Press Release No. <a name="P16_75"></a>05/141

An International Monetary Fund (IMF) staff mission headed by Lorenzo Giorgianni issued the following statement today in Ankara:

"As you know, this is my first visit to Turkey as head of the IMF delegation. I feel privileged to be here and will try to do my best to continue the close and fruitful partnership that my predecessor, Reza Moghadam, was able to establish with Turkey.

"I would like to thank all the people I was able to meet during my stay for their kind hospitality and productive exchange of views. In particular, I would like to thank Minister Babacan, Minister Unakitan, Undersecretary Çanakcı, Governor Serdengeçti, and their technical teams for very open and constructive discussions.

"As you know, the goal of this visit was to hold discussions for the first review of Turkey's program supported by a new Stand-By Arrangement with the IMF. At the outset, I would like to confirm that we have reached agreement in principle with the Economic Team on a draft letter of intent and the policy actions needed to complete the first program review.

"Among these actions are parliamentary passage of the agreed social security reform law and banking law by the end of this month. Provided these policy steps are taken, I will be able to recommend to IMF management that Turkey's request to complete the first program review be submitted to the Executive Board. Upon completion of the review, a further disbursement of about US$815 million will be made available under the terms of the US$10 billion loan arrangement with Turkey.

"Discussions over the last two weeks focused on progress to date in achieving the objectives set out in the government's economic program and the policies needed to extend Turkey's strong economic performance into the future. The results so far this year have been impressive. Budget execution is firmly on track, growth and inflation targets are well within reach, and the central bank has wisely taken advantage of strong capital inflows to build up reserves comfortably in excess of the program target.

"Looking ahead, we agreed with the Economic Team that continued prudent fiscal and monetary policy implementation is essential to allow further reductions in inflation and interest rates, continued robust growth, and progress in reducing the unemployment rate. While the current account deficit appears to be stabilizing, its size leaves no scope for an easing of the policy effort.

"A major part of the policy discussions was devoted to the question of how to improve compliance with taxes and social security contributions in Turkey. This may sound like a technical issue, but its importance for the success of the government's program cannot be overstated. Unless tax payments and social security contributions can be better enforced, and the tax base broadened further, there will be little, if any, room to begin reducing Turkey's very high tax rates, which in turn will continue to hold back growth and employment.

"Reflecting this concern, a key focus of the structural reform agenda in the period ahead will be on the steps needed to reorganize the newly established revenue administration, along the lines envisaged in the law. We and the government hope that this reform will lead in time to significant improvements in tax collections, thereby facilitating debt-reducing efforts and creating room in the budget for job-creating investment spending and reductions in tax rates. In parallel, the government is planning measures to strengthen the performance of the social security institutions in collecting contributions.

"In this context, we are very encouraged that the government—as announced by the Prime Minister yesterday—has ruled out any form of generalized restructuring or amnesty of social security arrears. Instead, the government intends to develop and implement later this year a comprehensive framework to address this complex problem. This framework will include measures to enhance compliance together with mechanisms that enable the institutions to address uncollectible arrears. This will be done on a strictly case-by-case basis, taking into account capacity to pay. Appropriate safeguards will be introduced to ensure that the process is conducted in a fair and transparent manner and all enforcement avenues pursued.

"The other main topic of the discussions during this review was the strategy for financial sector reform, especially regarding the state banks. Specific strategies for the two main state banks—Halk and Ziraat—are near completion, and in the coming months we expect to see the first concrete steps toward their eventual privatization.

"All in all, we remain very encouraged with the direction of policies and the prospects for the economy. This government's program has produced the best economic performance in a generation. I believe the government remains committed to taking the necessary steps to continue this success and, I personally, and the Fund, stand ready to assist Turkey in this endeavor."