Press Release No. 05/104

The Executive Board of the International Monetary Fund (IMF) today approved a three-year, SDR 6.66 billion (about US$10 billion) Stand-By Arrangement to support Turkey's economic and financial program through May 2008. An amount equivalent to SDR 555.17 million (about
US$ 837.5 million) will be made available immediately, with the remaining balance distributed in eleven equal installments. The Board also approved a one-year extension of Turkey's repurchase expectations totaling SDR 2.52 billion (about US$ 3.80 billion) arising in 2006.

Following the Executive Board's discussion on Turkey, Mr. Rodrigo de Rato, Managing Director and Chairman, made the following statement:

"Turkey's economic performance is at its strongest in a generation. Growth was 8 percent on average over the last three years, while inflation has fallen to single digits, its lowest level in more than 30 years. Strong policy implementation under the previous Fund-supported program has given rise to this impressive performance. Together with the EU's decision to open accession negotiations, this signals a sea change in Turkey's economic prospects.

"The authorities' new three-year program is designed to extend these gains in economic performance and reduce Turkey's remaining vulnerabilities. The government's commitment to maintain the primary surplus target at 6½ percent of GNP will steadily reduce the public debt and help contain the current account deficit. Continued independence of the central bank, together with next year's introduction of full inflation targeting, will help consolidate the reduction in inflation. These macroeconomic policies should facilitate further reductions in interest rates and generate sustained growth.

"Implementation of structural fiscal reform will be central to the success of the new program. The tax administration reform should be implemented in full to improve compliance and reduce the size of the underground economy. Tax reform needs to focus on raising revenues by simplifying the tax system and eliminating exemptions. Selective tax relief erodes the tax base, undermines compliance and should be avoided. Expenditure reform should gradually reduce the social security deficit, while improving the quality of spending.

"The authorities' structural reform agenda should also help sustain growth. Passage of the new Banking Law later this year should strengthen banking supervision, while the SDIF is making progress towards resolving the stock of non-performing assets. Success in this year's privatizations and implementation of the recommendations of this year's Investment Advisory Council should help improve the business climate. Labor market flexibility will also need to be improved to ensure that Turkey's recent strong growth performance results in new job creation.

"Through their strong policies, the Turkish authorities have transformed Turkey's economic performance, while reforms associated with EU accession negotiations hold out the promise for further economic advance. Turkey deserves the support of the international community on the strength of its impressive track record under the last Fund-supported program and the policies proposed under the new arrangement. The challenge now for the authorities is to implement the new program in full in order to sustain and build on this recent success."

On the issue of the non-complying disbursement, Mr. de Rato said:

"The Executive Board reviewed a non-complying purchase made by Turkey under its previous Stand-By Arrangement. Revised data indicate that expenditure levels reported to assess the 2002 primary balance for the fourth review were slightly higher than reported to the Board at the time. The Executive Board took note of the improvements brought about in the collection and dissemination of the data in question and concluded that the deviation was minor (0.13 percent of GNP) and did not alter the assessment of the fiscal situation under the program. Accordingly, the Executive Board granted Turkey's request for a waiver of the noncomplying purchase."

Program Summary

Turkey has concluded the last Fund-supported program successfully and the impressive outcome has laid solid foundations for the new program. These reforms have delivered a decisive break with Turkey's history of high and variable inflation, and low and volatile growth. Output has recovered strongly from the 2001 recession, with annual growth rates averaging 8 percent over the last three years. Inflation is now well below 10 percent and government debt has declined to 63.5 percent of GNP.

The overriding goals of the new program are to create conditions for sustained growth that will raise living standards and reduce unemployment; facilitate convergence towards the EU economies; and bring about an orderly exit from Fund support. To achieve this, the program aims to:

• Deal effectively with short-term macroeconomic challenges and, in particular, reduce the current account deficit to more sustainable levels.

• Secure permanently lower inflation, by retaining the floating exchange rate, preserving central bank independence, and adopting formal inflation targeting.

• Make the government debt position more sustainable through continued sizable primary surpluses, shifting towards longer debt maturities, and underpinning the fiscal adjustment with structural fiscal reforms.

• Restore Turkey's net foreign exchange reserve position and strengthen its resilience to unexpected external developments.

• Maintain financial sector stability by further improving the supervisory and regulatory framework, accelerating asset recovery and restructuring state banks.

• Implement a structural reform agenda that enhances Turkey's growth prospects, lowers unemployment, and improves the investment climate.

The program's macroeconomic framework is centered on achieving high and sustained growth of around 5 percent each year. In 2005, slower domestic demand and continued export growth are expected to lower the current account deficit to 4.4 percent of GNP. Inflation is targeted at 8 percent this year, declining to the low single digits by the end of the program. The program also envisages a 5 percentage point decline in the overall fiscal deficit that should help reduce the government's net debt ratio by a further 10 percent of GNP.

Turkey became a member of the Fund on March 11, 1947; its quota is SDR 964 million (about US$1.45 billion); and its outstanding use of IMF resources as of March 31, 2005 is SDR 13.19 billion (about US$19.89 billion).

Table 1. Turkey: Selected Indicators, 2000-05
						Projections
	2000	2001	2002	2003	2004	2005
	(In percent change)
Real sector
Real GNP growth rate	6.3	-9.5	7.9	5.9	9.9	5.0
GNP deflator	50.9	55.3	44.4	22.5	9.5	6.8
Nominal GNP growth rate	60.4	40.5	55.8	29.7	20.3	12.1
WPI (12-month, end-of-period )	32.7	88.6	30.8	13.9	15.3	8.0
CPI (12-month, end-of period)	39.0	68.5	29.7	18.4	9.3	8.0
Average nominal treasury bill interest rate	38.0	99.1	63.5	45.4	24.9	16.4
Average ex-ante real interest rate 1/	-9.5	35.5	38.2	34.8	16.6	9.4
	(In percent of GNP)
Central government budget
Primary balance 2/	4.6	4.8	2.4	5.0	5.1	5.1
Net interest payments 3/	15.8	26.4	15.9	15.9	13.2	11.3
Overall balance	-11.2	-21.6	-13.4	-10.9	-8.0	-6.2
Consolidated public sector
Primary balance	3.0	5.5	4.2	6.2	6.9	6.5
Net interest payments	16.0	26.4	16.1	16.0	13.1	11.1
Overall balance	-13.0	-20.9	-11.9	-9.8	-6.2	-4.6
Operational balance	-6.9	-4.7	-4.4	-4.8	-2.9	-1.0
Net debt of public sector	58.3	90.5	78.5	70.4	63.5	60.0
Net external	19.0	37.7	32.3	22.1	17.5	16.4
Net domestic	39.3	52.8	46.2	48.3	46.0	43.6
External sector
Current account balance	-4.9	2.4	-0.8	-3.4	-5.1	-4.4
Gross external debt	59.0	78.9	71.3	61.0	53.6	48.3
Net external debt	39.3	55.1	56.2	47.4	40.4	36.5
Short-term external debt (by remaining maturity)	21.7	22.7	17.9	17.6	16.7	16.4
Monetary aggregates
Seignorage 4/	1.8	1.1	1.0	1.2	1.2	1.0
Nominal growth of M2Y broad money (in percent)	40.2	87.5	25.4	13.0	22.1	16.7
	(In billions of U.S. dollars, unless otherwise indicated)
Privatization proceeds	3.3	2.8	0.5	0.2	1.3	1.5
Net external financing of central government	4.1	-2.3	-1.4	1.0	1.9	0.0
Amortization	6.2	6.7	11.4	7.0	7.0	12.2
Gross borrowing	10.3	15.0	18.1	8.0	8.9	12.2
Of which: Eurobond issues	7.5	2.2	3.3	5.3	5.8	5.5
GNP	201.3	144.0	182.7	238.5	301.7	349.0
GNP (in quadrillions of Turkish lira) 5/	125.6	176.5	275.0	356.7	428.9	481.0
Sources: Data provided by Turkish authorities; and IMF Staff estimates. 1/ Average of monthly nominal interest rate divided by 12-month ahead CPI inflation. 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/ Change in reserve money in percent of GNP, where reserve money is defined as currency issued plus reserve requirements. 5/ In billions of new Turkish lira from 2005 onwards.