Press Release No. <a name="P16_75"></a>04/265

Mr. Rodrigo de Rato, Managing Director of the International Monetary Fund (IMF), issued the following statement today in Washington:

"I am very pleased to announce that the Turkish authorities and the IMF mission have reached understandings ad referendum on the elements of an economic program and draft letter of intent that could be supported under a new three-year stand-by arrangement. It is expected that the letter of intent could be considered by the IMF's Executive Board early in the new year.

"Over the last three years, Turkey's economic program has delivered positive results. Output has grown rapidly, inflation has fallen to its lowest level in a generation, and government debt has declined markedly. To build on this success, the authorities have formulated a detailed three-year economic program, for which they are seeking IMF support. I believe the new program, if implemented successfully, will help Turkey create the conditions for sustained growth and employment creation, reduce inflation toward European levels, and enhance the economy's resilience, in part through a significant further decline in debt. It should also allow Turkey to exit from further IMF financial support.

"Continued fiscal discipline remains central to achieving these goals, and hence the program envisages maintaining the 6½ percent of GNP primary surplus target. This will be achieved within a debt reduction framework aimed at reducing public debt by around 10 percentage points of GNP over the next three years. To support the program's fiscal objectives, the government plans to undertake reforms of public expenditure, tax administration, and tax policy.

"To achieve sustained fiscal consolidation, containing and reducing the social security deficit will be a major challenge. In the absence of fundamental reform, the social security deficit is set to more than double in the long run from its current level of 4½ percent of GNP, despite Turkey's favorable demographics. This would undermine the hard-won fiscal consolidation of recent years. To address this challenge, the social security deficit will be capped at its 2004 level during the next three years. In parallel, reforms will be introduced to reduce the deficit in the pensions system over the long term to 1 percent of GNP.

"Tax policy reforms will bring the tax regime closer to EU norms. The government intends to simplify corporate and personal income taxes, phase out financial intermediation taxes, and harmonize the tax treatment of financial instruments. The government attaches high priority to reducing tax evasion through improved administration under legislation to be introduced shortly.

"The taming of inflation was one of the major policy successes of the past three years, a tribute to the independence of the central bank, and rigorous fiscal discipline. The new program will build on this achievement by further strengthening the central bank's monetary policy framework. The Central Bank of Turkey will shortly announce its plans for enhanced transparency and a phased transition to formal inflation targeting.

"In the banking sector, the goal over the next three years will be to align Turkey's supervisory framework more closely with EU standards, accelerate resolution of assets held by the Savings Deposit Insurance Fund, and strengthen further the operations of the state banks. A key first step will be the introduction of a new financial services law that will upgrade rules relating to bank owners and managers, licensing, and related party lending, and allow the Banking Regulation and Supervision Agency to coordinate on-site and off-site inspection more effectively.

"The government plans to implement a range of structural reforms to improve the climate for investment and growth, and to address Turkey's unemployment problem. These plans are being guided by the recommendations of the inaugural Investor Advisory Council meeting, held in early 2004.

"The authorities are requesting a stand-by arrangement with exceptional access equivalent to US$10 billion. Before this request can be considered by the IMF's Executive Board, a number of steps are envisaged relating mainly to progress on key pieces of legislation regarding financial services, social security, and tax administration. The Board will also consider the authorities' request for a one-year extension of repurchase expectations amounting to about US$3.75 billion that fall due in 2006."