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Press Release No. 02/7
February 4, 2002
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Managing Director Sees Impressive Commitment by Turkey to Economic Reforms; Executive Board Approves US$16 Billion Stand-By Credit

The Executive Board of the International Monetary Fund (IMF) today approved a three-year, SDR 12.8 billion (about US$16 billion) stand-by credit for Turkey to support the government's economic program for 2002-2004. This decision will enable Turkey to draw SDR 7.3 billion (about US$9 billion) from the IMF immediately.

The arrangement with Turkey replaces the previous stand-by credit, which was approved in December 1999 (see Press Release No. 99/66) and amounted to a total of SDR 15 billion (about US$19 billion). Total disbursements to Turkey under the previous stand-by credit came to SDR 11.7 billion (about US$15 billion). The remaining undisbursed SDR 3.3 billion (about US$4 billion) were folded into the new arrangement and are included in the total amount.

After the Executive Board discussion on Turkey, IMF Managing Director Horst Köhler issued the following statement:

"Today's decision is a recognition by the international community of Turkey's success in developing and implementing a bold and comprehensive economic reform program. Progress is impressive, and the authorities are committed to doing what is necessary for the country's economic and financial recovery through continued steadfast policy implementation. The IMF continues to support Turkey in its truly "owned" program.

"Executive Directors commended the Turkish authorities on the considerable progress they have made in implementing their ambitious economic reform program. They have moved successfully to a floating exchange rate regime, set a clear course toward debt sustainability through a greatly improved fiscal position, and achieved important progress in banking sector restructuring, public sector reform, and preparations for privatization. In tandem with the associated strengthening in the perceptions of markets, these policies have laid the basis for a resumption of growth.

"Achieving a lasting improvement in Turkey's economic conditions will require the authorities' strong perseverance in the flawless implementation of their reform agenda to further improve prospects for economic recovery, disinflation, and debt sustainability.

"The authorities have appropriately responded to the exogenous shock that Turkey suffered following the September 11 events with a strengthened medium-term program. The new program aims at cleaning up the banking sector, consolidating fiscal adjustment, and achieving disinflation within a floating exchange rate framework, and, if consistently implemented, will go a long way toward making the economy more robust in the face of possible future shocks.

"The recent improvement in Turkey's growth performance, and prospects for continued recovery, underpinned by improved market stability and confidence, are encouraging. The authorities should now act with determination to sustain this recovery into the medium term by removing the basic impediments to growth. This will imply rehabilitating the banking system, introducing an efficient management of public resources, and creating an environment supportive to private investment and the growth of a dynamic private sector.

"Achieving sustained reductions in public indebtedness will require high primary budget surpluses over the medium term, underpinned by fundamental reforms of the tax and spending policies. The planned reduction in public sector employment is key to achieving a permanent budget adjustment and a more efficient public administration. It must be pursued vigorously but in a manner which minimizes social costs. Building on the considerable progress in streamlining the budget system over the last several years, the authorities will also further improve public procurement, overhaul the tax system, reform public sector employment, and consolidate budget institutions.

"Lowering inflation on a lasting basis will be central to the achievement of a stable macroeconomic environment conducive to economic growth, and to the success of the floating exchange rate regime. To achieve the targeted disinflation, the central bank will adhere strictly to its base money targets, while finalizing preparations for a successful transition to formal inflation targeting.

"The reforming of the state banks has been one of the main achievements under the program, and every effort must now be made to complete the operational restructuring of these banks, followed by their privatization. The authorities' strong efforts to put in place the legal and regulatory framework supporting the new recapitalization scheme for the private banks are commendable.

"The authorities' continued strong implementation of a challenging economic program, and the renewed demonstration of political unity behind the program justify the Fund's exceptional support to Turkey's reform agenda," Mr. Köhler said.

ANNEX

Recent Developments

In late summer 2001, Turkey's revised economic program was beginning to show positive results, when the events of September 11 struck. The September 11 shock has affected the Turkish economy through lower export demand, loss of tourism receipts, reduced access to international financial markets, and weaker privatization and foreign direct investment prospects. These losses in foreign exchange strained domestic financial markets in September-October and led to large increases in domestic interest rates, the opposite of the program's goal.

By November 2001, Turkey was estimated to face an external financing gap of US$10 billion for 2002, with gaps of US$1 billion in each of the following two years. Although the program, which was strengthened in May, addressed many of Turkey's deep-rooted macroeconomic and structural problems, including the heavy debt burden, entrenched high inflation, banking sector difficulties, and pervasive state involvement in the economy, Turkey now needed to follow an intensified medium-term approach in order to fulfill its growth potential with disinflation and falling debt ratios.

In recent months, the prospects of a strengthened economic program, to be supported by additional external financing in the context of a Fund arrangement, has helped to improve market sentiment. In January, the Turkish lira appreciated by more than 10 percent against the U.S. dollar, bringing the cumulative appreciation since mid-October 2001 to more than 20 percent. In addition, the interest rate on the benchmark bond has fallen by more than 20 percentage points (to around 70 percent at end-January), while the stock market has risen more than 80 percent from its post-September 11 low.

Program Summary

Turkey's economic program for 2002-2004 deepens and extends the efforts that were made under the previous program. The program aims at protecting the economy against future crises, while laying the basis for sustained economic growth. Three key elements of the program are designed to reduce the risk of future crises. First, continuation of the floating exchange rate regime will limit the potential for speculative attacks, allowing greater interest rate stability. Second, efforts to reform and strengthen the financial system will make banks less vulnerable to withdrawal of funds, and boost confidence in domestic financial assets. Third, expenditure and tax reforms will help sustain the fiscal adjustment needed in the medium term to ensure debt sustainability.

The program aims to generate sustained economic growth through macro stability, to be achieved by fiscal adjustment, disinflation under the planned inflation targeting framework, and structural reforms. Structural reform efforts will focus on completing banking sector restructuring, intensifying public sector reform, and strengthening the private sector's role in the economy.

The medium-term macroeconomic framework envisages gradual economic recovery, continued disinflation, improved external accounts, and government debt sustainability. For 2002, GNP is projected to grow by 3 percent with an upside potential given the depth of the 2001 recession. The authorities have reaffirmed their commitment to reach the CPI inflation target of 35 percent in 2002, from 68.5 percent in December 2001. The government intends to support a viable debt position by maintaining the public sector primary surplus in 2002 at the level of 6.5 percent of GNP. The current account is still expected to move from a surplus of about US$2 billion in 2001 to a deficit of a similar magnitude in 2002. The capital account deficit is projected at US$3 billion in 2002, compared with US$13 billion in 2001, reflecting mainly the expected improvement in portfolio and banking sector flows as a result of a gradual restoration of confidence. Provided interest rates converge to program levels and the primary surplus remains strong, Turkey's public debt would be sustainable in the medium term-that is, it would shift to a declining trend relative to GNP.

On fiscal policy, the authorities intend to continue their strong fiscal efforts begun in 2001, which had allowed for a public sector primary surplus of more than 5.5 percent of GNP despite the deep recession. For 2002, Parliament has passed a central government budget consistent with the objective of achieving a public sector primary surplus of 6.5 percent of GNP, and the authorities have already started to implement supporting measures to enhance revenues and rationalize expenditures. On debt management, the authorities plan to take further steps to build on the recent achievements, including offering securities that are matched by investors' needs; widening the investor base to make it more stable; and lengthening the maturity of government debt and deepening the liquidity of benchmark issues.

The authorities reaffirmed that the goal of monetary policy will be to lower inflation, and they are making additional efforts to put in place the preconditions for successful inflation targeting. Improving financial market conditions and a stabilizing exchange rate will rebuild confidence in the financial system and free monetary policy to target inflation.

Structural priorities under the program are threefold: in the banking sector to restore credit flows to the real sector; in the public sector, greater transparency of government operations, and state enterprise restructuring; and in the private sector, intensifying privatization and fostering greater foreign direct investment. The authorities will implement a policy package to accelerate banking sector reforms and complete the restoration of the sector's soundness. Their two-pronged strategy will force banks to value their loan portfolios rigorously, while at the same time offer limited public support for private bank recapitalization efforts. Furthermore, institutional capabilities need to be established to resolve the large amount of assets of banks taken over by the Savings Deposit Insurance Fund (SDIF), and the momentum for strengthening the regulatory and supervisory frameworks needs to be maintained.

In the public sector, the authorities are determined to sustain the fiscal adjustment through reforms aimed at a lasting improvement of the fiscal position, and a significant enhancement of fiscal transparency. Tax system reform will make the revenue base broader and more sustainable, and reduce distortions in the economy. Consolidating fiscal activities into fewer institutions will enhance aggregate fiscal control and improve transparency. Social protection in the new program will be enhanced to cushion the impact of the necessary retrenchment program in public enterprises. At the same time, the authorities plan to take major steps to revitalize privatization in 2002 and to improve the private investment environment. Key to fostering a business-friendly environment will be to improve transparency and governance, and enhance communication of the aims of the economic program.



Turkey: Selected Indicators, 1999-2004


 

1999

2000

2001

2002

2003

2004


 

(In percent)

Real sector

           

Real GNP growth rate

-6.1

6.3

-8.5

3.0

5.0

5.0

GNP deflator

55.8

50.9

60.7

48.9

24.9

13.1

Nominal GNP growth rate

...

60.4

47.0

53.4

31.2

18.8

WPI (12-month, end-of-period )

62.9

32.7

88.6

31.0

16.2

12.0

CPI (12-month, end-of period)

68.8

39.0

68.5

35.0

20.0

12.0

Average nominal treasury bill interest rate

106.2

38.0

99.7

69.6

46.0

32.4

Average ex-ante real interest rate 1/

32.0

-9.4

32.4

33.2

27.5

20.5

             
 

(In percent of GNP)

Central government budget

           

Primary balance 2/

1.5

4.2

5.0

5.4

5.6

5.6

Net interest payments 3/

13.1

15.8

23.2

20.5

16.2

13.5

Overall balance

-11.6

-11.6

-18.2

-15.2

-10.6

-7.8

Consolidated public sector

           

Primary balance

-2.0

2.3

5.7

6.5

6.5

6.5

Net interest payments 4/

22.1

21.9

24.7

18.4

15.8

13.3

PSBR (including CBT profits)

24.2

19.6

19.0

11.9

9.3

6.8

Net debt of public sector

61.0

57.4

92.2

81.3

73.3

69.4

Net external

20.1

18.3

38.0

35.1

30.6

28.5

Net domestic

40.9

39.1

54.2

46.2

42.7

40.9

Of which:

           

Central government (gross)

42.5

40.9

70.3

54.2

...

...

Auctioned and other cash debt

25.8

23.4

25.3

23.1

...

...

Bank recapitalization

...

17.4

35.6

28.4

...

...

External sector

           

Current account balance

-0.7

-4.9

1.3

-1.2

-1.2

-1.2

Gross external debt

55.0

56.6

75.4

71.7

66.7

63.3

Net external debt

34.0

37.0

51.6

48.1

44.4

40.8

Short-term external debt (by remaining maturity)

20.8

23.0

23.3

20.4

19.0

18.8

Monetary aggregates

           

Seignorage 5/

3.2

1.8

1.0

1.0

0.7

...

Nominal growth of broad liquidity (in percent)

96.9

40.2

75.1

40.2

27.4

17.1

             
   

(In billions of U.S. dollars, unless otherwise indicated)

Privatization proceeds

0.1

3.3

2.8

1.5

2.5

1.0

Net external financing of central government

1.4

4.1

-2.7

1.0

-1.0

-1.0

Amortization

6.0

6.2

8.2

6.5

8.4

8.0

Gross borrowing

7.4

10.3

5.5

7.4

7.5

7.0

Of which: Eurobond issues

5.0

7.5

2.2

2.5

4.5

4.7

GNP

187.4

201.3

150.3

165.6

183.0

201.3

GNP (in quadrillions of Turkish lira)

78.3

125.6

184.7

283.2

371.6

441.3


Sources: Data provided by Turkish authorities; and IMF staff estimates.

1/ Average of monthly nominal interest rate divided by 12-month ahead CPI inflation. With average maturity of newly issued debt less than one year, and with FRNs paying quarterly coupons, this measure overstates the effective real interest rate when inflation is declining.

2/ On a commitment basis, excluding profit transfers from the CBT, interest receipts, and privatization proceeds.

3/ Interest payments minus interest receipts plus profit transfers from the central bank.

4/ Interest payments minus interest receipts plus CBT profits before transfers to the government.

5/ Change in reserve money in percent of GNP, where reserve money is defined as currency issued plus reserve requirements.




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