Press Release No. 99/66

Press Release: IMF Approves US$4 Billion Stand-By Credit for Turkey

December 22, 1999

After the IMF Executive Board's discussion on Turkey, Stanley Fischer, First Deputy Managing Director, made the following statement:

"The Turkish authorities have decided to embark on a strong program designed to free the country from the high inflation that had plagued the economy for two decades, to restore macroeconomic fundamentals, and to address the long-standing structural weaknesses in the economy.

"Turkey's program is strong and well balanced. The large adjustment in the primary fiscal balance will help re-establish fiscal solvency and reduce inflation. With full implementation, the program should restore Turkey's credibility vis-à-vis markets. In particular, rigorous implementation of the budget, and the mobilization of resources through the privatization program are necessary to lower the need for domestic borrowing and hence support the decline of interest rates.

"The preannounced path of the exchange rate is designed to play a key role in anchoring inflation expectations and reducing interest rates. The up-front fiscal adjustment, the strong commitment to the exchange rate path, and the ambitious structural reforms provided strong safeguards against the risk of an unsustainable real appreciation of the exchange rate in the near future. The pre-announced exit strategy included in the program will limit the risk common in other exchange-rate based disinflation programs, namely that of locking the exchange rate in at levels that could prove inappropriate over the long term.

"The structural reform agenda is comprehensive and far reaching. The privatization program is appropriately ambitious; the pension reform represents a major turning point; and the reforms of agricultural policies should produce important efficiency gains and allow the government to keep fiscal costs in check. Implementation of these structural measures is critical, both to contribute to the medium-term sustainability of the fiscal adjustment and to increase economic efficiency and growth," Fischer said.

ANNEX

Turkey's economic program centers on an ambitious goal: freeing Turkey from inflation and enhancing the prospects for growth and for a better standard of living for all sectors of society. The persistent cause of inflation in Turkey has been the weakness of public finances, as the large and sustained primary deficits that emerged during the 1970s and continued during the 1980s and 1990s were, to a large extent, monetized.

The government's program¹ rests on three pillars: up-front fiscal adjustment, structural reform, and a firm exchange rate commitment supported by consistent income policies. The fiscal adjustment is necessary because the weakness of public accounts is the ultimate factor behind high inflation. Structural reform is needed to make the fiscal adjustment sustainable; improve economic efficiency; and, through increased privatization receipts, facilitate the decline of public debt. A firm exchange rate commitment and consistent income policies are needed to bring inflation and interest rates down more rapidly, particularly in the first phase of disinflation. In 2000, real GNP growth is expected to be 5-5 ½%, with an expected rebound from negative growth in 1999. CPI inflation is projected at 25%, compared to about 65% in 1999; and the external current account balance is projected at -1.8% of GNP, against -0.5% in 1999.

The main fiscal goal for 2000 is to raise the primary surplus of the public sector-which includes the consolidated central budget, the extrabudgetary funds, the local government, the nonfinancial state enterprises, the central bank, and the so-called duty losses of state banks-to 2.2% of GNP in 2000 (or 3.7% excluding earthquake-related expenses, which are estimated at about 1½% of GNP). Fiscal policy will be complemented by a more active and diversified debt management policy and through the acceleration of privatization, so as to contain the burden of interest payments.

Monetary and exchange rate policies will be guided by two considerations. First, disinflation and a rapid decline in interest rates require that the monetary and exchange rate developments become more predictable, to reduce uncertainty on the value of financial investment for both residents and nonresidents. Second, to avoid being locked into a monetary and exchange rate framework that may lead to unnecessary rigidities in the long run, the program calls for a transparent and preannounced exit strategy from this exchange rate regime.

Structural reforms are designated to make the fiscal adjustment implemented in 2000 sustainable over the medium term, to lower the burden of interest payments on public sector debt, to improve transparency and economic efficiency, and to reduce the contingent liabilities of the public sector. In the fiscal area, reforms will aim at strengthening public finances, providing better services to the population over the medium term, reducing inequalities in the tax burden, and reducing waste in public expenditure. To address distortions built up in the agricultural sector, the government aims to phase out existing indirect support policies over a two-to-three year period and replace them with a direct income-support program. In the area of privatization, the government is committed to disengage further from economic activity, raising sizeable receipts for debt reduction, including through major privatization operations in the key sectors of telecommunications and energy.

Turkey joined the IMF on March 11, 1947 and its quota² is SDR 964.0 million (about US$1.323 billion). Its outstanding use of IMF financing currently totals SDR 437 million (about US$599 million).