Turkey and the IMF
News Brief: IMF Approves US$3 Billion to Turkey Under Stand-By Arrangement
Country's Policy Intentions Documents
Free Email Notification
Mr. Horst Köhler
Dear Mr. Köhler:
1. Under our strengthened economic program adopted in May, we have made major strides in stabilization and reform. Owing to our strong fiscal efforts, the public sector now has a large primary surplus, compared with a large deficit only two years ago. Important structural reforms to lay the foundation for a more competitive economy have been launched, with emphasis on increased transparency and greater separation between politics and the management of economic institutions. Key laws relating to banking reform, fiscal transparency, deregulation, and the independence of the Central Bank of Turkey (CBT) have been enacted.
2. Despite occasional domestic disagreements, not surprising given the far-reaching nature of the reforms, these efforts started to bear fruit toward the end of the summer. The stabilization and reform process has been challenging and far reaching. At times, public debates concerning agricultural support prices, public sector wages, and the preparations for privatization in key sectors, including telecoms, interrupted the improvements in financial indicators. Nevertheless, by early September, inflation had declined, the external current account had moved into surplus, and interest rates on government securities were on a downward trend. The floating exchange rate regime had started to function more effectively, and the value of the Turkish lira had stabilized in the foreign exchange market. Also, there were signs that the economic downturn triggered by the crisis was coming to an end.
3. The tragic events of September 11 disrupted the positive momentum in the economy and worsened the outlook. In the immediate aftermath, financial markets reacted strongly: interest rates on governments securities rose by 10–15 percentage points, stock prices fell sharply, and the Turkish lira depreciated substantially. While financial indicators have since recovered because of the expectations of further financial support from the international community, the adverse effects on the economy more generally are only beginning to show. Tourism receipts are taking a hit, and exports, which had performed well in the first eight months, will be affected, delaying the start of economic recovery and weakening the external current account. Capital inflows are diminishing, as Turkey's access to the international capital markets has become more limited and investors' appetite for Turkish assets has weakened.
4. Nevertheless, we have continued the firm implementation of our economic program. Since the completion of the ninth review under the stand-by arrangement, we have made further progress in key areas, notably bank restructuring, fiscal adjustment, and monetary policy. All performance criteria relevant for completion of the tenth review have been met (Annex A). We have also observed three key structural benchmarks, namely the appointment of advisors to help develop the corporatization plan for Türk Telekom, submission to parliament of a Public Procurement Law strengthening transparency and efficiency and in line with EU standards, and accompanying the draft 2002 budget by accounts and financial outlook for the various public sector entities (Annex B).
5. In response to the worsened outlook following the September 11 events, we are now formulating a strengthened program for 2002–04, and we are seeking further financial support from the international community. This medium-term program will build on the progress we have already made in macroeconomic and financial stabilization, while taking decisive steps to complete banking reform, revitalize privatization and private sector development more generally, and improve governance and efficiency in the public sector. We expect to finalize this program and present it to the Fund before the end of this year.
6. Meanwhile, we are already taking measures to alleviate the impact of the September 11 events on Turkey. In particular, we are introducing urgent initiatives to allow us to meet the ambitious fiscal targets for 2002, and to support viable real sector enterprises facing temporary difficulties as a result of the current situation. We will continue to communicate these and other policy measures to the Turkish people and domestic and international investors, to broaden support for our economic program.
7. On this basis, we request completion of the tenth review under the stand-by arrangement. We also request modifications of the program's monetary performance criteria and indicative targets for end-2001, as set out in paragraph 14 below. In particular, to anchor monetary policy, we propose converting the end-2001 indicative ceiling on base money into a performance criterion. We also request modification of the end-December 2001 performance criterion on the primary expenditure of the central government, as discussed in paragraph 17 below. We believe that the policies and measures described in this letter are adequate to achieve the objectives of the program, but we stand ready to take additional measures if necessary to keep the program on track, in close consultation with the Fund.
8. The worsened external environment is delaying the economic recovery, complicating our disinflation efforts, and weakening the external current account. A steeper-than-expected decline in the second quarter had already suggested a need to revise downward our earlier projection of real GNP growth of –5.5 percent in 2001. The September 11 shock has further delayed the recovery, and we now estimate real GNP to decline by 8.5 percent this year. While we continue to expect a recovery in 2002, we have lowered our growth projection by one percentage point, to 4 percent. As regards inflation, the further currency depreciation suggests that our end-year CPI inflation projection needs to be increased from 58 to 65 percent. This still implies a substantial moderation in annualized inflation, from 75 percent in the first half of 2001 to 56 percent in the second half. For next year, based on the advice of the Monetary Policy Council, the government and the CBT have set an inflation target of 35 percent. Finally, the economic slowdown and the depreciation of the Turkish lira have led to a marked turnaround in the external current account in 2001, with a surplus of US$2¼ billion projected for the full year despite the anticipated loss of tourism and export receipts in the last quarter. For 2002, we project a current account deficit of almost US$2 billion, reflecting the combined effect of the September 11 shock, the economic recovery, and a more stable real exchange rate after the large real depreciation in 2001. We are well aware that in the present circumstances our projections are subject to considerable uncertainty, and we stand ready to adjust our policies should changes in the macroeconomic framework warrant this.
9. Given the depth of the recession, extra attention must be given to the supply side of the economy, while maintaining our strong fiscal stance. In August, we established a high level private sector led committee to review and propose possible measures in this area. Any measures to support the economic recovery will be market based, transparent, and consistent with budget targets. Two types of initiatives have been identified to date. First, to help ensure that viable firms receive the credit necessary for their operation, we will facilitate private sector-led corporate debt restructuring, while refraining from using public funds for this purpose (see paragraph 24 below). Second, we have adopted two temporary and narrowly-targeted tax reductions (in the supplementary motor vehicle purchase tax and the VAT rate on consumer durables) to last only until end-2001, with the objective of reducing a large accumulation of stocks in the consumer durables sector. The VAT tax rates had of course been increased for the great majority of goods and services in June, and our fiscal policy targets will not allow any further temporary or other reductions in 2001 or 2002.
10. Our strong budget implementation and measures to increase demand for treasury bills introduced in late July have secured the prospects for a comfortable domestic debt rollover for the coming months. As a result, the rollover ratio required of the private sector for the remainder of 2001 has fallen appreciably. To ensure a smooth rollover, we will continue to closely coordinate the government's borrowing strategy with restructuring of the public banks. In line with the program's strategy for bank restructuring, the Treasury has serviced in cash the recapitalization bonds held by state and SDIF banks (intervened banks controlled by the Saving Deposit Insurance Fund) to allow these banks to reduce their short-term liabilities and to provide for any migration of deposits to private banks. During the latter half of 2001, this policy has facilitated a sharp reduction in public banks' short-term liabilities, as their deposit base has been stable. Looking ahead, we will ensure that any liquidity of public banks in excess of that required to meet deposit outflows will be utilized to reduce the Treasury's borrowing requirement from the private sector. We expect that the strong financial position of state banks and continued growth in their deposits should give considerable scope for state banks to participate in the rollover.
11. We will take additional steps to further ease the rollover of government debt in 2002. The potential for participation of the state banks in the rollover as discussed above, together with additional external support to the budget, should limit the borrowing required from the private sector in 2002 to manageable levels. This will ease the rollover, and help to bring about a reduction in real interest rates. To further improve the prospects for a smooth rollover, we will take the following steps:
12. We have further strengthened the Treasury's borrowing strategy by improving the flow of information from the banking system. To this end, we have established a special committee that meets weekly. It consists of representatives from the Treasury, the CBT, the Banking Regulation and Supervision Agency (BRSA), the SDIF, the Capital Markets Board, and the state banks. The improved exchange of information, including a weekly report circulated to the heads of the participating institutions, will assist the Treasury in the formulation of its borrowing strategy.
13. We have decided to postpone the introduction of inflation targeting until next year, when we expect the conditions for a successful launch to be in place. We remain determined to make inflation targeting our nominal anchor as soon as conditions allow. However, the pass-through to domestic prices from recent exchange rate weakness associated with September 11 would have given the new regime, which we had intended to launch in the last quarter of this year, an unduly difficult start. The delay will also give us time to make progress in stabilizing government finances and further strengthening the banking sector, improving the prospects for the new regime. Ahead of the move to formal inflation targeting in 2002, we have announced a medium-term disinflation path, with an end-year target for CPI inflation of 35 percent in 2002, and projections of 20 percent in 2003 and 12 percent in 2004. We are also continuing our technical preparations for inflation targeting, with publication of a quarterly Monetary Policy Report scheduled for November. This report is the forerunner to an inflation report, which we intend to start publishing when we adopt inflation targeting. The newly created Monetary Policy Council (MPC) is responsible for formulating the principles and strategy of monetary policy, guided by the CBT's primary objective of price stability. It has already held its first meetings, and, as part of our effort to enhance transparency, will start issuing press releases after its meetings. Our fight against inflation will also benefit from the amended CBT Law's prohibition against lending to the Treasury, which became effective on November 5. For its part, the government will contribute to the disinflation effort, by ensuring tight fiscal discipline. Moreover, in our ongoing discussions with social partners and in the next meeting of the Economic and Social Council (to be convened before the end of the year), we will encourage forward-looking price and wage-setting behavior consistent with the inflation target.
14. In the interim, the existing monetary targets and overall implementation strategy remain in place. Consistent with the eventual move to inflation targeting, recent interest rate decisions have placed increased weight on the inflation outlook. At the same time, we have comfortably met performance criteria for net domestic assets and net international reserves under the existing monetary program. The monetary base has also been kept well within its indicative ceiling. For end-2001, we propose keeping the indicative targets on net domestic assets (NDA) and on the change in net international reserves (NIR) unchanged, but converting the latter into a performance criterion. To strengthen the monetary program, and to ensure that a nominal anchor is in place during the transition to inflation targeting, we also propose converting the indicative targets on the monetary base into performance criteria. For 2002, the monetary program will keep base money growth in line with the growth of real output and target inflation. Targets for base money will be lowered if the share of foreign currency deposits were to increase, and raised if the share of Turkish lira deposits recovers, in line with increasing confidence.1
15. We will further improve the working of our flexible exchange rate system. We will continue to strictly limit discretionary intervention in the foreign exchange market, that is, CBT foreign exchange transactions outside pre-announced auctions. We are also taking additional institutional steps to improve the functioning of the foreign exchange market. To enhance the development of forward and futures exchange markets, we will encourage the introduction of a Turkish Interbank Offer Rate, which should serve as a basis for pricing these financial instruments. In addition, we will clarify the taxation and accounting procedures of the futures contracts. This further development of the futures market will allow exporters and importers to hedge against exchange rate uncertainty. Also, the Treasury and the Privatization Agency are taking measures to improve financial management in the state economic enterprises, to prevent their lumpy foreign exchange transactions from causing disruptions to the foreign exchange market.
16. Fiscal policy in 2001 remains well on track. End-July and end-September performance criteria on the consolidated government sector primary surplus were met comfortably. Indeed, through end-September, the primary surplus stood at 5.6 percent of annual GNP, comfortably above the 3.4 percent program target. The overall balance of the consolidated government sector was also in line with the program at both dates (although the indicative floor for end-July was breached for technical reasons—see Annex E, which also includes a revised indicative floor for end-December 2001). The central government budget showed a strong primary surplus of 4.8 percent of GNP through end-October (almost 1 percent of GNP above expectations), owing to better than anticipated tax revenues and strict expenditure discipline (the end-June and end-September performance criteria on primary expenditure were both met).
17. For 2001 as a whole, we expect to meet our end-year public sector primary surplus target of 5.5 percent of GNP, but central government primary spending is likely to exceed its target. Adjusted for trend growth, this represents an impressive fiscal effort, on the order of 8 percent of GNP. While painful, it has helped Turkey restore confidence and lay the foundation for a rapid decline in the debt-to-GNP ratio starting next year. In the consolidated government sector, the impact of higher inflation on revenues, adherence to fixed budget expenditure ceilings, and postponement of investment spending at extrabudgetary funds (EBFs) and state economic enterprises (SEEs) will be more than sufficient to offset the impact of higher inflation on operating costs. However, in the central government, indexation of wages and pensions consistent with the higher inflation rate will produce higher expenditures, and we request modification of the end-December 2001 performance criterion on the primary expenditure of the central government by the corresponding amount (Annex F). Spending in other areas will be kept within the limits budgeted in nominal terms. In view of uncertainties about future revenue performance, and the need to secure our financing situation, we intend to save any possible overperformance. We will refrain from reducing tax rates or eliminating taxes beyond the two temporary cuts mentioned in paragraph 9 above.
18. For 2002, the program target for the primary surplus of the public sector remains 6.5 percent of GNP. Since we do not project a sharp rebound in public sector revenues and need to support some new programs, this requires a substantial effort on our part to identify measures. While economic conditions are adverse, we see no alternative to this approach given the need to ensure debt sustainability. With the expected economic recovery and lower real interest rates, the targeted primary surplus should facilitate a decline in the public debt ratio over time. This in turn should lead to further declines in interest rates. The measures to reach our ambitious target are summarized in the next few paragraphs, and described in detail in Annex G.
19. In the central government, we aim to increase the primary surplus to 5.6 percent of GNP in 2002. To achieve this target, we aim to collect 25.0 percent of GNP in primary revenue, and to spend 19.4 percent of GNP, excluding interest payments. On the revenue side, we will avoid sharp increases in tax rates. Some tax increases are, however, necessary, including further real increases in the petroleum consumption tax and the motor vehicle tax. As regards expenditures, we will strictly limit personnel costs, and keep civil service and public sector hiring to a minimum. We will also make major strides in limiting non-wage spending, including by rationalizing our investment program and reorienting our agricultural support system.
20. In the remainder of the public sector, we aim to achieve a primary surplus of 0.9 percent of GNP in 2002. We expect the primary positions of social security institutions and local governments to remain broadly in balance. For EBFs we expect a small deterioration to a primary deficit of 0.2 percent of GNP (to accommodate increased social spending). This deficit however will be offset by a small surplus in the unemployment insurance fund (the decline vis-à-vis 2001 reflects the beginning of benefit payments in March, and a cut in premium payments in support of job creation). Hence, we expect the targeted primary surplus in the remainder of the public sector to come from SEEs. To accomplish this, we are taking a large number of measures, split roughly evenly between expenditures and revenues. On the expenditure side, our focus is on controlling the wage bill, and restructuring operations. The revenue measures include removal of exemptions and increases in enterprise tariffs. In support of these measures, we have assigned Treasury auditors to monitor performance and implementation on a quarterly basis.
21. While our fiscal policy stance is tight, we will nevertheless increase real spending in the social sector, protecting the most vulnerable segments of society. Overall social spending in the public sector in 2002—including education, health, and social protection (covering the Social Solidarity Fund, direct income support for farmers, and the social security institutions)—is expected to exceed the 14.5 percent of GNP benchmark set by the government under its expenditure management program supported by the World Bank's PFPSAL program. Additional social initiatives include the unemployment insurance system (which will start to make payments in early 2002); the programs of the Directorate for Social Services and Child Protection; and labor redeployment and reinsertion programs for workers laid off as a result of privatization (supported under the World Bank's Privatization Social Support Project).
22. We will ensure that all the measures to reach the primary surplus target of 6.5 percent of GNP will be in place by January 2002. The leaders of the coalition government have approved all the measures described in Annex G, and some have already been implemented. We expect parliament to approve the central government budget along the lines discussed above by December 14. Other measures will be implemented upon passage of amendments to existing laws, issuance of various circulars, and, for state economic enterprises, also upon decisions by their Boards of Directors. Most of these actions will be completed by end-year, but because of our already full parliamentary calendar some measures requiring legal amendments will be dealt with in January 2002.We believe that the measures set out above will be sufficient to achieve our target. Should deviations emerge, including during the approval processes for budgets of broader public sector entities, we would take immediate steps in consultation with the Fund to meet the consolidated public sector primary surplus target.
23. Our fiscal-structural agenda for 2001 remains on track:
Banking sector reform
24. We are pressing ahead with our strategy to strengthen the private banking system, so as to underpin a return to rapid medium-term growth. The central part of this strategy is to ensure that all private banks achieve and maintain a capital adequacy ratio of at least 8 percent by end-2001:
25. With the restructuring of the SDIF banks moving ahead expeditiously, we are on target to complete the resolution of the remaining eight SDIF banks by end-2001, as planned:
26. Further progress is being made with the restructuring of the state-owned banks, in preparation for their privatization:
27. We are continuing with the preparations for privatization of major state-owned companies. Preparations for further public offerings of TÜPRAŞ (oil refinery) and POAŞ (petroleum distribution) were well advanced before September 11, but the weakened market conditions have forced us to postpone these offerings to early next year. We are restructuring ISDEMIR (steel plant), including through staff reductions, and merging it with ERDEMIR. We will subsequently reduce the state share in ERDEMIR below 50 percent. Operational restructuring of Turkish Airlines continues, although the worldwide slump in the airline industry has weakened the company's financial position and prospects for sale. The Tobacco Law has been re-submitted to parliament following the veto of the first draft by the President, and we expect parliament to enact it early in January 2002. The Privatization Administration is working to complete the privatization plan for TEKEL (tobacco and alcohol monopoly), as well as for ŞEKER (sugar factories), although the finalization of those plans may extend beyond the original deadline of end-2001 because of legislative delays. In the energy sector, we appointed the regulatory board on November 2. Moreover, we are preparing for the sale of power plants and distribution network (with the support of the World Bank), and have initiated the transfer of two gas distribution companies to the Privatization Agency. On October 31, the new Board of Türk Telekom chose advisors for its corporatization plan (meeting a structural benchmark). So far this year, we have raised US$2.8 billion in privatization receipts. In 2002, we expect to raise about US$1.5 billion.
28. We are taking a number of steps to improve governance and attract FDI. A key step, the submission to parliament of a new Public Procurement Law consistent with international standards, was already mentioned above. Beyond this, to increase the transparency of economic policies, we will reinforce our efforts to improve the quality of public sector data. To this end, and to enhance public sector resource management more generally, we will present to parliament a Public Finance Management and Internal Control Law by mid-2002. Moreover, a conference was held in Ankara in mid-September to review the recommendations from the study of administrative barriers to investment, carried out by the World Bank's Foreign Investment Advisory Service (FIAS). An action plan based on the conference's findings has been presented to the Council of Ministers. As a result, among other things, we intend to:
29. Other measures to improve the business climate are under consideration. We are in the process of reviewing the commercial law, the land development law, the tax law, and other legislation affecting the business environment. We are also working to identify further measures to combat corruption and incorporate them into an integrated and ambitious plan of action for better governance in the public sector. This plan will be ready before the end of 2001, and will be based on the findings of a series of anti-corruption conferences, the first of which was held on September 20–21. Moreover, we are preparing for an investor conference that will bring together major international business leaders. This will enhance our communication of our economic program to domestic and international financial markets, and encourage FDI.
30. In structural and social issues we continue to work closely with, and expect the support of the World Bank.
Very truly yours,
Annex A—Table 1. Turkey: Quantitative Performance Criteria and Indicative Targets
Table 2. Turkey: Structural Policy Conditionality, 2001
Table 3. Turkey: Performance Criteria and Indicative Targets for the Monetary Base of the Central Bank of Turkey 1/
1. Targets for net domestic assets and base money are unchanged from Annex D of the July 31, 2001 MEFP. However, the base money target will now be a performance criterion under the program. Correspondingly, net domestic assets (whose definition has been revised) has been made an indicative target.
2. 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 U.S. dollars at current cross rates, and the figures converted into Turkish lira at end-July 2001 exchange rates.
3. Base money is defined as currency issued by the CBT, plus the banking sector's deposits in Turkish lira with the CBT. Indicative ceilings for base money are shown in Table 3.a below.
4. 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 May 3 MEP), medium-term and long-term foreign exchange credits (net), and other net foreign assets (including deposits under the Dresdner scheme of original maturity of two years or longer and the holdings in accounts of the Turkish Defense Fund, but excluding CBT's net lending to domestic banks in foreign exchange. As of March 31, 2001, net foreign assets of the CBT amounted to TL 9,012 trillion.
5. The cumulative net change in the devaluation account from its balance at end-1999 (excluding any distribution of unrealized foreign exchange profits, in cash or through the write-off of government paper held by the CBT, since end-March 2001), evaluated at end-July 2001 exchange rates, will be subtracted from end-period NDA stock as defined above. The balance of the devaluation account at end-March 2001 was TL-1,380 trillion.
6. 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:
where: R denotes the 4 percent reserve requirement plus the 2 percent liquidity requirement coefficient and ΔB denotes the change in base generated by a change in the definition of the reserve aggregate. The averaging period will not be changed during 2001.
7. NDA ceilings will be adjusted for any change in the reserve requirement coefficient according to the following formula:
where: B is the level of the base to which the reserve requirement applies on the test date and ΔR is the change in the reserve requirement coefficient and the liquidity requirement coefficient.
8. 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 3a. Turkey: Performance Criteria and Indicative Targets on the Net Domestic Assets of the Central Bank of Turkey (in trillions of Turkish Lira) 1/
Table 4. Turkey: Performance Criteria on Changes in Net International Reserves
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 (or TL-denominated liabilities indexed to any exchange rate) with an original maturity of up to and including one year (including 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. 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.
6. The limits on the changes in net international reserves for June through end-October specified in the above table will be increased by either the unused portion of the limit on the change in net international reserves from the previous period, or by 25 percent of the limit during the current period, whichever is less.
7. The limits on the changes in net international reserves for end-December and subsequent periods specified in the above table will be increased by the unused portion of the limit on the change in net international reserves from the previous period.
8. The change in net international reserves will be evenly distributed within each period.
Table 5. Turkey: Indicative Floors on the
1. The indicative floor (for December 31, 2001) on the cumulative overall balance of the consolidated government sector has been revised. The revision reflects a technical error in the calculation of the overall balance for SEEs. The new target for December 31, 2001 is given in this table, which replaces Table 4 of Annex D of the May 3, 2001 MEFP (EBS/01/69).
2. The overall balance of the consolidated government sector (CGS), Table 5, comprises the primary balance of the CGS as defined in Annex B (EBS/01/69), the net interest payments of the consolidated central government and the unemployment insurance fund and gross interest payments of the EBFs, SEEs, and SSIs, and the overall balance of any new government funds and institutions established after March 31, 2001. The monitoring of the different components of the overall balance will be as indicated in paragraph 1 of Annex B (EBS/01/69). Revenues of the CVGS will be as defined in paragraph 2 of Annex B; i.e., excluding privatization proceeds.
3. All definitions and adjusters specified in Annex B to apply to the primary balance of the CGS will also apply to the overall balance of the CGS.
Table 6. Turkey: Performance Criteria on the Cumulative
1. The primary expenditure of the consolidated central government (Table 6) comprises the cumulative non-interest expenditure of the consolidated central government (consolidated budget). The quarterly ceilings will be monitored from above the line on a modified cash basis (the so-called consolidated budget adjusted non-interest expenditure).
2. For purposes of the program, primary expenditure (Table 6) will exclude tax rebates, transfers to Eximbank, treasury payments of guaranteed debt up to the quarterly baseline reported in Annex J of the May 3 MEP, and any payment related to bank recapitalization and to the restructuring of state banks.
3. The deficits of the social security institutions (SSIs) are covered by transfers from the central government budget. The ceiling on the primary expenditure of the central government (Table 6) will be adjusted downward for any increase in the expenditure arrears of the SSIs. Arrears of the SSIs are defined as those payments overdue by more than one month, and in the case of Bag Kur, exclude arrears to the common retirement fund. As of December 31, 2000, the stock of arrears of Bag Kur stood at TL 120 trillion, while the two other institutions had no expenditure arrears.
4. The ceiling on the primary expenditure of the central government (Table 6) will be adjusted downward for any off-budget expenditure of the central government.
To help achieve our public sector primary surplus target of 6.5 percent of GNP in 2002, improve the cost-effectiveness of public administration, and reduce the weight of public expenditures on the real economy, we have specified TL 5.7 quadrillion (2 percent of GNP) in additional measures to be taken. The impact of the measures on the central government budget amounts to TL 3.1 quadrillion (about 55 percent) of the total; the remaining measures affect state economic enterprises (SEEs). For other parts of the public sector, we have specified our targets without recourse to new measures.
Central government budget (measures equivalent to 1.3 percent of GNP)
To enhance revenues, we have raised the petroleum consumption tax (PCT) by substantially more than the WPI in November. Looking forward, we will continue to index the PCT monthly for WPI inflation. We will also impose the PCT on natural gas at a specific rate of TL 12,500 per cubic meter (and index this rate to WPI subsequently); raise the special transactions tax by 50 percent and the motor vehicle tax by 75 percent (50 percent above the revaluation rate) in December 2001; and take measures to raise property tax revenues in large cities (while reducing the municipal tax share to 4.1 percent, to direct the additional resources to the budget). Together, we expect these measures to yield us TL 1.1 quadrillion (0.4 percent of GNP) in additional revenues. SEE price increases will yield an additional TL 0.5 quadrillion to the budget (0.2 percent of GNP), through Treasury shares, fund revenues and VAT.
To rationalize personnel expenditures, we will (i) reduce the replacement hiring ratio from 80 percent to 50 percent in the entire government budget except security, education, and health (total hiring, excluding transferred state bank workers, would be limited to total attrition); (ii) avoid new hiring of public sector workers (except in the military) and prevent any transfer of public workers from privatized institutions to consolidated budget agencies; (iii) restrict the applicability of the circular which states that retirement cannot be required to workers below 50, with expected wage savings in 2002 of TL 60 trillion; (iv) reduce labor costs for public sector workers in weakly performing enterprises by 10 percent; (v) require state banks to remit monthly to us funds sufficient to cover the cost of their redundant former civil servant employees, now paid by the budget (this payment would cease no later than the end of 2002); and (vi) increase rents for civil servants living in government housing. As regards civil service wage increases, our indexation methodology will remain the same as in 2001, and the upfront payment in January and July will be 10 and 5 percent respectively. Together, we expect these measures to yield us TL 0.5 quadrillion (0.2 percent of GNP) in cost savings.
To rationalize benefit expenditures and transfers to our pension funds, we will reduce regulated profit margins for medicine; tighten quality controls; limit prescriptions to amounts necessary and withhold a 10 percent co-payment; and pass by end-November the Bag-Kur reform bill, which will reorganize this institution and increase health premia for its members by 5 percent. Together, we expect these measures to yield us TL 0.5 quadrillion (0.2 percent of GNP) in cost savings. Given the impact of our retirement policy on the social security institution, the net impact of our public sector measures on benefits and pension transfers will be to achieve cost savings of TL 0.4 quadrillion (0.1 percent of GNP).
To improve the cost-effectiveness of operations and maintenance expenditures, we will immediately start the process of transferring obligations and resources from the central to the local level wherever appropriate. This process will continue and accelerate throughout 2002. We will eliminate the regions level administration; and gradually shift the workers, equipment and responsibilities of the Rural Affairs department, and of other central government departments and agencies, to the provincial administrations. Transfers to these ministries and agencies will be reduced by TL 0.3 quadrillion (efficiency gains, and additional revenues associated with revaluing properties for tax purposes by a factor of 9.5 should enable lower levels of government to cope with this burden). Together, we expect these measures to yield us TL 0.4 quadrillion (0.1 percent of GNP) in cost savings.
Finally, to help rationalize our system of agricultural and other subsidies we will eliminate all premia except those budgeted for soybean and canola (which together amount to TL 10 trillion). Also, reflecting price increases for sugar (see below), budgetary transfers to TSFAS will be reduced by TL 100 trillion. Consistent with earlier program commitments, we have eliminated all bank credit subsidies. Eliminating the premia payments and lowering transfers to TSFAS will yield us TL 0.3 quadrillion (0.1 percent of GNP) in cost savings.
State economic enterprises (SEEs) (measures equivalent to 1.1 percent of GNP)
To enhance SEE revenues, in November we raised the price of alcohol and tobacco products by 25 percent; prices at Telekom by 12 percent; and prices for sugar by 25 percent. We will undertake price increases netting us another TL 100 trillion by end-2001. During 2002, SEE prices will move in line with the WPI, or world market prices (where applicable). We will also eliminate discounts and exemptions granted by the coastal surveillance corporation, the airports, the railway, the airline, TEDAS (for induction furnaces and treatment plants), TIGEM and others. Finally, we have undertaken to reduce distribution losses in the energy sector by (i) installing and activating meters for those customers of TEDAS who currently receive electricity free of charge (this will require an amendment in the Construction Law, which we expect to be approved by end-December); and (ii) an enhanced program of on-site inspection, for which TL 27 trillion in funds have been allocated in TEDAS' budget. We expect these measures to yield us TL 1.6 quadrillion (0.6 percent of GNP) in additional SEE revenues.
To rationalize personnel and benefit expenditures, (i) we have imposed a hiring freeze for all budget funded SEEs and limited replacement hiring to 10 percent for all others (workers transferred from the PA portfolio will be counted in this 10 percent limit); (ii) we will reduce labor costs by 10 percent by methods appropriate to each enterprise at hand; (iii) following the restriction of scope of the circular preventing retirements (see above), we will pursue wage savings of TL 300 trillion in SEEs; (iv) we have eliminated overproduction premia for workers in idle units of SEEs; and (v) we will strictly limit overtime payments by reducing hours of overtime by 20 percent for public workers (compared to 2001), and 50 percent for others. Together, we expect these measures to net us TL 0.7 quadrillion (0.2 percent of GNP) in cost savings.
To reduce non-wage operating expenses, we will instruct SEEs to (i) lower their planned general administration expenses (including reduced advertising, promotion, and association memberships) by TL 100 trillion; and (ii) reduce their stock of inventories by TL 175 trillion, by selling metal items for scrap, and by tighter controls on raw material procurement. We will also eliminate 10 loss-making railroad routes; we will reduce airline branch offices abroad, eliminate unprofitable routes, and increased THY's reliance on travel agents; and we will close idle airports. Together, we expect these measures to yield us TL 0.3 quadrillion (0.1 percent of GNP) in cost savings.
1We also propose to modify the definitions of the NDA and NIR targets, for technical reasons (Annexes C and D). First, although base money is on track, depreciation beyond what had been projected under the program is artificially boosting NDA (because of the valuation effect on the CBT's foreign currency loans to the government). To remedy this, we request that NDA will now be calculated using the exchange rate as of end-July 2001 (when the monetary program was last revised), and not the current exchange rate. Second, concerning changes in NIR, we propose that any unused portion now be fully transferable to the next period. This will allow CBT on-lending to more closely match the government's payments needs. However, the NIR performance criteria themselves remain unaltered.