Transcript

International Monetary Fund
Istanbul, Turkey
May 6, 2004

MS. KRUEGER: Good afternoon, ladies and gentlemen, and thank you for coming. I'd like to say just a few words before taking your questions.

As you know, during my visit to Turkey this week, I have addressed both the Economic Congress in Izmir yesterday and the Istanbul Forum earlier today. I've also had a series of meetings with members of the government and with others. Yesterday I met with Prime Minister Erdogan, Deputy Prime Minister Sener, Minister Babacan, and Minister Unakitan, Governor Serdengecti, and other officials. Earlier today I met with academics and representatives from the private sector.

As I said in my remarks both yesterday and earlier today, I'm delighted to be here in Turkey at such an auspicious moment. The global recovery is strengthening, and Turkey's economic performance continues to be impressive. Growth was 6 percent last year, or close to it, and is expected to be around 5 percent this year.

The primary surplus last year was 6.2 percent, the highest ever recorded in Turkey, and the government is confident it will meet its 6.5 percent target for this year. As you know, consumer price inflation is now down to just over 10 percent, according to the figures released this week. That brings single-digit inflation within Turkey's grasp.

These achievements reflect the government's determination to stick with its economic objectives and its reform program. The government's commitment remains impressive. Much has been achieved, but much remains to be done, as the Prime Minister noted in his address to the Economic Congress yesterday, so that Turkey can move permanently to a new era of higher growth and rising living standards for all.

The pursuit of low inflation, fiscal discipline exercised in a way that ensures sustainability over the medium term, further reform of the financial sector—these are all government objectives that the IMF endorses. They are the means to the end of sustainable economic growth. It is the Fund's role to provide advice and technical assistance wherever we can, in addition to the financial support we are providing under the current program.

My talks with government Ministers and official were, as always, constructive and friendly. I was left in no doubt of the strength of the government's determination to stick with its economic objectives. I congratulated Prime Minister Erdogan and his colleagues on their achievements so far and strongly encouraged them to press on with the measures that are ushering a new economic era for Turkey, one that brings rapid economic growth, rising living standards, and reduced poverty.

Thank you very much, and now I'll be happy to take questions.

QUESTION: What kind of relationship will be established between the IMF and Turkey over the next year?

MS. KRUEGER: The economic program doesn't end until next March. It will be a decision of the government's. I think they will be talking about that and letting us know what they want.

QUESTION: In the Letter of Intent, Turkey said it will establish new criteria for bank ownership. What kinds of cross-ownership does the IMF think should not be allowed in the new law? And how long should be allowed for transition to these new criteria?

MS. KRUEGER: I'm going to turn that question over to Mr. Odd Per Brekk, our resident representative. I think it's very difficult to say what we think should not be allowed. I think that's always—you know, all the things you won't let is much harder to judge than what you will allow. I will, nonetheless, let Mr. Brekk try to field the question.

MR. BREKK: Well, the main purpose of the legislation which is in the works is to bring Turkish banking legislation into line with EU standards. And I think that's really all I can say at this point. We are providing technical assistance. In fact, over the next couple of weeks, there will be discussions between the government and our technical experts on this.

QUESTION: Ms. Krueger, there was a discussion after yesterday's meeting with Mr. Erdogan about the primary surplus. What do you think about the primary surplus? Will it remain at 6.5 percent? Or do you think it's negotiable to decrease a little?

MS. KRUEGER: Well, for the program currently underway, the target is 6.5 percent, and I don't think there is any change in that.

The purpose of having the primary surplus at that level, of course, is so that the debt burden over time can go down. And when that happens, of course, the primary surplus will be able to be smaller in the future. But the first and important thing is to get the debt burden to a much more sustainable level.

QUESTION: [Inaudible]

MS. KRUEGER: Well, as I understand it, the question is do I think the program should continue, and as I already said, I think that's a decision of the Turkish Government.

What's important is that Turkey stay on course—with a set of economic policies that permits a very quick transition, which I think can be done now, to a higher rate of economic growth, more employment, and maintains price stability, fiscal stability, and gets, as I said, the debt down to a much more reasonable level.

Now, how the government chooses to do that I think is its choice. We will provide technical assistance, and whatever else we are asked to do. But I think the more important question is: Will the government adhere to its policies? And I believe the answer to that question is yes.

QUESTION: When are you planning to do the Eighth Review with Turkey? And do you think that the consumer credit is a risk for the Turkish economy now?

MS. KRUEGER: As of right now, the mission is planned for early June, which is when the Eighth Review would be.

And as to consumer credit, I understand that total consumer credit is—what, 5 percent of GDP? Still a relatively small number.

QUESTION: Maybe building on that previous question, you know, could we interpret your comments about technical assistance, as a pledge to government, as an open letter to government for a possible post-2005 March relationship?

MS. KRUEGER: Well, first off, normally we don't have any open invitations to programs. In general, it has to be something where there is a policy commitment from a government, and then there's some discussion of it. So you could not interpret my comment about technical assistance in that way, even in my wildest dreams I didn't mean it that way.

On the other hand, of course, we want to support Turkey, and as I said in my talk earlier, we want Turkey to do well. And if we can provide technical assistance, that kind of thing, at the government's request, we would try to do so.

QUESTION: Do you think that the current account deficit is a concern for Turkey for 2004? And you said the Eighth Review will be held in early June. Will there be any talks regarding the post-stand-by 2005?

MS. KRUEGER: Okay. The current account number, as I understand it, is only out for January. The February number is supposed to be announced shortly. Or is it out? I don't know. But one or two months don't tell a story, and as I understand it, in Turkey, anyway, there is a seasonal factor, which means that it's normally high in winter.

That much said, there is also a flexible exchange rate, and the fact that the exchange rate is free to move does mean that, you know, if there's any emerging problem, one of the beauties of having a more freely floating exchange rate is that there's a shock absorber built in right there. So, at the moment, certainly, we see no reason for concern on that account whatsoever.

On the second question: once again, that's up to the government.

QUESTION [Inaudible]

MS. KRUEGER: As to the first question, which, as I understand it, is what is the effect of any potential increase in the interest rate by the U.S. Federal Reserve on Turkey, I have to divide that into several parts. The first part is that the expectation is that any such increase in rates, if it comes, will probably be quite gradual, which gives people the time to adjust.

Secondly, I think about one-third of Turkish debt is foreign, so the direct interest effect is on that. So it's one-third of the debt, not the whole debt, that would be affected. And, of course, the debt has a time structure, so it would feed in gradually.

The second part of the answer is—and this is the part that always puzzles me because people forget that when the Fed does raise the interest rate, they're doing so because economic activity is expected to proceed more rapidly in the country. Well, that more rapid economic activity is a good thing for Turkey, and so what one wants to weigh in a sense is, well, what happens to Turkish exports to the United States, to other countries, as the world economy is going better, and to what extent—these are two offsetting forces, and the interest rate increase doesn't come about just because one day the Fed says, well, you know, economic activity is still where it is, we'll do it. It comes about because they see enough expansion that they don't think the American economy can grow faster.

Now, in a sense, when they raise the rate that way, one has to ask: What's happening to activity? What does that do, for example, to the determination of the Turkish exchange rate? If, in fact, the exchange rate is a appreciates a little bit, as you would expect, in real terms because the U.S. economy is growing faster, that again makes the burden of the debt, which is half foreign exchange denominated as contrasted with foreign owned, somewhat less. And so I think it's quite ambiguous what would happen.

There are a lot of emerging markets where a much higher percentage of the debt is foreign owned and denominated in foreign exchange. So I think for Turkey the answer is that, of course, it increases somewhat the burden of the debt. But, remember, the debt to GDP ratio is already down quite a bit. The maturity structure of the debt has been lengthened, and Turkey is in much better shape now in that regard than it was even a short time ago.

QUESTION [Inaudible]

MS. KRUEGER: Now, as I understand, the question was that—the questioner had not heard as yet a consistent response from government officials as to what they wanted next and so what did I think, essentially.

Well, the first part of it is that we are at the beginning of May 2004. A lot is going to happen over the next six months, eight months, ten months in the world economy and in Turkey. And I think the government would probably not be well-advised to decide right now what it wants next. I think they are considering it, and I think that they just need more information. And to decide now without regard to what will happen next to me would not make sense. So I think it probably speaks well of them that they are considering the options without as yet reaching a conclusion.

I think Mr. Brekk earlier on did outline what the alternatives are. They are fairly standard within the Fund. And I have no advice to give because, as I say, I don't know either what will happen over the next eight or ten months. But even if I did, it would be the government's choice and I wouldn't say.

Moderator: Okay. Ladies and gentlemen, thank you very much for coming.