News Brief No. 02/32

News Brief: IMF Approves US$1 Billion Tranche to Turkey Under Stand-By Credit

April 15, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the first 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 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$16 billion). So far, Turkey has drawn SDR 7.3 billion (about US$9 billion).

After the Executive Board discussion on Turkey, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"The Turkish authorities have made considerable progress in implementing their ambitious economic reform program. In the past, financial indiscipline and structural weaknesses had prevented Turkey from realizing its economic potential, and created an environment of highly volatile growth and inflation over several decades. The program addresses these weaknesses and should reduce the vulnerability of the economy to shocks. It represents a further decisive step away from the interventionist policies of the past, and will lay the groundwork for a more consistent economic performance in the future.

"In this regard, the positive momentum of macroeconomic adjustment and structural reform that the authorities have maintained since last fall has been encouraging. Macroeconomic policies have remained on course, and the government has continued to press ahead with structural reform. The authorities' efforts have been rewarded by a substantial decline in interest rates, a strong balance of payments position and an associated appreciation of the Turkish lira, and a drop in inflation and in inflation expectations. Despite these positive developments, downside risks remain. In particular, the timing and strength of the recovery in output are as yet uncertain, and financial markets remain alert to the possibility of further shocks. Unwavering implementation of the program with the undivided support of the government coalition is needed to bring the Turkish economy onto a sustainable growth path.

"Fiscal developments remain on track, but strict budget implementation must continue to ensure debt sustainability. While the authorities remain firmly committed to the target of a public sector primary surplus of 6.5 percent of GNP for 2002, they need to remain mindful of possible downside implementation risks, and stand ready to take further offsetting measures to safeguard the primary surplus target.

"To be sustainable, the achievement of the overall budget targets will need to be underpinned by decisive reforms in public employment and budget mechanisms. In this regard, efforts to improve expenditure management, streamline tax policy, and strengthen revenue administration are encouraging. On the tax side, it will be important to avoid complicating the tax code with additional incentives. On the expenditure side, credible estimates of overstaffing in state economic enterprises are required to lay the basis for the much-needed downsizing in this sector.

"The scope for monetary policy to promote disinflation and enhance confidence is increasing. One avenue is a move to inflation targeting, which could help further anchor inflation expectations. In this regard, recent inflation developments are encouraging. Regarding reserve management, the authorities' efforts to make use of the better-than-expected balance of payments developments to build up foreign exchange reserves through pre-announced foreign exchange purchase auctions are appropriate, and should further improve confidence. Further development of the money and foreign exchange markets is needed to help ensure a smoother functioning of the floating exchange rate regime. The authorities' plans to lower distortionary taxes and reform the system of reserve requirements are welcome. The Central Bank has made good progress in improving transparency, including through improvements in financial reporting, internal controls and in the external audit process.

"More even progress is needed in the structural areas. The progress in banking sector reform, including the implementation of the bank recapitalization plan, is welcome, but corporate debt restructuring should be accelerated. Moving forward, the integrity and transparency of the bank recapitalization process and the independence of Turkey's regulatory institutions should be maintained. Renewed impetus should be given to privatization now that market conditions are more favorable, and the government should forcefully demonstrate its commitment to dealing with deficiencies in the investment environment and improving governance," Ms. Krueger said.