, to the extent made possible by our exchange rate commitment, of
keeping monetary conditions at a level supportive of our inflation target.
The December LoI indicated that should capital inflows be stronger than
envisaged at that time, NDA would be kept below its ceiling so as to
avoid excessive money creation. This policy has been strictly implemented
in January, thus helping to restore confidence. The CBT will continue
to monitor developments in base money, and reduce NDA in response to
higher-than-projected capital inflows, keeping in close consultation
with Fund staff. Moreover, in light of the large margin of NDA with
respect to its ceiling that is expected to be registered at end-January,
we have revised downwards the NDA ceiling for the dates following January
31, so as to increase the predictability of monetary policy (Annex
A). Correspondingly, the NIR floors have been revised upward (Annex
B). The appropriateness of the NDA and of the NIR floors will be
reassessed during the forthcoming program reviews, in light of developments
in external accounts and inflation. NDA between test dates is not expected
to exceed systematically, or by large amounts, the ceilings set for
the test dates following January 31, except during the March religious
holidays (for which a more detailed indicative path for NDA will be
discussed during the February program review). In the event of significant
deposit withdrawals and in accordance with the protocol between treasury,
the Savings Deposits Insurance Fund (SDIF), and the CBT, the latter
is committed to provide liquidity to the affected SDIF bank (banks),
if needed to implement the guarantee. Should this lead to a breach of
the NDA ceiling, the CBT will consult with the Fund staff to examine
the factors behind the breach, and will be committed to move NDA back
within the ceiling with open market operations immediately thereafter.
Finally, in order to facilitate monetary management, state banks will
be more prompt in adjusting their borrowing rates to money market conditions.
3. The reform strategy for the tobacco sector and the
restructuring of TEKEL, one of the main component in our agricultural
policy reform and in our privatization drive, is being strengthened
with respect to the December LoI. We will transfer the state monopoly
agency (TEKEL) to the Privatization Agency (PA), instead of transferring
only its tobacco processing units. To this end, a law—which will
also reform the tobacco sector and phase out support purchases of tobacco—will
be enacted by end-February 2001 (a structural benchmark, Annex C).
4. As stated in the December LoI, strengthening tax administration
is essential to improve efficiency and equity of the tax system. Among
other steps, we have increased the number of TINs from 13 million at
end-1999 to 15.2 million at end-2000. We intend to increase by 50 percent
the number of TINs from the end-2000 level by end-2002. To that end,
the necessary tax regulations will be enacted by end-September 2001
(a structural benchmark, Annex C).
5. Regarding banking, the resolution of the SDIF banks
is proceeding according to schedule. The transition bank set up to reorganize
the assets and liabilities of the five banks that will have their license
revoked will be sold or otherwise resolved by end-September 2001 (a
structural performance criterion). The strategy for dealing with the
remaining two banks taken over by the SDIF after September 2000 is still
being developed as information on these banks is being refined. SDIF
intends to sell the larger of these two banks (Demirbank) using a "fast
track" process, taking advantage of substantial investor interest
already expressed in this bank. The bidding terms will be announced
by end-January 2001 and will be followed by a brief due diligence process;
after that we expect to complete a speedy sale. In the case of the remaining
bank, the SDIF will follow the same sales process used for the banks
taken over before October 2000 but with a two-month time lag. Regarding
bank regulation, a new regulation meeting EU standards that defines
direct and indirect ownership relationships in connected lending is
still being discussed with the banking industry and is expected to be
introduced by end-February 2001 (a structural benchmark).
|Very truly yours,
Mr. Recep Önal
Minister of State for Economic Affairs
Mr. Gazi Erçel
Governor of the Central Bank
Table 1. Turkey: Performance Criteria
on the Net Domestic Assets
of the Central Bank of Turkey
(In trillions of lira)
Outstanding NDA as of January 11, 2001:
January 31, 2001 (performance criterion)1
February 28, 2001 (performance criterion)1
March 31, 2001 (performance criterion)1
June 30, 2001 (performance criterion)1
September 30, 2001 (indicative ceiling)1
December 31, 2001 (indicative ceiling)1
1 The compliance
with the performance criterion (indicative target) shall be based
on the average of the stocks prevailing during the five working
days immediately preceding each of these dates.
1. The net domestic assets (NDA) of the Central Bank of Turkey (CBT) are defined
as base money less the net foreign assets of the CBT valued in Turkish lira
at end-month actual exchange rates.
2. Base money is defined as currency issued by the CBT, plus the banking sector's deposits in Turkish lira with the CBT.
3. Net foreign assets of the CBT are defined as the sum of the net international reserves of the CBT (as defined in Annex F of the Letter of Intent (LoI) dated December 18, 2000), medium-term foreign exchange credits (net), and other net foreign assets (including deposits under the Dresdner scheme of original maturity of two years or longer). As of September 30, 2000, net foreign assets of the CBT amounted to TL 6,776 trillion.
4. The cumulative net change in the devaluation account from its balance at end-1999 (excluding any distribution—in cash or through the write-off of government paper held by the CBT or by any other mean—of unrealized foreign exchange profits) will be subtracted from the end-period NDA stock as calculated above.
5. NDA ceilings will be adjusted for any change in the definition of the aggregate to which the reserve requirement applies according to the following formula:
NDA = R*B,
where: R denotes the 4 percent reserve requirement plus the 2 percent
liquidity requirement coefficient and B
denotes the change in base generated by a change in the definition of
the reserve aggregate. Neither this coefficient nor the averaging period
will be changed during 2001.
6. The NDA ceilings will be adjusted downward for any waiver of reserve requirements
for any additional bank intervened by the BRSA. The adjustment will be
equal to the existing reserve requirement coefficient times the amount
of liabilities at these banks subject to reserve requirements.
Table 2. Turkey: Performance Criteria on
Net International Reserves
(In millions of U.S. dollars)
Outstanding stock as of January 11, 2001:
January 31, 2001 (performance criterion)
February 28, 2001 (performance criterion)
March 31, 2001 (performance criterion)
June 30, 2001 (performance criterion)
September 30, 2001 (indicative floor)
December 31, 2001 (indicative floor)
1. Net international reserves of the Central Bank of Turkey (CBT) comprise its gross foreign assets excluding encumbered reserves less its gross international reserve liabilities plus the net forward position of the central bank, denominated in U.S. dollars. Encumbered reserves are reserves that are not readily available.
2. For the purpose of the program, gross foreign assets are all short-term foreign (convertible) currency denominated claims on nonresidents, monetary gold valued at the November 30, 2000 average London fixing market price of US$269.05 per troy ounce, foreign bank notes, balances in correspondent accounts, and any reserve position in the IMF. At present encumbered reserves consist of foreign asset holdings in accounts of the Turkish Defense Fund (amounting to US$426 million on November 30, 2000). The special Dresdner portfolio (amounting to US$898 million on November 30, 2000) is also encumbered, but is not subtracted from foreign reserves given the overlap with one-year foreign currency denominated liabilities (see below). Reserve assets as of November 30, 2000 amounted to US$19,428 million.
3. Gross international reserve liabilities include all foreign currency-denominated liabilities to nonresidents with an original maturity of up to and including one year, reserves against foreign currency deposits of the banking sector, claims from central bank letters of credit, overdraft obligations of the central bank, and liabilities arising from balance of payments support borrowing irrespective of their maturity (including liabilities to the IMF). On November 30, 2000 reserve liabilities thus defined amounted to US$8,331 million.
4. The net forward position is defined as the difference between the face value of foreign currency-denominated central bank off-balance sheet (forwards, swaps, options, and any future contracts) claims on nonresidents and foreign currency obligations to both residents and nonresidents. As of November 30, 2000 these amounts were zero.
5. All assets and liabilities denominated in foreign currencies other than the U.S. dollar will be converted into U.S. dollars at the program cross rates specified in Annex J in the Letter of Intent dated December 18, 2000.