Turkey and the IMF

News Brief: IMF Approves US$1 Billion Tranche to Turkey Under Stand-By Credit

Country's Policy Intentions Documents

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Turkey—Letter of Intent

Ankara, April 3, 2002

The following item is a Letter of Intent of the government of Turkey, which describes the policies that Turkey intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Turkey, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. Our economic program for 2002-04, which the IMF supports under a stand-by arrangement approved in February, is off to a good start. The last five months have marked an important turning point for the Turkish economy. Since late October 2001, the confidence that returned to financial markets is reflected in the Turkish lira gaining value, interest rates declining, and the stock market recovering.


2. The positive developments reflect our continued strong policy efforts. We have met the end-January performance criterion for the consolidated government sector surplus, and the end-February performance criteria for base money and net international reserves (Annex A). We have also continued to make progress in structural areas, including several structural benchmarks (Annex B). Moreover, we expect to complete shortly the two prior actions for the first review, namely passing the Law on Public Debt Management and issuing supporting regulations, and identifying redundancies in state enterprises and eliminating unfilled positions. The latter measures are an important part of our strategy of pursuing state enterprise reforms aimed at increasing efficiency and eliminating the burden imposed on employment and growth in the rest of the economy by excess costs and staffing in the state sector.

3. On this basis, we request that the first review under the stand-by arrangement be completed. Our targets and policies remain as set out in the January 18 Letter of Intent. This letter updates on policy developments and describes additional steps we plan to take to achieve the program targets.

4. The key challenge now is to steer the right course that will allow Turkey to realize both the 3 percent growth target and the 35 percent inflation target set for 2002. Both targets are equally important. An economic recovery has to take hold so that we start generating employment again, so that hope in the future can gain momentum, and so that financial markets evaluate positively not only short-term prospects but also the medium-term outlook for the Turkish economy. At the same time, we must and will use the opportunity offered by current circumstances to decisively break inflation expectations and secure the realization of our inflation target. The February outcome shows that we are at a turning point. Inflation is at the root of most of the problems suffered by the otherwise very dynamic Turkish economy. We must reduce inflation to 35 percent this year and to single digits in the medium term. This is an essential condition for rapid, equitable, and truly sustainable growth.

Fiscal policy and debt management

5. Our fiscal policy remains firmly geared to achieving a public sector primary surplus of 6.5 percent of GNP in 2002. We estimate the 2001 outcome at 5.9 percent of GNP, above the target of 5.5 percent of GNP. Building on this strong performance, and with tax revenue exceeding projections and spending restraint continuing in January, we comfortably met the end-January 2002 performance criterion on the consolidated government sector primary surplus (which is cumulative from January 1, 2001). Further, we are close to meeting the structural benchmark on completing the remaining measures from the fall fiscal package: most state economic enterprises (SEEs) have approved budgets in line with cost reductions mandated, and we have instructed the others (which had already approved their budgets before the savings measures were defined) to correct their budgets; and we are finalizing the identification of savings from closing regional administrations and other line agency offices. For the latter measure, broad budget appropriations have already been blocked, and implementation of closures is expected by end-June. To offset the lower-than-expected petroleum consumption tax revenue so far this year and the government's recent decision to support job creation (through delaying half of the increase in the social security contribution base by three months, and introducing limited tax incentives), we are taking additional measures. In particular, we will keep investment expenditure in one of our social security institutions (SSK) at the level originally planned in the investment program for 2002, which will entail a saving of TL 195 trillion, and we will implement a generic drug purchase program in another (Emekli Sandıgı) by end-April. In addition, we now expect a dividend of TL 180 trillion from the state-owned Ziraat bank, whereas the budget assumed no profit transfer from state banks this year. We are confident that the measures we have taken will be sufficient to enable us to meet our fiscal targets. However, should signs of deviations emerge, we will not hesitate to take decisive and timely action to safeguard these targets.

6. We are taking further steps to strengthen government debt management. With the re-introduction of floating rate note issues in January, the maturity of newly auctioned debt has increased sharply. In addition, parliament has passed the Law on Public Debt Management, and we expect and the supporting regulations to be in place shortly. In line with international practice, this law will establish a Treasury office covering the presently dispersed responsibilities for formulating overall public debt strategy and assessing risk management, and should allow closer coordination in managing the domestic and international debt portfolios. Details on the operations of this office will be spelled out in a government communiqué to be issued in June. Further organizational and, if needed, legislative improvements will be made based on the recommendations of a comprehensive study on debt strategy and risk management, which will be undertaken by Treasury with the contributions of external consultants and completed by June 2002.

Monetary and exchange rate policy

7. The Central Bank of Turkey (CBT) will continue to focus its policies on keeping inflation within the targeted 35 percent for 2002. While ensuring that our base money and net international reserves (NIR) targets continue to be met, we are preparing for the introduction of inflation targeting, and expect that the pre-conditions will be met by mid-year.

8. While adhering to the floating exchange rate regime, the CBT will use the improvement in the balance of payments and reverse currency substitution to build up its foreign exchange reserves. As interest rates have declined, the CBT has been in a stronger position to offset any use of the Treasury's foreign exchange receipts for domestic payments through money market operations, rather than foreign exchange auctions. Accordingly, NIR is now well above the program floor. If the balance of payments were to strengthen further, and reverse currency substitution to continue, we would consider making foreign exchange purchases in a transparent manner to further bolster our reserve position. We therefore expect to be able to preserve our improved international reserve position and stay well above the formal target. From a medium-term perspective, reserve accumulation will enhance market confidence and enable Turkey to better withstand external shocks. As before, discretionary intervention in the foreign exchange market will be strictly limited, though the CBT stands ready to intervene to dampen excessive volatility in the foreign exchange market.

9. We will take steps to develop deeper and more liquid foreign exchange and money markets. The CBT has already announced a program to phase out its intermediary role as a "blind broker", beginning in March 2002, which will promote interbank markets. To encourage the development of futures markets, the Ministry of Finance has clarified that profits taxes will not be levied on daily mark-to-market profits, but on profits when the contract is closed. To encourage development of the foreign currency market, we will eliminate stamp duties on forward contracts and remove the tax on interbank foreign exchange transactions by end-May, 2002. Also by end-May, we will require withholding for interest earned through transactions intermediated by Takasbank, with a view to reducing segmentation in the interbank market. To rationalize the system of reserve requirements, the CBT has announced, effective from May 2002, increases in (i) the scope and length of the averaging of reserve requirements, and (ii) the remuneration of both Turkish lira and foreign currency reserves, linking remuneration to market rates. Remuneration will take place at less than market rates, since these are riskless assets. Many of these initiatives have been developed by a multi-agency working group, which will continue to identify measures to ensure the successful development of money and foreign exchange markets.

Financial sector reform

10. Implementation of the recapitalization scheme for private banks is proceeding as envisaged. Since the amended banking law took effect on February 1, the Bank Regulation and Supervision Agency (BRSA) has issued regulations and guidelines, and briefed banks and auditors about the details of the scheme. The banks' external auditors are expected to complete the targeted assessments of the banks' capital needs by end-March as scheduled. The BRSA has started the selection of third-party audit firms to carry out the second reviews, designed to verify auditor compliance with regulations and guidelines in estimating the capital needs. We expect the BRSA to appoint the auditing firms within a week (allowing us to meet an end-March structural benchmark with minimal delay). To clarify the conditions for government support, the BRSA is preparing prototype contracts to be signed between the Saving Deposit Insurance Fund (SDIF) and the majority shareholders on the pledging of shares, share buy-backs, and the conversion of Tier-2 capital into Tier-1 capital.

11. The operational restructuring of state banks in preparation for privatization is also moving ahead after the passage in January of the required legislation and decree. The Joint Board of Ziraat and Halk has already taken the initial steps leading to the closure by mid-year of 827 branches (458 in Ziraat and 369 in Halk): as of March 7, 119 branches had been closed. As regards the privatization of Vakif Bank, five potential bidders have expressed interest and are conducting due diligence. Bids are expected in May.

12. The SDIF is committed to resolving the remaining intervened banks and to ensuring transparency in its operations. It is taking steps toward resolving the four intervened banks still under its ownership. Three potential bidders are carrying out due diligence on one of them (Toprak) and are expected to present their bids by April 9. A second bank (Bayindir) is acting as a bridge bank, and once the resolution process has been completed a decision will be made whether to sell or liquidate the bank. The resolution of the remaining two banks (Taris and Türk Ticaret) has been temporarily halted by court decisions. To promote transparency, an auditing firm has been appointed to carry out the annual audit of the SDIF, which we expect to be completed by end-April (meeting a structural benchmark), by which date the SDIF will also start presenting monthly balance sheets.

13. To complement bank rehabilitation, we are taking steps to promote corporate debt restructuring. The voluntary market-based framework introduced in January 2002 (the "Istanbul Approach") will facilitate restructuring of the debts of large borrowers. In support of this, a framework agreement to be jointly signed by the creditors and used as the basis for the debt workouts has been finalized, but has yet to be signed. The Production and Finance Committee, chaired by the Treasury, and with high-level representatives from government agencies and the business and banking communities, is meeting regularly. To accelerate the restructuring process, we will establish a secretariat to this committee in April. The committee will complement existing incentives by developing further measures, consistent with preserving the transparency and integrity of the bank recapitalization exercise, to catalyze banks' and corporates' participation in the "Istanbul Approach". This committee will also work with the relevant government agencies to establish by June 2002 a database to monitor corporate debt. In addition, the SDIF has announced that a private asset management company will be set up by end-August 2002, with the SDIF owning a minority share.

Other structural reforms

14. The government is supporting growth and the reduction of inflation through major structural reforms. In addition to our prudent fiscal policies, our efforts to restructure the banking system, reduce overstaffing in the public sector, increase the role of the private sector in the economy, and improve the business environment will promote growth and enhance price competition. The government will also undertake reforms to de-index the economy, and lessen inflation expectations. In the ongoing negotiations on new two-year private sector wage contracts the government will, in its role as an intermediary, stress to labor unions and employers the need to reduce backward indexation. Moreover, in the first of a planned series of meetings, the Treasury, the State Planning Organization, and the CBT met in February with labor unions and employers' associations to discuss wage and price policies consistent with the 35 percent inflation target.

15. Important steps to strengthen government finances and public sector efficiency are being taken as planned. A more efficient public sector and a more equitable and efficient tax system are essential to pave the way for rapid growth and new productive employment creation throughout the economy. The steps we are taking include the following:

  • To rationalize employment in the public sector, we have eliminated all open unfilled redundant positions at state economic enterprises (SEEs), and we have tentatively identified the number of redundant public workers in SEEs to be in the range of 40,000-60,000 positions. By end-April we will determine how best to meet our target of reducing the identified redundancies by one third by end-June. In parallel, we will sharpen the tentative estimate, based on aggregate analysis, by using company-specific information, and will by end-May produce final estimates. Our aim remains to reduce the redundancies by two thirds by end-October 2002 (a structural performance criterion), and to eliminate them altogether by end-June 2003. For the central government, the Ministry of Finance and the Treasury are in the process of completing an evaluation of redundancies, and will by end-September 2002 formulate an action plan to address them. The process aiming at improved public sector efficiency has been underway since last September, and good progress has been possible through voluntary retirement of workers receiving the severance payments they are entitled to. We will continue with this strategy, and will rely on layoffs only when necessary.

  • The first phase of tax reform, focusing on simplifying indirect taxation, will soon be fully in place. This phase will also include initial steps to reduce distortions associated with the taxation of interest income, and rationalize taxes on financial transactions. In particular, we will reduce disparities among the withholding tax rates on deposits. We are preparing the necessary draft legislation, and expect parliament to adopt the legislation in April. Further steps to rationalize the taxation of financial transactions will be taken in the second phase of our tax reform program this fall.

  • We have identified key actions to be taken during 2002 to reform the revenue administration. By end-July, we will institute an audit coordination unit in the Ministry of Finance, and require that it produce a coordinated audit plan for the following year by end-November (completion of the first such plan by November 2002 is a new structural benchmark). By end-September, the Minister of Finance will adopt a strategy to strengthen the collection of outstanding public sector tax arrears (a new structural benchmark). In the budget for 2003, we will provide resources to increase the number of auditors by 400 to move toward OECD standards (inclusion of such resources in the draft budget submitted to parliament is a new structural benchmark for October 17). Finally, to help overhaul our revenue administration in the medium term, we will implement a functional reorganization, beginning at end-June.

  • To strengthen expenditure management, we have consolidated revolving funds, reducing their number by 589, and completed our survey of end-2001 expenditure commitments in excess of appropriations (with these actions, we have met two structural benchmarks). To enable us to monitor and address commitments on a regular and timely basis, we will from now on conduct such surveys twice a year (as of end-June and end-December), with the aim of having the results available within six weeks after the end of each period. We have also completed all the preparatory work to establish an independent procurement agency (an end-March structural benchmark), and expect the board of the agency to be appointed shortly, following the issuance of an enabling regulation.

16. As market conditions have improved, we will give privatization new impetus. In March, we completed the second public offering of shares in POAŞ (petroleum distribution company)on schedule, raising US$167 million for 16.5 percent of the shares in the company. We are also preparing for the third equity offering of TÜPRAŞ (petroleum refinery), aiming to close this deal by end-June depending on market conditions. We plan to offer a minimum 16 percent stake, which would bring TÜPRAŞ under majority private ownership. In addition, restructuring and corporatization studies regarding TEKEL's tobacco and alcohol entities and the determination of SEKER's (sugar company) privatization strategy are underway. A privatization plan for Türk Telekom will be adopted by the Council of Ministers in April as planned. Following the Constitutional Court decision regarding the pending transfer of operating rights (TOOR) contracts, we will determine which, if any, investors are eligible for Treasury guarantees and inform by end-June 2002 those eligible of the amendments needed to bring the contracts in compliance with the license regulations of the Energy Market Regulation Agency and the Electricity Markets Law. With the exception of these eligible projects, the government will transfer all state-owned thermal generation and electricity distribution assets under the scope of privatization by end-July 2002. Moreover, the eligible contracts for which the financial arrangements have not been finalized by end-January 2003 will be cancelled, and the related assets transferred under the scope of privatization by end-February 2003. As regards pre-privatization restructuring, the Privatization Administration has merged two maritime companies under its portfolio and decided to merge another four companies with Sumerholding. Moreover, one tourism company will be liquidated shortly. As a result of these steps, we expect significant savings in operating and overhead costs.

17. We are continuing efforts to improve the business environment. We have prepared legislation reducing the number of documents needed to obtain investment incentives, implemented an employee code of ethical conduct for customs, and submitted to the Council of Ministers legal amendments to strengthen the Turkish Patent Institute. Also, we have started the preparation of a new Law on Foreign Direct Investment and legal documents facilitating hiring, including of foreign personnel. Moreover, an Investor Relations Office was set up within the Treasury in February, and this office will open an interactive website in April. Finally, to promote Turkey as an investment destination and learn from international perspectives we have scheduled the inaugural meeting of the Investor Council for July 2002. Once established, we foresee that the Council, consisting of top-level officials of major international corporations, will meet annually.

18. Transparency in the public sector will be improved through a phased implementation of our action plan. On February 13, the Council of Ministers adopted a decree spelling out an action plan to enhance transparency and good governance. This plan is part of a broader public sector reform effort, encompassing also public expenditure management and civil service reform. To oversee the implementation of this plan, a Ministerial Steering Group for public sector reform, as well as a subcommittee to provide support to the Steering Group in implementing the action plan to enhance transparency and good governance, will be established by end-April 2002 (a new structural benchmark). We will accelerate the ongoing work in public administration reform and define additional conditionality in this area in later program reviews. In the meantime, we have defined the following steps to improve transparency:

  • publication of (i) the above-mentioned action plan to enhance transparency and good governance, and (ii) the Report on the Observance of Standards and Codes (ROSC) on the quality of economic data, carried out in consultation with the IMF;

  • improvement of the public sector personnel system, including passage of legislation to establish a code of ethical conduct for civil servants and public administrators by end-2002 (a new structural benchmark); and

  • increase in access to information, through the preparation of an Information Act, defining the rights of citizens to request information and the obligation of public organizations to provide information by end-2002.

19. In the context of an IMF safeguards assessment, which is required for new Fund-supported programs, we have formulated a plan that will further improve the transparency and effectiveness of the CBT's control, accounting, reporting, and auditing systems. With effect from 2001 financial statements, the CBT will publish audited financial statements consistent with IAS. Starting with the 2002 financial statements, the CBT will clarify disclosures of the Fund position and the relationship with the Treasury, and limit the amount of profits available for distribution to realized profit, less unrealized losses. The CBT will expand the role of its existing audit committee, and from now on, when mandating an external audit firm, will include among the duties of the external auditor to issue a report reviewing the consistency between the program data reported to the IMF (specifically covering base money, net international reserves, and net domestic assets) and the audited financial statements. In this regard, by May 15, 2002 the CBT will ask the existing audit firm to prepare such a report, and will issue it by July 15, 2002 (a new structural performance criterion). Also by May 15, 2002, the CBT and Treasury will issue a Memorandum of Understanding to clarify the Treasury/CBT relationship with the Fund. Moreover, the CBT will reorganize by end-2002 the internal audit function. To this end, it will (i) adopt a new charter, which will detail the mission, scope, accountability, independence, responsibility, and authority of the audit function in line with the Standards for the Professional Practice of Internal Auditing of the Institute of Internal Auditors. The CBT will also (ii) formulate an implementation plan identifying staffing levels, reporting lines, scope of audits, risk assessment methodologies, and developing an internal audit manual and training programs (measures (i) and (ii) constitute a new structural performance criterion). For the purposes of the safeguards assessment, an internal audit of foreign exchange management and program data as of end-2002 will be conducted by May 15, 2003 (a new structural benchmark).

20. Finally, we continue to receive support for the structural and social components of our program from the World Bank.

Very truly yours,

/s/

Kemal Derviş
Minister of State for Economic Affairs

 

/s/

Süreyya Serdengeçti
Governor of the Central Bank of Turkey

ANNEX A

Turkey: Quantitative Performance Criteria and Indicative Targets Relevant for the First Review


Ceiling/Floor

Outcome


January 31, 2002

 

I. Performance criteria

 

1. Floor on the cumulative primary balance of the consolidated government sector
(in trillions of Turkish lira)1

9,802

13,153

 
 

February 28, 2002

 

2. Ceiling on contracting or guaranteeing of new external public debt
(in millions of US$)

6,500

1,645

 

3. Ceiling on the stock of public short-term external debt outstanding

(in millions of US$)

1,000

0

 

4. Floor on level of net international reserves (in millions of US$)

-6,500

-4,907

 

5. Ceiling on base money (in trillions of Turkish lira)2

8,250

7,823

 

II. Indicative targets

 

January 31, 2002

 

1. Floor on the cumulative overall balance of the consolidated government sector
(in trillions of Turkish lira)

-32,448

-33,564

 
 

February 28, 2002

 
2. Ceiling on the stock of net domestic assets of the CBT2 (in trillions of Turkish lira)

26,100

24,318


1For January 31, 2002, the ceiling applies to the cumulative primary expenditure of the central government since January 1, 2001. For the other test dates, the starting date is January 1, 2002.
2Target calculated as the four working day average of February 11-12 and March 11-12, 2002, to take account of the transitory impact of the Bayram religious holiday on currency demand.

ANNEX B

Structural Policies, 2002–04

Action Type  LOI Para1 Status, April 2, 2002

Fiscal policy
1. Implement all further measures to reach the 6.5 percent primary surplus target that are technically feasible to put in place in January: PA for SBA 13  
(i) Council of Ministers to approve a reduction in the share of central government tax revenues accruing to metropolitan municipalities to 4.1 percent     Done.
(ii) issue a circular to implement attrition rules     Done.
(iii) the Minister of Finance to approve a reallocation of spending to ensure adequate funding for DIS for agriculture     Done.
2. Increase the PCT (on items excluding natural gas) by 1 percent in real terms in early February 14 Not done. Increase was equal to January WPI inflation.
3. By end-March 2002, (i) the Ministry of Finance to identify savings from closing regional administrations and other regional line agency offices, and block relevant budget appropriations in the budget, and (ii) SEEs to approve budgets in line with the cost reductions mandated BM 14 Underway. (i) In March, savings from closing regional administrations and other regional line agency offices were identified, and relevant budget appropriations were blocked in the budget. A decree regarding closure of regional administrations and other regional line agency offices is expected to be issued shortly. (ii) Most SEEs have approved budgets in line with cost reductions mandated, and the others have been instructed to correct their budgets. Treasury auditors will monitor implementation.
4. Keep investment expenditure in SSK at the level originally planned in the investment program for 2002, implement generic drug purchase program in ES by end-April, and receive profit transfer of TL 180 trillion from Ziraat Bank 5 of April 2002 LOI
5. Refrain from introducing any new tax exemptions or incentives, except those specified in the tax reform plan 14 Not fully complied with. Payroll and personal income tax deferments were introduced in March 2002 as part of an effort to stimulate employment.
6. Refrain from introducing any new discounts or exemptions for SEEs, except those pursued for commercial reasons by enterprises' managements 14 Done. The president approved Law No:4736 on January 18, 2002 preventing any new discounts or exemptions for SEEs.
Public debt management
7. Continue to lengthen average maturity in Treasury bill auctions and public offerings to the extent demand allows and encourage a diverse range of investors 18 Underway.
8. Resume in January 2002 the program of FRN auctions. Before the first issue publicize a revised standard method of price and yield calculations, in line with international practice 19 Done.
9. Reintroduce a primary dealer program by end-September 2002 BM 19 Underway. Discussions with candidate primary dealers are taking place.
10. Continue to issue, subject to market conditions, domestic FX denominated and FX indexed bonds, as well as international bonds 19 Underway. Taking into account redemptions and market conditions, FX denominated and FX indexed securities will be issued.
11. The Treasury to conduct a study of its operational mechanisms, procedures, and structure to improve its risk and debt management, including through closer coordination between domestic and international borrowing. The recommendations of this study will be implemented by mid-2002 19 Underway. As an interim step the new Debt Management Law calls for the establishment of a middle office in the Treasury in charge of developing overall debt strategy and managing risk.
12. Issue in June government communiqué that spells out details of the operations of the middle office that will formulate overall public debt strategy 6 of April 2002 LOI
13. The Treasury to develop its cash management operations, acting in coordination with the CBT 19 Underway. The new Debt Management Law includes a clause calling for the preparation of technical infrastructure for cash management operations in coordination with the CBT.
14. The Treasury to intensify its dialogue with the full range of investors, including bilateral contacts and group discussions with institutional investors and intermediaries, and enhanced retail outreach 19 Underway. With the target of broadening the investor base, discussions are ongoing on the conditions of a security which is planned to be issued for insurance companies. A series of meetings has been started with private banks, which will provide feedback about market developments and specific concerns banks have.
Monetary and incomes policy
15. Ensure that any new laws or regulations do not undermine the independence enshrined in the CBT law 21 Done. All new laws and regulations are consistent with CBT independence.
16. CBT to continue its technical preparations for the introduction of inflation targeting, including improved modeling and forecasting of inflation 22 Underway. Work ongoing at the CBT covers short- and near- term forecasting, and development of the data base.
17. Move to inflation targeting 22 Preparations underway. In addition to progress in establishing the necessary technical infrastructure (see item 16 above), favorable developments in disinflation and inflation expectations, fiscal policy, and the banking sector are expected to allow the pre-conditions for formal inflation targeting to be met by mid-2002.
18. Seek a significant reduction of the ex-post indexation element contained in current wage contracts during the next public worker collective bargaining round and civil service salary adjustment, and use the Economic and Social Council as a forum for incomes policy discussions with the private sector 23 Underway. An exploratory meeting between labor unions and the authorities to achieve this goal was held in February.
19. a. Consider the possibility of reducing backward indexation of administered prices without compromising SEEs' financial conditions 23 Partially done. Most SEE prices have not been changed monthly during 2002 but rather at discrete intervals in line with WPI; the exception is energy prices which are closely tracking world market prices.
b. In the ongoing negotiations on new two-year private sector wage contracts the government to stress to labor unions and employers the need to reduce backward indexation   14 of April 2002 LOI
20. Encourage a successful conclusion by end-February 2002 of banks' discussions to establish interbank borrowing reference rates in Turkish lira out to at least three-month maturity to enhance money market liquidity and transparency, and to provide accurate reference rates for financial instruments 25 Underway. A working group established under coordination of the Banks Association is discussing proposals, and measures are being introduced to deepen the interbank money market. Reference rates are evolving but will depend on increased market activity along the yield curve.
21. The CBT to gradually end its practice of acting as a blind broker during 2002 25 Underway. The phasing out by end-2002 has been announced by the CBT.
22. Working group to facilitate the development of financial markets to identify concrete actions by end-January 2002 in the areas of taxation, accounting, and regulation. The first measures will be put in place by end-February 2002 25 Underway. Interagency committee chaired by CBT with membership from Banks Association of Turkey, BRSA, MOF and ISE, established and has held two meetings. Taxation of revaluation profits clarified in February, and prudential rules on market risks effective since January.
23. The Privatization Agency to authorize companies in its portfolio to transact their foreign exchange business at the market rate (not at the CBT official rate). The oil and gas companies (TÜPRATM and BOTATM) to work with state banks to improve their foreign exchange practices, to minimize lumpy transactions in the foreign exchange market 25 Done.
24. To encourage development of the foreign currency market, eliminate stamp duties on forward contracts and remove the tax on interbank foreign exchange transactions by end-May 2002 9 of April 2002 LOI Underway. A preliminary meeting between MoF, BRSA, CMB and CBT was held on March 26.
25. Require as of end-May withholding of interest earned through transactions intermediated through Takasbank 9 of April 2002 LOI
26. To rationalize the system of reserve requirements the CBT, effective from may 2002, to (i) increase the scope and length of the averaging of reserve requirements, and (ii) increase the remuneration of both Turkish lira and foreign currency reserves, linking remuneration to market rates 9 of April 2002 LOI Done. The communiqués on required reserves and liquidity requirement were issued in the Official Gazette on March 29, 2002, and will be effective on date of issue starting from the tables dated May 10, 2002.
27. Multi-agency working group to continue to identify measures to ensure the successful development of money and foreign exchange markets 9 of April 2002 LOI Underway. Multi-agency working group chaired by the CBT with the participation of Bankers' Association of Turkey, BRSA, MOF, ISE, IGE, Treasury, and CMB has held two meetings related to the development of the derivatives markets and TL reference rate fixing. Taxation and accounting problems of the futures transactions have been addressed by the MOF and BRSA, respectively.
Banking reform
28. Pass necessary legal amendments, and issue a Council of Ministers Decree for staff reductions in state banks PA for SBA 28 Done.
29. By end-June 2002, reduce the number of state bank branches by 800. In this context also reduce staffing correspondingly PC 28 Underway. The process has been initiated, and the number of staff will be gradually reduced by the targeted number by June 2002.
30. For Vakif Bank privatization, bids to be invited from potential investors in May 28 Underway. Five potential bidders have expressed interest and are conducting due diligence; potential bidders are waiting for the audit results being carried out under the new public support scheme. Bids are expected in May.
31. BRSA to issue guidelines for targeted evaluations of private banks in preparation for the public support scheme for private banks PA for SBA 30 Done.
32. The targeted evaluation of loan portfolios, collaterals, and certain other exposures to be performed by banks' existing external auditors to be completed by end-March 30 Underway. Necessary regulations are in place in accordance with Banking Law No. 4389, provisional Article 4. Audit process is underway.
33. Third-party auditing firms to be appointed by the BRSA by end-March 2002 to verify that the guidelines have been followed, and to ensure the integrity of the process BM 30 Underway. Regulation on third-party reviews was published in Official Gazette on March 27, 2002. Selection process of auditing firms has been initiated, and letters for initiating third-party reviews has been sent to external auditors.

34. a. The BRSA to (i) complete the final interpretation of the evaluations by end-April and (ii) send letters to banks stipulating required actions on the basis of this interpretation by May 15

      b. Evaluation results to be fully incorporated into banks' end-June 2002 financial statements

      c. Banks to apply for participation in the scheme before end-May 2002

      d. Recapitalization scheme to be completed before end-June 2002

      e. The BRSA to prepare prototype contracts to be signed between the Saving Deposit Insurance Fund (SDIF) and the majority shareholders on the pledging of shares, share buy-backs, and the conversion of Tier-2 capital into Tier-1 capital

PA for second review (action # (ii)) 30, 3110 of April 2002 LOI
35. The legal framework and related regulations for the public support scheme for private banks to become effective in January 2002 PA for SBA 32 Done.
36. The BRSA to undertake legal consultations, as necessary, to ensure implementation of the public capital support scheme as planned 32 Done.
37. Resolve by end-2001 all banks taken over by the SDIF before November 2001, with the exception of two banks whose resolution has been halted by courts PA for SBA 33 Done.
38. Determine final resolution method for the medium-size bank taken over in November 2001 by February 2002 33 Done. The bank was offered for sale on January 31, 2002. Three potential bidders have expressed interest and are conducting due diligence. Bids are due by April 9, 2002.
39. The SDIF to prepare a monthly balance sheet starting end-March 2002 and become subject to annual external audits; the external audit for 2001 will be completed by end-April 2002 BM (the latter action) 34 Underway. Agreement with audit firm has been signed. External audit will be started in early April 2002.
40. Laws and regulations regarding loan classification, loan loss provisioning, and collateral valuation will be amended as necessary following the portfolio reviews by end-June 2002 35 Underway. Will be done under the framework of Istanbul Approach if needed.
41. Pass legal amendment in January 2002 to eliminate with immediate effect the existing four-year transition rule for loan loss provisioning PA for SBA 35 Done.
42. Start trial implementation of new accounting system [for banks] in line with IAS in January 2002 PA for SBA 35 Done.
43. Following the trial implementation the BRSA to evaluate the experience and issue by end-June 2002 a revised regulation on the new accounting standards to ensure that banks' end-2002 balance sheets comply with IAS PC for end-June 35
44. Improve reporting requirements based on the findings of the independent assessments, and strictly enforce the quality and timeliness of the reporting as of end-June 2002 35

45. a. Off-balance sheet repos to be included on balance sheet as of February 1, 2002

      b. Capital charges for market risks to be calculated on a solo basis as of January 1, 2002 and on a consolidated basis as of July 1, 2002

      c. Regulation on monitoring of internal control and risk management systems to become effective January 1, 2002

35

Done.

Corporate debt restructuring
46. Introduce in January 2002 a voluntary market-based framework (the "Istanbul Approach") for dealing case-by-case with multicreditor exposures to large and medium-size borrowers 36 Underway.
47. Create in early 2002 a multiagency Coordination Committee with private sector participation under the Treasury, responsible for facilitating and monitoring the corporate debt restructuring process, as well as identifying and proposing the removal of impediments that may exist 36; 13 of April 2002 LOI Not done. Work to be carried out by the Production and Finance Committee chaired by the Treasury.
48. Establish secretariat to the Production and Finance Committee in April 13 of April 2002 LOI
49. Production and Finance Committee to develop further measures, consistent with preserving the transparency and integrity of the bank recapitalization exercise, to catalyze banks' and corporates' participation in the "Istanbul Approach" 13 of April 2002 LOI
50. Production and Finance Committee to work with the relevant government agencies to establish by June 2002 a database to monitor corporate debt 13 of April 2002 LOI Underway. The CMB has issued the regulation on the reporting requirements. Firms are expected to start reporting in June 2002.
51. A private asset management company will be set up by end-August 2002, with the SDIF owning a minority share 13 of April 2002 LOI Underway. The authorities have requested technical assistance for drafting a proposal for potential investors.
52. The Ministry of Justice to prepare an action plan based on the findings of a World Bank Report on Standards and Codes (ROSC) on Turkey's insolvency regime and form a Commission to prepare necessary amendments to the Bankruptcy Law 37 Underway.
53. Support the upgrading administrative procedures in the judiciary to improve the capacity of the courts 37
54. The CMB to introduce international accounting standards, including inflation accounting provisions, by January 1, 2003. 38 Underway. The CMB has issued the regulation. Firms are taking steps to adopt the new accounting framework. It is expected that many firms will start accounting under the new rules in June 2002.
55. Starting end-March 2002, the CMB to require corporate groups to provide consolidated financial statements and to set up a dedicated group to monitor their finances 38 Underway. The CMB has issued the regulation.
56. Starting end-March 2002, the CMB to require corporate groups with financial affiliates to provide consolidated group statements and share those statements with the BRSA 38 Underway. The CMB has issued the regulation. The Accounting Standards and Corporate Finance departments of the CMB will monitor the accounts.
Public sector reform
57. Parliament to approve Public Procurement Law in line with UN (UNCITRAL) standards in January 2002 PA for SBA 40 Done.
58. Establish an independent procurement agency by end-March 2002 BM 40 Underway. All the preparatory work has been completed, and the board of the agency will be appointed shortly, following the issuance of an enabling regulation.
59. Change laws and regulations to make them consistent with the new public procurement framework 40
60. Parliament to amend the Public Procurement Law by end-May 2002, to (i) bring the real value of the thresholds toward those in line with international best practice and (ii) extend the minimum time period for procurement applicable for cases below the thresholds PA for second review 40
61. Compile a comprehensive list of public investment projects to be phased out in time to make decisions for the 2003 budget 40 Underway. Rationalization of public investment program will continue in 2003 within the framework of a High Planning Council Decision. The Decision will be communicated to spending agencies with 2003 Investment Circular in June 2002. Then, the list will be compiled concurrently with 2003 investment programming process that will be finalized by end-2002.
62. Approval by Council of Ministers in January 2002 of plan to reform the tax system PA for SBA 40 Done.
63. Enact the first phase of the tax reform plan by end-April 2002 BM 40; 15 of April 2002 LOI Underway. Draft Special Consumption Tax Law (implementing indirect tax changes) has been prepared, and the World Bank and the Fund have provided comments. In addition, disparities among the withholding tax rates on deposits will be reduced.
64. Submit to parliament legislation for the second phase of the tax reform plan by end-October 2002 BM 40 Underway. A World Bank technical assistance mission is expected in April.

65. Reorganize tax administration in line with the study carried out with the World Bank:

 

40 and 15 of April 2002 LOI

Underway.

      a. By end-July, institute an audit coordination unit in the Ministry of Finance, and require that it produce a coordinated audit plan by end-November each year BM (first such plan by Nov 2002)
      b. By end-September, the Minister of Finance to adopt a strategy to strengthen the collection of outstanding public sector tax arrears BM    
      c. In the budget for 2003, include resources to increase the number of auditors by 400 (for October 17) to move toward OECD standards BM    
      d. To help overhaul the revenue administration in the medium term, implement a functional reorganization, beginning at end-June      
66. Council of Ministers to adopt a civil service reform strategy by end-2002 40
67. As part of the preparatory work for item 66, by end-March 2002 establish a ministerial committee to carry out a functional review of government, which will be completed by end-September 2002 40 Underway. A commission to coordinate necessary work will be established in line with the CoM decision dated February 4, 2002.
68. By end-September, have in place an integrated system to monitor total general government and SEE employment levels on a quarterly basis BM 40 Underway. A circular (dated December 14, 2001, No. 94997) has been sent to SEEs; monitoring of SEE employment levels will start on a quarterly basis as of March.
69. 15,000 individuals (public sector workers) to have been retired or notified of their retirement by mid-January 2002 PA for SBA 41 Done.
70. By end-January 2002,



PAs for first review
(i) identify all redundant workers and positions in SEEs   41 (i-ii) Underway. Preliminary estimates by SEE management and unions fall short of WB estimates; work to reconcile the numbers is underway, at which point specific redundant positions in SEEs will be identified. .
(ii) sharpen tentative estimate based on aggregate analysis, by using company-specific information and by end-May produce final estimates   15 of April 2002 LOI41
(ii) eliminate all open, unfilled redundant positions     Done. Treasury has sent a circular (No:4654/4655) to SEEs requesting the elimination of 90-100 percent of their open positions. There will be no open, unfilled redundant positions in SEEs as of end May 2002.
71. Extend voluntary retirement offers to the recently identified redundant workers in Türk Telekom and in the Privatization Agency portfolio of companies; for those who accept, provide payments, and allow them to retire, no later than end-March 2002 41 Underway. 3,635 out of 7,477 applied have retired so far and rest were expected to have retired by end-March 2002 for Turk Telekom. Work on assessment of redundant workers is proceeding with the World Bank, and the retirement offer remains open.
72. Through voluntary retirement offers, and layoffs only when necessary, reduce the number of redundant workers by one-third by end-June, and cumulatively by two-thirds by end-October 2002 PC (the Oct action) 41
73. By end-June 2003, phase out the remaining redundancies 41
74. The Ministry of Finance and the Treasury to formulate by end-September 2002 an action plan to address redundancies in the central government 15 of April 2002 LOI
75. Audit SEE compliance with this program on a quarterly basis 41 Underway. Treasury Controllers will be responsible for auditing.
76. To strengthen the legal framework for fiscal policy pass the Law on Public Debt Management and issue two supporting communiqués PAs for the first review 42 Underway. The law has passed by parliament on March 28, and the supporting communiqués are being prepared.
77. Submit to parliament by end-June 2002 a Law on Financial Management and Internal Control consistent with best international practices BM 42 Underway. A strategy regarding the Law on Financial Management and Internal Control has been sent to the Auditing Working Group and discussed at a meeting on February 5, 2002. Moreover, a seminar was organized in March to ensure consistency with EU practices.
78. Close, by end-March 2002, 548 additional revolving funds BM 42 Done.
79. Incorporate in the draft budget for 2003 the revenue and expenditures under Law 3418 BM for Oct 17, 2002) 42
80. Eliminate the earmarking under Law 3418 and Law 4306 42
81. Amend by July 2002 the governing legislation for the remaining EBFs to require passage of their budgets by parliament, external audit of their accounts (reported to parliament), and monthly reporting of their accounts, on a consolidated basis, with the central government's accounts BM 42
82. Eliminate the remaining budgetary fund (the Support Price and Stabilization Fund) in three years, when the World Bank's Agricultural Reform Implementation Project ends 42
83. In the draft 2003 budget to be submitted to parliament (i) include net lending as an appropriation, and (ii) extend accounting and coding reforms to all consolidated budget agencies, and to general government units on a pilot basis BMs for Oct 17, 2002) 42 Underway. To extend coding reforms to general government units on a pilot basis, the MoF has prepared a budget implementation circular. Studies on accounting reform are progressing as planned.
84. Complete, by end-March 2002, a survey of end-2001 commitments in excess of appropriations BM 42 Done.
85. To monitor and address [expenditure] commitments on a regular and timely basis, conduct surveys of commitments in excess of appropriations twice a year (as of end-June and end-December), with the aim of having the results available within six weeks after the end of each period 15 of April 2002 LOI
86. Address the impact of public sector retrenchment through the labor redeployment and reinsertion program and through unemployment insurance 42 Underway. Unemployment insurance payments started in March 2002.
Enhancing the role of the private sector
87. The Privatization Administration (PA) to proceed with the public offerings of POATM by end-March 2002 and the public offering of TÜPRATM by end-June 2002 and launch the initial public offering for THY as soon as market conditions allow 45 Underway. The second public offering of POAS was completed in March, with a 16.5 percent stake sold to foreign and domestic investors. The third public offering of TUPRAS shares is planned for the second quarter, and privatization of THY still depends on market conditions.
88. CoM to adopt a privatization plan for Türk Telekom in April 2002 PA for the second review 45 Underway. A report of consultants to be finalized for Türk Telekom; road map regarding the privatization strategy will be drawn up by April 2002.
89. Parliamentary approval of Tobacco Law PA for SBA 45 Done.
90. Prepare and adopt a privatization plan for TEKEL by end-September PA for fourth review 45 Underway. A restructuring study is being undertaken to provide a basis for privatization plan.
91. Proceed with the privatization of TMEKER, with the first step being the adoption of a privatization plan by May 2002 45 Underway. PA is working with other related agencies for the privatization plan of SEKER.

92. a. In the electricity sector, in January 2002, subject to legal clarification, the Council of Ministers to adopt a government decree annulling with immediate effect all the projects for which transfer of operating rights (TOOR) contracts are pending

45

Changed. See item b.

      b. Following the Constitutional Court decision regarding the pending transfer of operating rights (TOOR) contracts, determine which, if any, investors are eligible for Treasury guarantees and inform by end-June 2002 those eligible of the amendments needed to bring the contracts in compliance with the license regulations of the Energy Market Regulation Agency and the Electricity Markets Law. With the exception of these eligible projects, transfer all state-owned thermal generation and electricity distribution assets under the scope of privatization by end-July 2002. Moreover, the eligible contracts for which the financial arrangements have not been finalized by end-January 2003 will be cancelled, and the related assets transferred under the scope of privatization by end-February 2003 16 of April 2002 LOI  
93. By March 2002, the Ministry of Energy to inform the PA which electricity assets will be privatized, and by April 2002 the prequalification tenders for the distribution companies will be launched 45 Underway. Working groups have finalized their reports, and the PA is ready for the privatization of the generation and distribution assets. As soon as the distribution regions are transferred, the pre-qualification tender will be launched.
94. Complete the transfer of gas distribution companies to the PA by March 2002 45 Underway. High Planning Council Decision is about to be finalized after which a Privatization High Council Decision will be sought.
95. The PA to go forward with the divesting of ETI Krom ATM, ETI Elektrometalurji ATM, ETI Gümüs ATM, which are in the PA portfolio, as soon as licenses are transferred from ETI Holdings 45
96. The PA to continue its divestment of ERDEMIR, and of tourism and fertilizer assets in its portfolio. The PA also to continue divesting its portfolio of small and medium-size companies 45
97. Build on efforts made in 2001 (including legal amendments and simplified procedures) to increase the sale of government land. Initiate a study to evaluate how the remaining obstacles to government land sales could best be removed 45
98. The Council of Ministers to adopt in January 2002 follow-up actions to FIAS study to make Turkey more attractive for domestic and foreign investors PA for SBA 46 Done.
99. Submit to the parliament by end-May 2002 a new draft Law on Foreign Direct Investment in line with the findings of the FIAS study BM 46 Underway. FIAS study is expected to be finalized in early May, and the draft law is planned to be submitted to parliament on schedule.
100. Submit to the parliament by end-March 2002 a draft law on work permits prepared by Ministry of Labor and Social Security, and issue a communiqué by end-April 2002 on the implementation procedures for employing foreign personnel employed by foreign capital companies as soon as the new law is approved by parliament 46 Underway. A draft law on work permits has been submitted to parliament, and is currently with the relevant commission.
101. Complete by end-February 2002 legislation reducing the number of documents needed to obtain investment incentives 46 Underway. MoF (GD of Revenues) and Treasury coordinating relevant work.
102. Establish and implement by end-February 2002 an employee code of ethical conduct for proceedings at customs 46 Underway. A communiqué was issued on September 11, 2001.
103. Submit to the Council of Ministers by end-January 2002 legal amendments to strengthen the Turkish Patent Institute 46 Underway . Draft law has been submitted to the Prime Ministry, and is expected to be opened to CoM signature soon.

104. The Council of Ministers to adopt a strategy by end-January 2002 for increasing transparency and combating rent-seeking activities

BM

47

Done. Decree signed on February 13.

105. Define and include as program conditionality concrete follow-up actions for the remainder of the 2002-04 program period based on the plan in #102:

 

 

47 and 18 of April 2002 LOI

Done.

      a. Establish by end-April 2002 a Steering Group for public sector reform, as well as a subcommitee to provide support to the Steering Group in implementing the plan to enhance transparency and good governance BM  
      b. Publish (i) the above-mentioned action plan to enhance transparency and good governance, and (ii) the Report on the Observance of Standards and Codes (ROSC) on the quality of economic data, carried out in consultation with the IMF BM   Done.
      c. Improve the public sector personnel system, including passage of legislation to establish a code of ethical conduct for civil servants and public administrators by end-2002    
      d. Increase access to information, through the preparation of an Information Act, defining the rights of citizens to request information and the obligation of public organizations to provide information by end-2002    
106. Establish an Investor Relations Office by February 48 Done.
107. Establish an Investor Council consisting of prominent business representatives from Turkey and abroad 48 Underway. Inaugural meeting scheduled for July.
108. Further strengthen the efforts of the of the Treasury, the CBT, and the BRSA to explain policies under the economic program in their respective areas, including through the arrangement of regular (bimonthly) press conferences by the Treasury 48 Underway.
Safeguards Assessment

109. Follow-up measures in the context of Safeguards Assessment:

 

19 of April 2002 LOI

 

a. With effect from 2001 financial statements the CBT to publish audited financial statements consistent with IAS      
b. Starting with the 2002 financial statements, the CBT to clarify disclosures of the Fund position and the relationship with the Treasury, and limit the amount of profits available for distribution to realized profit, less unrealized losses      
c. CBT to expand the role of its existing audit committee     Underway. The Audit Committee will meet twice a year with the external audit firm and, once established, with the internal audit department. It will also review the CBT's overall risk management practices and systems of internal control.
d. Include among the duties of the external auditor to issue a report reviewing the consistency between program data reported to the IMF (specifically covering base money, net international reserves, and net domestic assets) and the audited financial statements      
e. By May 15, 2002 the CBT to ask the existing audit firm to prepare such a report, to be issued by July 15, 2002 PC (issuance of report)    

f. By May 15, 2002, the CBT to issue a Memorandum of Understanding to clarify the Treasury/CBT relationship with the Fund.

g. The CBT to reorganize by end-2002 the internal audit function. To this end, it will (i) adopt a new charter, which will detail the mission, scope, accountability, independence, responsibility, and authority of the audit function in line with the Standards for the Professional Practice of Internal Auditing of the Institute of Internal Auditors, and (ii) formulate an implementation plan identifying staffing levels, reporting lines, scope of audits, risk assessment methodologies, and developing an internal audit manual and training programs PC (measure (i) and (ii))    
i. Internal audit department to conduct an audit of foreign exchange management and program data as of end-2002 by May 15, 2003 BM    

1Unless otherwise noted, paragraph numbers refer to January 18, 2002 Letter of Intent.
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