Press Release No. 07/239

Press Release: Statement by the IMF Staff Mission to Turkey

October 23, 2007

The following statement was issued today in Washington, D.C. by the International Monetary Fund's mission to Turkey on the discussions related to the seventh review under the IMF's Stand-By Arrangement:

"An International Monetary Fund (IMF) mission, led by Mr. Lorenzo Giorgianni, held discussions with the Turkish authorities in Ankara during October 8-17. Discussions continued during October 18-22 in Washington, D.C., in the context of the Annual Meetings of the IMF and the World Bank.

"Recent economic developments have been good, with growth rebalancing away from domestic to external demand and inflation easing thanks to the central bank's cautious monetary policy stance. Despite a weaker external backdrop, the removal of election uncertainty has boosted investor confidence and capital inflows.

"The outlook for the Turkish economy remains positive overall. Next year, economic activity is expected to accelerate moderately to 5½ percent; inflation should continue declining gradually; and the current account deficit appears to be stabilizing below 8 percent of GNP—though oil prices and lira appreciation pose key risks.

"However, fiscal performance has weakened considerably in 2007, making the policy mix less supportive of external adjustment, and disinflation more reliant on tight monetary policy. The primary surplus outturn in 2007 is now expected at around 4¼ percent of GNP—well below the government's target of 6.7 percent of GNP—as primary spending accelerated throughout the year, tax compliance weakened, and the financial position of energy companies deteriorated. Softer revenues resulting from weaker-than-expected consumption also contributed to the deterioration in this year's fiscal position.

"Against this background, the mission noted that the new government had a unique opportunity to strengthen macroeconomic policy implementation and reenergize reform. Discussions focused on the 2008 budget proposal and structural actions to safeguard the long-term fiscal position.

"There was agreement with the authorities that the primary surplus anchor of 6½ percent of GNP had served Turkey well, by easing the debt burden, facilitating declines in inflation and real interest rates, and thus creating the conditions for private-sector led growth to flourish. At the same time, it was recognized that a lower primary surplus target on the order of 5½ percent of GNP would still be consistent with reducing the debt ratio quickly toward safer levels. Adherence to such a target would also achieve a significant tightening of fiscal policy relative to this year, thereby assisting disinflation and interest rate reductions. Moreover, there was agreement in principle that, going forward, fiscal policy will be anchored to a strong medium-term fiscal framework, with consideration being given to an explicit fiscal rule.

"The mission, therefore, supported the authorities' intention to target a public sector primary surplus of 5½ percent of GNP in next year's budget. While welcoming the associated reduction in primary spending of ¾ percent of GNP relative to this year's expected outturn, the mission noted that adequate safeguards needed to be developed to ensure that the primary surplus target is achieved.

"Turning to monetary policy, the mission welcomed the central bank's recent decisions to cut interest rates. Going forward, a continued cautious and measured approach to interest rate decisions is desirable in light of remaining upward risks to inflation.

"The mission welcomed the authorities' intentions to implement important structural measures, in particular overhauling the social security system by early next year, tackling rising tax evasion by enhancing auditing capacity under the Revenue Administration, privatizing Halkbank, and adopting measures to restore financial soundness to energy companies (including by allowing full cost-recovery pricing).

"In the period ahead, IMF staff and the authorities will work together to finalize agreement on a strong package of policies that would enable the completion of the seventh program review."