Transcript

With Reza Moghadam, IMF Mission Chief to Turkey
Friday, July 30, 2004
Washington, D.C.

MS. LOTZE: Thank you very much. Good afternoon. I'm Conny Lotze from the IMF External Relations Department, and I welcome you to this conference call on Turkey with Mr. Reza Moghadam, the IMF Mission Chief to Turkey. This call is on the record.

As you know, the Executive Board today discussed the Eighth Review under Turkey's Stand-By Arrangement as well as the report on the Article IV consultation. A little earlier, you received a press release on the Eighth Review, and in the next week or so, you will also receive the Public Information Notice which will provide information on the discussion of the Article IV consultation.

With this, I will turn over to Mr. Moghadam, who will make some introductory remarks before we take your questions. Thank you.

Mr. Moghadam?

MR. MOGHADAM: Thank you, Conny. I will be very brief to give time to questions. I think you have explained that the Board met today and had a very good discussion of issues in Turkey, both from a program perspective and also from the Article IV perspective, which gives an opportunity to stand back and assess how policies have done over the course of the last couple of years when the last Article IV was conducted, and look ahead in terms of the challenges that Turkey has and the policies that are needed to meet those challenges.

As Conny has mentioned to you, the Managing Director has already issued a press release on the Eighth Review aspect of the Board meeting, and we hope that the Public Information Notice on the Article IV will be released soon.

In terms of the issues, obviously the Board looked at performance this year. The Board was of the view that the growth target is likely to be meet and, in fact, exceeded. The Board thought that inflation, the target for this year, the 12-percent target was clearly achievable.

The Board commended the strict conduct of fiscal policy. As you probably know, budget policies are overperforming currently, and they also commended the conduct of monetary policy by the central bank of Turkey, which has been very successful in contributing to the reduction in inflation. And both of these have obviously laid the basis for the strong growth.

The Board discussed the current account and thought that preventing a widening of that, avoiding a widening of that was an immediate policy challenge. They noted that the authorities had already taken some measures and that they are monitoring the situation carefully. And, in particular, the Board recommended strict fiscal discipline and staving the budget overperformance that is currently taking place.

To support this fiscal and monetary agenda, the Board was very strongly supportive of the structural reform efforts that are taking place, particularly in regard to those which underpin the performance of the budget, as well as those in the financial sector. And we can discuss those later.

And as I said, Turkey's performance has been very strong and very successful, and the Board has endorsed the completion of the review today.

Thank you.

MS. LOTZE: We'll go to questions now, please.

QUESTIONER: Hi, Mr. Moghadam. My question is: From what you have seen, because you were in Turkey, and from what you have seen and from what the Board is saying, would you say that Turkey could go it alone next year outside of an IMF program?

MR. MOGHADAM: As you know, the Turkish authorities are considering the modality for cooperation with the Fund as we move out of this program. And the Board was very conscious and we, the staff, are very conscious that this is in the first place a decision that needs to be made by the authorities. It requires careful analysis. They are doing that. And one needs to give them time to do that.

They are preparing, the Turkish authorities are preparing a medium-term plan. Indeed, they need to do so. They need to submit a pre-accession plan to the European Union. And they're working on that in parallel with looking at the options. And I think carefully considering all of these options is important before moving to a decision, and that decision is theirs, not for us.

QUESTIONER: Good afternoon, Mr. Moghadam. I would like to ask you about the social security reform which was very widely discussed in Turkish press reports today. Could you elaborate on the Fund's suggestion that retirement pay should now be taxed as a short-term measure to sustain the social security?

MR. MOGHADAM: I am aware of the work which is going on in Turkey. It is work which is being conducted in the first instance by the Ministry of Labor and Social Security. I do know they are considering all kinds of options.

But I also know that from a broad macroeconomic perspective, the social security deficit in Turkey has been widening, and the size of the social security deficit in Turkey is almost the same as the size of the central government primary surplus.

So it is a problem which needs to be looked at. It's a problem which requires very careful analysis, and that is what is going on at the moment. And they are developing options, and it's also a problem which needs to be viewed with the ongoing demographics and with administrative reforms that are being discussed for the three different systems that are in place.

So I think it's natural to have the debate, the discussion, but as I said, this is work led by Turkey, led by the Ministry of Labor, and I believe they are doing good work, and they are considering all kinds of options. But as I understand, there is a timetable for preparing, for looking at the options, deciding on the options, and then ultimately legislating. And that timetable spans the next few months until basically the fall of this year. And the process of looking at options is a good one, and obviously discussions are continuing.

QUESTIONER: Thanks for that, but just very briefly, how crucial does the Fund see that taxation? Because it is mentioned as a short-term measure.

MR. MOGHADAM: I think in terms of the structure of the budget, obviously the current spending in the budget is very high, and there are also social needs, there are also investment and other needs. There has to be a balance between all of these, and choices have to be made between the prioritizing of what Turkey wants to do. So I think it's difficult to isolate one issue outside the budget cycle.

Perhaps all these issues need to be discussed. Choices need to be made in the context of the budget, not one measure at a time, and I understand that's the process. So the time to look at it is with all the other priorities and options in the context of the forthcoming budget. One should not be isolating one measure here and there and discuss the merits of it on its own.

QUESTIONER: Hi, Dr. Moghadam. Apparently, one leading point in the Managing Director's statement is about warning against the widening of the current account deficits. How bad is it? How threatening is it? Is there a possibility of another financial crisis?

Also, the presently implemented floating currency regime was supposed to be a buffer against such current account deficits. Is it failing to do that? Does Turkey need devaluation?

Thank you.

MR. MOGHADAM: Thank you. Let me just step back a little bit. If one looks at the parameters of the authorities' economic plan for the last year, even the last 2 years, one sees a lot of success—success on inflation, success on growth, success on debt reduction, and in a way the current account problem is a problem of success. Growth is higher than expected.

But let's also put it in the context. The context is that Turkey now has a floating exchange rate regime so it's not a question of one level or another. The market determines what that exchange rate is, depending on the flows. So there is a safety valve there.

Secondly, my belief is that the Turkish Government is very carefully monitoring the situation, and indeed they have already taken some measures. As you know, some of the incentives were reduced. From a prudential point of view, they are looking at bank lending very carefully, and they are conducting a very strict fiscal policy. All of these are good. And it is important to continue with this monitoring, maintain this strong fiscal policy, and if that monitoring necessitates taking measures, then that needs to be done in due course.

So I think our advice is to maintain the strict fiscal policy and maintain the overperformance of the budget because that ultimately helps with the current account.

Also, let me say that some of these measures of course take time to have an effect. They've been taken fairly recently. So, again, some of the figures we are seeing are figures which were based on policies which were there earlier. So we should see the effects of some of these policies hopefully soon.

And also it seems the current account was seen widening. Consumer credit interest rates have gone up. So, again, that should help moderate the widening of the current account, and the effect of all of those needs to be monitored and decisions need to be made once some time is given for these policies to work.

Thank you.

QUESTIONER: Hello, Mr. Moghadam. I wanted to ask you a couple of questions. The first is, is it your sense that Turkey is going to make its decision about whether to continue its IMF program once it hears about the European Union accession?

And I guess you sort of got into the area of interest rates on the last question, but I wanted to know if you could also address the vulnerability of Turkey with regard to the likelihood of rising interest rates in the U.S. and how much of an impact that would have on Turkey.

MR. MOGHADAM: Thank you. I think the Turkish authorities have made statements which basically indicate that they are looking at all options. And my understanding is that they have indicated they will make a decision by September, and they will be working at a technical level during the month of August to help with that decision-making process. So I think, on that, we will have to wait and see.

The current Fund program, it goes through this year and expires only in February next year. So a decision on EU that you referred to is in December. My understanding is also that the authorities are working on a pre-accession economic plan that does have a medium-term component, and they hope to be able to talk about that before the fall. So I think we have to wait and see what decisions they make.

Turkey is a founding member of the IMF, and we will continue to work with Turkey irrespective of the modality that they choose to have. And all of those modalities are being very actively considered. So no decision has been made, no option has been ruled out or chosen yet. So on that we have to wait and see.

On the second issue, on the issue of interest rates, one, Turkey is an emerging-market country, which real interest rates are very high, and so the nominal interest rates—and inflation obviously has come down, but it is obviously higher than the global average, and so what determines interest rates in Turkey is both domestic policy credibility, inflationary outlook, and global factors. All of those matter. And real interest rates are still very high in Turkey.

So one would expect that policy credibility domestically could help reduce real interest rates, and that kind of reduction would be bigger than any impact from the global interest rates.

And as inflation in Turkey declines hopefully further, that also enables interest rates, which are quite high, overnight rates at the moment are in the range of 25, 26, but obviously that's higher than the global rates that we see internationally. So it is not just global factors. Domestic policy has a huge impact, also. And consistent and good policy-making within Turkey can help shelter Turkey against global threats.

QUESTIONER: But are you saying that Turkey's policies are going to offset any impact from an increase in U.S. interest rates or are you saying that Turkey should work on its domestic policies in order to offset the effect?

MR. MOGHADAM: What I am saying is that ultimately what matters is the domestic policy stance. If those policies are good, they can shelter Turkey.

QUESTIONER: But what's your view of the situation now and the threat?

MR. MOGHADAM: At the moment, the policy, as you know today, we completed a review of the Fund program, and that of course is the signal of confidence that policies that were needed to be put in place for the review have been put in place. Fiscal policy is overperforming, monetary policy conduct has been extremely good. So that the record up to now is very good. The key is maintaining those, and the key is to supplementing those policies, those good macro policies with good structural policies to enable the good performance to continue.

QUESTIONER: Thanks.

MS. LOTZE: All right. If there are no more questions, then we will end the conference call right here. Thank you very much for joining. Goodbye.

[End of conference call.]