News Brief No. 02/57

News Brief: IMF Approves US$1.15 Billion Tranche to Turkey under Stand-By Credit

June 28, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Turkey's economic performance under the three-year stand-by credit. The decision will enable Turkey to draw up to SDR 867.6 million (about US$1.15 billion) immediately.

The stand-by credit was approved on February 4, 2002 (see Press Release No. 02/7) in a total amount of SDR 12.8 billion (about US$17 billion). So far, Turkey has drawn SDR 8.2 billion (about US$11 billion).

After the Executive Board discussion on Turkey, Horst Köhler, Managing Director and Chair, said:

"The Turkish authorities are to be commended for their strong policy performance. Fiscal policy has remained on course; the Central Bank of Turkey (CBT) has adhered to a prudent monetary policy; and structural reforms in banking and in the public sector have been impressive. These policies have delivered a sharp drop in inflation and inflation expectations, and the beginnings of an economic recovery.

"The significant fiscal adjustment of the last two years has been one of the main achievements of the program. The authorities' commitment to maintaining the present strong fiscal stance in 2003 and over the medium term will play a crucial part in ensuring debt sustainability. The recent decisions to bring price increases in state economic enterprises back on track are a strong signal of this commitment. Going forward, this should be reinforced with reforms in direct taxes, a prudently managed reduction of redundant staff positions in state economic enterprises, and improved tax administration and procurement procedures.

"The central bank's contribution to reducing inflation and inflation expectations is a further major achievement. This should now be strengthened by advancing with the technical preparations for inflation targeting. The central bank should continue its policy of gradually building up its foreign exchange reserves, as long as the underlying balance of payments position permits. The authorities should also move further to reduce tax distortions in financial markets.

"The Bank Regulation and Supervision Agency (BRSA) has handled skillfully the private bank audit and recapitalization exercise and has demonstrated, through its recent action, its commitment to strengthening Turkey's financial system. Together with adoption of the Istanbul Approach for corporate debt restructuring, and planned improvements in the legal framework for bankruptcy, this will set the stage for a lasting recovery in credit growth.

"Greater attention needs to be devoted to structural reform, especially privatization, in the period ahead. In the light of the inefficiencies in state enterprises and the burden they place on the budget, the authorities should intensify their efforts to privatize these enterprises. The recent presentation to parliament of a new Foreign Direct Investment Law is an important step in improving the business environment and supporting the privatization efforts.

"Overall, the authorities' impressive policy implementation has been producing tangible gains. Vulnerabilities remain, however, as evidenced by recent financial market developments. Full implementation of the program strategy is therefore essential to create sustained economic growth. For these efforts to be fully successful, a critical priority will be to provide reassurance to markets about economic, financial, and political stability, and thus the long-term credibility of Turkey's reform efforts," Mr. Köhler said.