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Turkey and the IMF Press Release: IMF Completes Seventh Review and Approves US$495 Million Disbursement Under Stand-By Arrangement with Turkey April 16, 2004 Country's Policy Intentions Documents |  | |
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Turkey—Letter
of Intent Ankara, April 2, 2004
Ms. Anne Krueger Acting Managing Director International Monetary Fund Washington, D.C. 20431 Dear Ms. Krueger: 1. Following a year of successful macroeconomic management under our Fund-supported program, the economy is now at its strongest in a generation. Last year, annual inflation fell to 18½percent—below target for the second year running—with further declines in the first few months of this year. The economy grew by around 6 percent in 2003 exceeding the 5 percent growth projection, and is now in its third year of strong recovery, with key indicators showing continued strength. Financial markets remain positive, with benchmark bond yields halving last year to stand now at close to 20 percent. 2. To build on the achievements of 2003, we are deepening and advancing the economic reform agenda. Therefore, in addition to continuing with the macroeconomic policies that have yielded impressive results, we have formulated a comprehensive agenda for structural reform in 2004 (Annex A). These reforms are guided by our strong commitment to convergence towards European Union standards. The reforms that are detailed in this letter are aimed at putting the fiscal accounts on a more sustainable medium-term footing, moving the banking sector further in line with best international practice, and facilitating private sector development and investment. 3. With regard to recent policy implementation, we have continued to make good progress under the program, although there have been some delays. • The program's fiscal and monetary targets were broadly met. We increased the public sector primary surplus to more than 6 percent of GNP in 2003—the highest ever recorded in Turkey and 2 percent of GNP higher than the 2002 outturn. All monetary performance criteria and indicative targets for end-December were met. • On the structural side, we assessed the fiscal implications of planned social security reforms (meeting an end-December benchmark). While the end-2003 performance criterion on state enterprise redundant positions was missed, the overall reduction of positions—including positions not formally covered by the performance criterion definition—far exceeded the target. • Due to a heavy legislative workload, legislation on the civil servant code of conduct and state enterprise governance has seen delays, as has the introduction of legislation and accompanying regulations covering pre-packaged bankruptcy provision (all December benchmarks). The code of conduct legislation has been submitted to Parliament and is expected to be passed shortly. Bankruptcy legislation was approved by Parliament in February, and the accompanying regulations are expected to be put in place shortly. We also refrained from introducing any new amnesty on public receivables, meeting a continuous performance criterion. |
4. We have also met several prior actions for this review to illustrate our commitment to take decisive steps to maintain the momentum of the program. We have introduced remedial fiscal measures to secure this year's 6½ percent of GNP primary surplus target. We have also passed legislation for the second phase of direct tax reform, which progressively transforms free trade zones into export processing zones in line with international best practice, and targets regional incentives at employment generation in lower income regions. On the banking side we have decided to resolve Pamuk bank by integrating it with Halk bank. We will also start the Imar bank inquiry shortly.
5. Against this favorable backdrop, we request the completion of the Seventh Review under the Stand-By Arrangement. Last year's central government surplus, of more than 5 percent of GNP, exceeded our target, although the state enterprise surplus monitored under the program fell somewhat short. The overall consolidated government sector balance was, however, better than the indicative target. Corrective fiscal measures have now been taken to ensure the achievement of the 2004 fiscal targets; accordingly, we request a waiver of applicability for the end-March 2004 performance criterion on the consolidated government primary balance. Based on our strong performance in reducing inflation and the resulting increase in currency demand, we request a waiver of nonobservance for end-March 2004 base money performance criterion. The base money targets for the remainder of the year are being revised upwards to reflect the increased money demand to date. We also request a waiver of nonobservance for the end-December 2003 performance criterion on the elimination of redundant SEE positions, in light of our strong record in reducing overall redundant positions in state enterprises.
6. We also request a rephasing of remaining purchases. In light of the period of time available before the arrangement expires, we request the number of remaining reviews be reduced from four to three. The outstanding access is to be spread evenly, with a final test date of end-December 2004 (Annex C). The arrangement would now expire on February 3, 2005. The associated fiscal and monetary program is set out in Annex B. To facilitate more timely monitoring within the new phasing, we have introduced an additional performance criterion on the primary fiscal balance excluding SEEs. We will continue to consult the Fund about the progress being made in implementing policies supported by the Stand-By Arrangement, and in advance of any changes to these policies.
Macroeconomic framework
7. We remain confident that our macroeconomic objectives for 2004 will be achieved. With lower real interest rates and increasing confidence, we expect private consumption and investment to be the main drivers of growth. Building on the recent impressive inflation performance, we believe that continued prudent macroeconomic policy will bring Turkey closer to achieving single digit inflation by meeting the program's 12 percent inflation target by end-year. On the external side, we expect the current account balance to be broadly unchanged as a percent of GNP (with strong exports and tourism receipts offsetting higher imports due to robust domestic demand) and increased net capital inflows (as market confidence continues). Our net international reserves position will be maintained.
Fiscal policy
8. The 6.5 percent of GNP public sector primary surplus target remains a cornerstone of our program. The recent minimum wage and pension increases-motivated by our concerns for the most vulnerable segments of Turkish society-created challenges for meeting this year's target, as have weaker-than-anticipated revenues. We are therefore implementing a package of corrective fiscal measures that are expected to yield TL 7 quadrillion (1.7 percent of GNP) over the remainder of 2004 (a prior action for the Seventh Review). Many of these measures are permanent to help secure not only this year's target but also the medium-term fiscal position.
• While protecting key social spending programs, we recently passed legislation cutting discretionary expenditures by 13 percent and reduced investment incentives, saving some TL 3.9 quadrillion (1 percent of GNP). In addition, we will write over to the budget an additional TL 0.5 quadrillion (0.2 percent of GNP) of special revenues during 2004, not appropriating them for the associated special expenditures. To help underpin the spending cuts, we will monitor public sector arrears carefully during the course of the year and will take early action if any pickup is detected. No further increases for pensions (other than the already announced 10 percent increase in July) are planned this year.
• Petroleum, tobacco, alcohol and gas excises have all been increased to yield TL 2.4 quadrillion (0.5 percent of GNP). Looking ahead, we will also ensure that state enterprise prices and excises are adjusted promptly in line with budget assumptions during the year (see Annex A).
9. We are also committed to a comprehensive structural reform program to support a sustained improvement in Turkey's fiscal performance. Many of these reforms are designed to control expenditures, broaden the tax base, and shrink the unregistered economy over the medium term.
• We plan to upgrade revenue collection through tax administration reform. Planned legislation will transform the tax administration office into a semi-autonomous body within the Ministry of Finance with its Head reporting directly to the Minister. Importantly, the new body will be reorganized along functional lines and tax policy will be transferred to the Ministry of Finance. In addition, all local tax administration offices will be transferred to the new entity.
We will submit draft tax administration legislation to Parliament by end-May and expect parliamentary passage by end-July (both new structural benchmarks). We have already set up a steering committee to oversee the implementation of these reforms and to prepare an action plan with clear delineation of responsibilities and targets by end-April 2004. The committee will then coordinate the implementation of the plan until the restructured tax office commences its operations in January 2005.
• Social security deficits will be addressed to put the system on a sustainable path. We are updating our assessment of the fiscal implications of planned social security reforms as well as analysis aimed at identifying additional savings. In the area of pensions, this would include institutional reform of the three existing systems and parametric reform, to move the system to long-run sustainability. By end-June, we will develop a range of ambitious reform options, run the associated simulations, and present the findings to the Council of Ministers. Moving forward, we will adopt a rules-based approach to increasing pensions based on the new social security framework.
Regarding the planned introduction of universal health insurance, we will put together a coherent and affordable reform package that seeks to offset the costs from wider insurance coverage by end-July. Also, by end-June we will abolish the minimum social security contribution base. Submission to Parliament of draft social security reform legislation consistent with sustainability objectives, along with separate legislation for compensatory measures, will be set as a new performance criterion during the Eighth Review.
• We intend to improve the quality of our fiscal adjustment efforts to help place our medium-term fiscal targets on a stronger footing. To this end, we have sought technical assistance from the Bank and the Fund for a Public Expenditure Review. We expect to receive a preliminary study on short-term expenditure rationalization by the Eighth Review, followed by a more comprehensive assessment in the second half of the year. Preliminary recommendations, especially from the short-term study, will help guide the budget process, beginning with the 2005 budget. In the meantime, to help improve expenditure control, we have tightened existing regulations governing the use of the contingency account.
10. Our agenda includes several other ongoing fiscal structural reforms.
• We remain committed to containing the state enterprise employment. Building on last year's reduction of redundant positions, we will adhere to our policy of strictly limiting new hiring in state enterprises. At most 10 percent of those leaving through attrition will be replaced at each state enterprise, with limited exemptions for specialist positions (a new indicative target). An enterprise-by-enterprise workforce monitoring system was put in place in 2002. This will be used to help ensure strict compliance with the hiring policy.
• We are committed to further improve the transparency of public sector accounts. To this end, we will submit to Parliament by end-April 2004 legislation that will, effective January 1, 2005, result in the termination of "special" off-budget accounts and appropriations and expect passage by end-May 2004. Starting from April 2004, we are also providing details on a monthly basis on the primary surplus outcomes on Treasury's website, including the aggregate accounts of extra-budgetary funds, social security accounts and, on a quarterly basis, state enterprises.
• Further improving public sector governance is an important program goal. The civil service code of conduct legislation was sent to Parliament and is expected to be passed by end-June (a structural benchmark). After extensive consultation across government agencies, we have set up a committee, which will prepare a report by end-May 2004 on the key elements of our state enterprise governance strategy, including on audits and controls and state enterprise accountability (a new structural benchmark). The committee's findings will be used to decide on a legislative agenda to strengthen state enterprise governance.
• The Public Administration Framework (PAF) Law, setting out the principles of public governance, including decentralization, and clarifying the relevant responsibilities of central agencies and local governments, consistent with the Public Financial Management and Control (PFMC) law, is expected to be passed by Parliament shortly. We have set up a working group to look into fiscal intergovernmental relations to facilitate the decentralization process. We are also preparing framework legislation for regulatory agencies consistent with the PFMC and PAF laws.
Monetary policy
11. The CBT's monetary policy remains focused on achieving this year's 12 percent inflation target. Last year, we met all monetary targets and succeeded in reducing inflation to 18½ percent, well below our 20 percent target. In light of increased real currency demand due to the fall in inflation and the increase in banks' required reserves, we propose raising our base money targets for the remainder of the year (Annex B). The targets will continue to be kept under close review and further modification would be proposed if there is strong evidence of a shift in base money demand. The strength of the Turkish lira, the decline in inflation expectations, and the deceleration of inflation in recent months mean that prospects for meeting this year's 12 percent target are very good. To mark this success in disinflation and strengthened confidence in the Turkish lira, in January Parliament passed a law introducing a new redenominated currency next year (dropping six zeros from the currency).
12. We remain committed to the floating exchange rate regime. In light of the strength of the balance of payments, in January we re-introduced daily foreign exchange purchase auctions and in March and April increased the purchase amounts. This will further bolster our international reserves. While we have intervened on a few occasions to dampen excessive exchange rate volatility, such discretionary intervention will continue to be strictly limited.
13. The success of our policies has induced capital inflows and reverse currency substitution, creating a challenge for monetary policy. We have used this opportunity to accumulate reserves. However, the sterilization associated with reserve accumulation has created losses for the central bank in 2003. During 2004, the Treasury and the CBT will continue to coordinate closely in their respective areas of debt management and monetary policy. Relevant laws, regulations and procedures will also be reviewed to remove any impediment to effective coordination.
Financial sector reform
14. We are undertaking a comprehensive review of the Banking Act. By end-April we will complete the review of the Banking Act and prepare draft amendments to strengthen the Act in line with EU standards. Areas that will receive particular attention include: (i) "fit and proper" criteria for bank owners; (ii) on-site inspections; (iii) legal protection of BRSA and SDIF staffs for actions taken during the course of their duties; and (iv) delineation of responsibilities between BRSA and SDIF. We will submit a revised Banking Act to the Council of Ministers by mid-May 2004 and to Parliament by the summer recess (a new structural benchmark). Adoption of the Act will be set as a new performance criterion during the Eighth Review.
15. Further progress is being made on the Imar bank case. Upfront cash payments were made to depositors in January, and passbooks, which will be repaid according to the announced schedule over the next 36 months, have been issued for the remaining deposits. The Imar bank inquiry will start shortly with the appointment of its chairman and approval of its terms of reference (prior action for the Seventh Review), and we will make public its findings by end-August 2004 (a new performance criterion). The SDIF has taken over several companies and other assets of the former Imar bank owners to help offset the cost of compensating depositors.
16. We are currently working on a strategy and detailed action plan on how to prepare Halk bank and Ziraat bank for privatization. The strategy would aim to increase the operational efficiency of these banks while ensuring a level playing field for competition in the banking sector. We will make public key elements and a timetable for the action plan by mid-June 2004 (a new structural benchmark). We have already announced that Pamuk bank will be integrated with Halk bank (prior action). The integration will be completed by end-September 2004. If needed, Treasury will provide securities to facilitate the integration. For Vakif bank, the due diligence has been delayed as it will be based on audited end-2003 financial accounts. The due diligence will be completed by end-June 2004, and will be used to determine how to increase private participation in the bank.
17. We are pressing ahead with reforms to facilitate asset collections:
• The separation of the Boards of the SDIF and BRSA—designed to facilitate asset recovery and allow greater focus by the BRSA on its supervisory responsibilities-has now been completed. The new SDIF board took office in late January.
• SDIF did not complete the first auction of assets of intervened banks last December since the highest bid fell short of the Board's reference price. The new SDIF board is reconsidering the strategy for selling SDIF assets and will, by end-April 2004, announce revised strategies for the resolution of assets of intervened banks, including claims against former bank owners, and shares and companies taken over including those seized from the former owners of Imar bank (a new structural benchmark). The first asset disposal auction will be completed by end-July 2004.
• We will reassess the value of SDIF asset holdings to foster a better understanding of the recovery rates that might be expected from asset sales. To this end, for each intervened bank the SDIF will, by end-June 2004, announce the value of assets taken over at the time of intervention, accrued interest based on market rates as of end-June 2004, estimated market values (or recovery rates) and the costs borne by SDIF for restructuring or liquidating banks.
• Treasury has already issued debt to cover all liabilities of the SDIF. As of end-December 2003 SDIF liabilities amounted to US$36.2 billion, including US$13.6 billion of accrued interest. After the revaluation of assets and expected future recoveries, the SDIF and Treasury will, by end-December 2004, agree on the resolution of Treasury receivables from the SDIF.
18. We are also making progress in other important areas of banking reform:
• As previously announced, we intend to replace the blanket guarantee with a limited deposit protection scheme, in line with EU practices, on July 5, 2004. In preparation for this step, the BRSA will, by end-April 2004 present to the government a thorough assessment of the banking system (a new structural benchmark) and publish at the same time a summary of the presentation. In parallel, the CBT will also assess the effect of the abolition of the blanket guarantee on the Turkish payments system.
• We will submit, by the summer recess, legislation to Parliament enabling the transfer of the regulation and supervision of nonbank financial institutions from the Treasury to the BRSA, effective by January 1, 2005.
• Following the recent amendments to the Execution and Bankruptcy Law, implementing regulations are expected to be introduced shortly (a December 2003 structural benchmark).
Private sector development
19. Privatization is accelerating. A good start to the year has been made with the recent successful TÜPRAŞ auction (petroleum refineries), facilitated by Parliamentary approval, in December, of a new Petroleum Market Law. The winning bid for the 66 percent stake, of US$1.3 billion, was approved by the Privatization High Council in February and we expect the sale to be completed by mid-April. The sale of the alcohol unit of TEKEL, worth some US$300 million, was completed in February.
20. We are determined to build further momentum in this area and have announced a comprehensive privatization strategy for the remainder of the year. Having secured cabinet approval of a privatization plan for Türk Telekom last November, we expect to move ahead with the block sale of 51 percent of the shares by end-May 2004. We plan to announce a new strategy for the sale of TEKEL's tobacco unit by end-April 2004, and we will shortly hold fresh talks with potential investors in PETKIM (petrochemicals). This year we also plan to proceed with the privatization of ŞEKER (sugar refineries), up to a 15 percent stake in Turkish Airlines, and the National Lottery. We have adopted an electricity reform and privatization strategy, which envisages the launch of privatization tenders in energy distribution by March 2005. To expedite the privatization process, we will amend the public procurement and public contract legislation to allow for success fees and underwriting, and more flexibility in the hiring of consultants. We expect cash proceeds from privatizations to reach US$3 billion in 2004 (see Annex J).
21. To encourage foreign direct investment, an inaugural Investment Advisory Council (IAC) meeting was held on March 15. This high-level meeting included the participation of CEOs of a number of leading multinational companies, and developed many proposals that will help attract FDI in Turkey. We are carefully considering these proposals, and will draw up an action plan with the aim of presenting concrete results to the next meeting of the IAC.
| /s/ Ali Babacan Minister of State for Economic Affairs | /s/ Süreyya Serdengeçti Governor of the Central Bank of Turkey |
Use the free Adobe Acrobat Reader to view Annexes A–C.
Primary Balance of the Consolidated Government Sector
Table 1. Turkey: Performance Criteria and Indicative Targets on the Cumulative Primary Balance of the Consolidated Government Sector and Consolidated Government Sector Excluding SEEs.
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Floor | |
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Cumulative primary balance from January 1, 2004, to: |
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March, 31 2004 (performance criterion) |
5,420 |
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June, 30 2004 (performance criterion) |
14,100 |
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September, 30 2004 (indicative target) |
22,950 |
|
December, 31 2004 (indicative target) |
26,200 |
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Cumulative primary balance (excluding SEEs) from January 1, 2004, to: |
|
|
April, 30 2004 (performance criterion) |
6,300 |
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August, 31 2004 (indicative target) |
19,000 |
|
December, 31 2004 (indicative target) |
22,900 |
1. The primary balance of the consolidated government sector (CGS), Table 1, comprises the primary balances (primary revenue minus noninterest expenditures) of the consolidated central government (consolidated budget), the 3 extra budgetary funds (EBFs) identified below, the 12 state economic enterprises (SEEs) identified below, the social security institutions (SSIs), and the unemployment insurance fund. In 2004 the SEEs definition will be expanded to 27 as listed in paragraph six. SEEs are excluded from the cumulative consolidated government primary balance performance criterion for April, August and December. The floors on the primary balance of the CGS will be monitored:
• For the central government from above the line on a modified cash basis (including both special revenues and special expenditures). In this definition, reported transfers to social security institutions are reconciled with cash transfers reported by the social security institutions.
• For the EBFs, SSIs, and the unemployment insurance fund from above the line on a cash basis;
• For the SEEs, from below the line as described in paragraph 6.
2. For the purposes of the program, the primary revenues will exclude interest receipts of the consolidated central government (including on tax arrears), SEEs, and of the unemployment insurance fund, profit transfers of the Central Bank of Turkey (CBT) and proceeds from the sale of assets of the CGS (privatization proceeds or transfers thereof). Revenues of the CGS from sales of immovables below TL 500 trillion will be included. Interest receipts of EBFs and SSIs will not be excluded. As well, the floor on the primary balance will be adjusted upwards for any increase in revenues arising from changes in the revenue sharing agreement between any components of the CGS and other elements of the public sector, including local authorities. For the purposes of the program, revenues of the CGS will exclude payments-in-kind and other nonmonetary forms of payments.
3. For the purposes of the program, primary expenditure of the CGS will exclude any payments related to bank recapitalization and to the restructuring of private and state banks.
4. Net lending of any component of the CGS will be considered as a non-interest expenditure item. Payment of guaranteed debt by treasury on behalf of non-CGS components of the public sector will not be treated as net lending up to the baseline reported in Annex F.
Extra budgetary funds
5. The three EBFs included in the definition of the performance criterion for 2004 are: the defense fund, the privatization fund, and the social aid fund. The balance of the promotion fund—which does not have the legal authority to borrow, and will not be given such authority during the duration of the stand-by arrangement—is excluded from the definition of the performance criterion.
State economic enterprises
6. The 12 SEEs whose primary balances will be included in the definition of the performance criterion are: TTK (coal company), TSFAS (sugar company), TMO (soil products office), TEKEL (tobacco and alcoholic beverages company), TCDD (state railways), Telekom (telecommunications), BOTAS (natural gas), TEDAS (electricity distribution), EUAS (electricity generation), TETAS (electricity trade), TEIAS (electricity transmission), and TPAO (petroleum exploration and extraction). Starting in 2004 the SEEs for the purpose of the definition of the performance criterion will include in addition to those listed above the following enterprises: ETİ Maden, MKEK, TKİ, CAYKUR, DHMI, PTT, PETKIM, THY, TUPRAS, TIGEM, KIYEM, TDI, IGSAS, TUGSAS, DMO.
7. The primary balance of these SEEs will be monitored as the sum of net financing minus accrued interest made by the SEEs. Net financing will be monitored as: net financing from the banking system (excluding pre-export financing from the Eximbank) plus net external borrowing (excluding normal trade financing), plus the change in net arrears to and net advances from the private sector and to/from the non-CGS public sector (including subsidiaries and joint ventures), plus net interest payments undertaken by the Treasury. The net change in arrears on tax liabilities will be excluded.
8. Net financing from the banking system (excluding pre-export financing from the Eximbank) is defined as the change in all claims of these institutions on the SEEs listed above, including loans and capitalized interest arrears, less the change in deposits and repos of SEEs in these institutions, as reported by these SEEs. Changes in claims and deposits denominated in foreign currency will be valued at the average of the exchange rates between the Turkish lira and each corresponding currency prevailing during the quarter in question. As of December 31, 2002 the stock of net banking claims on SEEs as defined above stood at TL 92 trillion, valued at the exchange rates on that day.
9. Net external borrowing is defined as the receipt of external loans (including guaranteed debt and on-lending, and excluding normal trade financing) less amortization (excluding repayments of guaranteed debt and on-lending undertaken by the Treasury), valued at the exchange rate at the time of transaction. As of December 31, 2002 the stock of external loans stood at TL 11,200 trillion, valued at the exchange rates on that day.
Social security institutions
10. The deficits of the social security institutions (SSIs) will be covered by transfers from the central government budget, and they are thus expected to be in primary balance in 2004.
Adjusters
11. The floor on the primary surplus of the CGS will be adjusted upwards for any increase in the expenditure arrears of the SSIs. Arrears of the SSIs are defined as the sum of (i) overdue pension payments; (ii) medicine payments overdue by more than 30 days (from the date of invoice receipt); and (iii) other payments overdue by more than 30 days (from the date of invoice receipt). In the case of Bag Kur they exclude arrears to the common retirement fund. The stock of arrears for Bag Kur stood at TL 296 trillion; for SSK stood at TL 314 trillion; and for ES stood at TL 0 trillion on December 31, 2002. These stocks of arrears will be used for the purpose of calculating the adjustor in 2004.
12. The floors for the primary surplus of the CGS will be adjusted upward:
• for any issue of noncash debt other than for bank recapitalization and securitization of duty losses and for the restructuring of the Agricultural Sale Cooperative Units and military foreign financed in-kind spending;
• for any lower-than-programmed Direct Income Support as of December 31, 2004 (payments during 2004 are programmed at TL 2.6 quadrillion); and
• for any off-balance sheet expenditure of any component of the CGS (excluding military foreign financed in-kind spending).
13. The floor on the primary surplus of the CGS will be adjusted upwards (downwards) in line with the projected surplus (deficit) of the primary balance of any fund or entity that is incorporated in the CGS after January, 1 2003.
14. The floor on the primary surplus of the CGS will be adjusted downwards (upwards) by the primary surplus (deficit) projected at the time of the Sixth Review for any state economic enterprise (included in the performance criterion) when due to privatizations there is a change of control. The adjustor will be calculated as the difference between the primary surplus generated by the company while in public control and the annual projection. This adjustor does not apply to the primary surplus of the CGS excluding SEEs.
Overall Balance of the Consolidated Government Sector
Table 1. Turkey: Indicative Floors on the Cumulative Overall Balance of the Consolidated Government Sector
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| |
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Floor | |
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| |
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Cumulative overall balance from January 1, 2004 to: |
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March 31, 2004 |
-11,420 |
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June 30, 2004 |
-20,000 |
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September 30, 2004 |
-29,300 |
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December 31, 2004 |
-35,440 |
|
| |
1. The overall balance of the consolidated government sector (CGS), Table 1, comprises (i) the primary balance of the CGS as defined in Annex D, (ii) the net interest payments of the central government, the UIF, and the SEEs, (iii) the interest payments of SSIs and EBFs, and (iv) the profit transfers from the CBT to the consolidated central government.
2. The monitoring of the different components of the overall balance will be as indicated in paragraph 1 of Annex D.
3. All definitions and adjusters specified in Annex D to apply to the primary balance of the CGS will also apply to the overall balance of the CGS. In particular, the overall balance will be adjusted for the overall balance of any new government funds and institutions established after January 1, 2004.
Program Baseline for Treasury Net Lending
Table 1. Turkey: Program Baseline for Treasury Net Lending
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Baseline |
Baseline | |
|
Cumulative net lending from January 1, 2004 to: |
||
|
March 31, 2004 |
110 |
175 |
|
April 30, 2004 |
172 |
275 |
|
June 30, 2004 |
282 |
452 |
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August 31, 2004 |
355 |
569 |
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September 30, 2004 |
401 |
643 |
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December 31, 2004 |
527 |
845 |
1. Net lending (risk account) by Treasury to other (non-CGS) components of the public sector is defined as the sum of guarantee payments made by Treasury on behalf of these entities minus repayments obtained by Treasury from them.
2. Other components of the public sector include: extrabudgetary funds not in the CGS, revolving funds, associations or foundations, state economic enterprises not in the CGS, state banks (including Eximbank and Iller bank), special provincial administrations, municipalities, municipal enterprises, build-operate-transfer projects, and build-operate projects.
3. Repayments include those obtained in cash directly from municipalities. Repayments, obtained through claw-back mechanisms, either directly, by withholding of transfers of tax shares from the MoF, or indirectly, via withholding of transfers to be made by Iller Bank, and proceeds from privatization, direct or indirect, are not included as repayments.
4. For the purposes of program monitoring, the flows in U.S. dollars will be converted at the average TL/US$ exchange rate between test dates.
Monetary Targets
Table 1. Turkey: Performance Criteria and Indicative Targets for Base Money of the Central Bank of Turkey 1/
(In quadrillions of Turkish lira)
|
Ceilings |
Actual | |
|
Outstanding base money as of December 31, 2002 |
10.85 |
10.72 |
|
April 30, 2003 (performance criterion) |
12.8 |
11.9 |
|
June 30, 2003 (performance criterion) |
13.2 |
13.0 |
|
September 30, 2003 (performance criterion) |
14.1 |
13.9 |
|
December 31, 2003 (performance criterion) |
14.9 |
14.7 |
|
March 31, 2004 (performance criterion) |
16.1 |
16.9 |
|
April 30, 2004 (performance criterion) |
17.5 |
... |
|
August 31, 2004 (indicative target) |
19.2 |
... |
|
December 31, 2004 (indicative target) |
19.3 |
... |
1. This Annex sets out performance criteria for base money, and indicative targets for net domestic assets of the Central Bank of Turkey (CBT) and Treasury combined.
2. Base money is defined as currency issued by the CBT, plus the banking sector's deposits in Turkish lira with the CBT. The net domestic assets (NDA) of the CBT are defined as base money less net foreign assets of the CBT. The net domestic assets of the CBT and Treasury combined are defined as net domestic assets of the CBT plus (i) Treasury liabilities to the International Monetary Fund and (ii) Treasury foreign exchange denominated borrowing with an original maturity of less than one year.
3. Net foreign assets of the CBT are defined as the sum of the net international reserves of the CBT (as defined in Annex H), medium- and long-term foreign exchange credits (net), and other net foreign assets (including deposits under the Dresdner scheme of original maturity of two years or longer and the holdings in accounts of the Turkish Defense Fund, but excluding CBT's net lending to domestic banks in foreign exchange). As of December 31, 2002, net foreign assets of the CBT amounted to TL 3.93 quadrillion, net domestic assets of the CBT TL 6.50 quadrillion, and base money TL 10.43 quadrillion.
4. Net domestic assets of the Treasury are equal to treasury liabilities to the International Monetary Fund and treasury foreign exchange denominated borrowing with an original maturity of less than one year. As of December 31, 2002, these amounted to US$14.66 billion, or TL 21.10 quadrillion (evaluated at program exchange rates).
5. All assets and liabilities denominated in foreign currencies will be converted into Turkish lira at program exchange rates (Annex I).
6. NDA ceilings will be adjusted for any change in the definition of the aggregate to which the reserve requirement applies according to the following formula:
ΔNDA = R*ΔB,
where: R denotes the 6 percent reserve requirement and ΔB denotes the change in base generated by a change in the definition of the reserve aggregate, or due to any change in the averaging period.
7. NDA ceilings will be adjusted for any change in the reserve requirement coefficient according to the following formula:
ΔNDA = B*ΔR
where: B is the level of the base to which the reserve requirement applies on the test date and ΔR is the change in the reserve requirement coefficient and the liquidity requirement coefficient.
8. The NDA ceilings will be adjusted downward for any waiver of reserve requirements for any additional bank intervened by the BRSA. The adjustment will be equal to the existing reserve requirement coefficient times the amount of liabilities at these banks subject to reserve requirements.
Table 2. Turkey: Indicative Targets on the Net Domestic Assets of the Central Bank of Turkey and Treasury Combined
(In quadrillions of Turkish lira) 1/
|
Ceilings |
Actual | |
|
Outstanding NDA as of December 31, 2002: |
33.1 |
28.6 |
|
April 30, 2003 |
32.8 |
31.0 |
|
June 30, 2003 |
34.1 |
29.4 |
|
September 30, 2003 |
33.8 |
23.0 |
|
December 31, 2003 |
28.4 |
26.0 |
|
March 31, 2004 |
29.6 |
27.3 |
|
April 30, 2004 |
31.6 |
... |
|
August 31, 2004 |
33.3 |
... |
|
December 31, 2004 |
33.4 |
... |
Targets for Net International Reserves
Table 1. Turkey: Performance Criteria and Indicative Floors on the Level of Net International Reserves
(In billions of U.S. dollars)
|
Floor on level of NIR |
Actual |
Memo Item: NIR of the CBT | |
|
Outstanding stock as of September 30, 2003: |
-6.0 |
1.5 |
15.5 |
|
December 31, 2003 (performance criterion) |
-2.0 |
-0.5 |
13.6 |
|
March 31, 2004 (performance criterion) |
-2.0 |
0.7 |
14.9 |
|
April 30, 2004 (performance criterion) |
-2.0 |
... |
... |
|
August 31, 2004 (indicative target) |
-2.0 |
... |
... |
|
December 31, 2004 (indicative target) |
-2.0 |
... |
... |
1. For program purposes, net international reserves is defined as net international reserves of the CBT minus (i) Treasury liabilities to the International Monetary Fund and (ii) Treasury foreign exchange denominated borrowing with an original maturity of less than one year.
2. Net international reserves of the Central Bank of Turkey (CBT) comprise its gross foreign assets excluding encumbered reserves less its gross international reserve liabilities plus the net forward position of the central bank, denominated in U.S. dollars. Encumbered reserves are reserves that are not readily available.
3. For the purpose of the program, gross foreign assets are all short-term foreign (convertible) currency denominated claims on nonresidents, monetary gold valued at the December 31, 2001 average London fixing market price of US$276.5 per troy ounce, foreign bank notes, balances in correspondent accounts, and any reserve position in the IMF. At present encumbered reserves consist of foreign asset holdings in accounts of the Turkish Defense Fund (amounting to US$0.426 billion on December 31, 2002). The special Dresdner portfolio (amounting to US$0.771 billion on December 31, 2002) is also encumbered, but is not subtracted from foreign reserves given the overlap with one-year foreign currency denominated liabilities (see below). Reserve assets as of December 31, 2002 amounted to US$25.79 billion (evaluated at program exchange rates).
4. Gross international reserve liabilities include all foreign currency-denominated liabilities (or TL-denominated liabilities indexed to any exchange rate) to residents and non-residents with an original maturity of up to and including one year (including reserves against foreign currency deposits of the banking sector), claims from central bank letters of credit, overdraft obligations of the central bank, and central bank liabilities arising from balance of payments support borrowing irrespective of their maturity. Government foreign exchange deposits with the CBT are not treated as an international reserve liability. On December 31, 2002 reserve liabilities thus defined amounted to US$15.75 billion (evaluated at program exchange rates).
5. The net forward position is defined as the difference between the face value of foreign currency-denominated or indexed central bank off-balance sheet (forwards, swaps, options on foreign currency, and any future contracts) claims on nonresidents and foreign currency obligations to both residents and nonresidents. As of December 31, 2002 these amounts were zero.
6. As of December 31, 2002 the sum of: (i) Treasury liabilities to the International Monetary Fund and (ii) Treasury foreign exchange denominated borrowing with an original maturity of less than one year amounted to US$14.66 billion.
7. All assets and liabilities denominated in foreign currencies other than the U.S. dollar will be converted into U.S. dollars at the program cross exchange rates specified (Annex I).
Adjusters
8. The floor on the level of net international reserves as specified in Table 1 will be adjusted:
• Upwards in the amount of one half of the cumulative loan disbursements under the United States-Turkey Financial Agreement of September 2003;
• Downwards in the amount of principal and interest of domestically issued foreign exchange denominated bonds (original maturity longer than one year) not rolled over starting from May 1, 2004, capped at 20 percent of the principal and interest due May 1, 2004 to December 31, 2004 (equivalent to US$1,070 million).
Program Exchange Rates
Table 1. Cross Exchange Rates for Program Purposes
|
Turkish lira value |
U.S. dollar value | |
|
Program exchange rate |
||
|
U.S. dollar |
1,439,567 |
1 |
|
Euro |
1,268,115 |
0.8809 |
|
Japanese yen |
10,972 |
0.0076 |
|
Swiss franc |
854,490 |
0.5945 |
|
U.K. pound |
2,081,497 |
1.4465 |
1. This table sets out the program exchange rates referred to in earlier Annexes. They shall apply to the performance criteria/indicative ceilings or floors for the period December 31, 2001-December 31, 2004. Currencies not specified here will be converted at the representative exchange rates reported to the IMF as of December 31, 2001.
2. Constituent currencies of the euro shall be converted into euro at the official European Union conversion rates and then converted into the U.S. dollar value.
Privatization
Table 1. Turkey: Indicative Target on Cumulative Privatization
Proceeds of the Consolidated Government Sector
|
Floor |
Actual | |
|
Cumulative privatization proceeds from end-December 2002 to: |
||
|
March 31, 2003 |
30 |
23 |
|
June 30, 2003 |
90 |
50 |
|
September 30, 2003 |
790 |
168 |
|
December 31, 2003 |
2,100 |
257 |
|
Cumulative privatization proceeds from end-December 2003 to: |
||
|
March 31, 2004 |
100 |
... |
|
June 30, 2004 |
500 |
... |
|
September 30, 2004 |
1,000 |
... |
|
December 31, 2004 |
3,000 |
... |
1. The consolidated government sector is defined in Annex D above.
2. Privatization proceeds are measured in cash terms, except in the case of conversion of an exchangeable bond (proceeds exclude amounts realized from the sale of convertible bonds).
3. Privatization proceeds exclude sales of immovables and movables, and any other items already captured in the performance criteria for the consolidated public sector (see Annex D, referenced above).
4. Privatization proceeds exclude any sale of assets to entities in the consolidated government sector, to the local governments, or to state economic enterprises not captured in the program definition of the consolidated government sector.
5. Privatization proceeds exclude receipts from the sale of transfer of operating rights (TOORs).
Short-Term External Debt Ceilings
Table 1. Turkey: Performance Criteria and Indicative Ceilings on the Stock of Short-Term External Debt Outstanding
|
Ceilings |
Actual | |
|
October 31, 2003 (performance criterion) |
1,000 |
0 |
|
December 31, 2003 (performance criterion) |
1,000 |
0 |
|
March 31, 2004 (performance criterion) |
1,000 |
... |
|
June 30, 2004 (performance criterion) |
1,000 |
... |
|
September 30, 2004 (indicative target) |
1,000 |
... |
|
December 31, 2004 (indicative target) |
1,000 |
... |
1. The limits specified in Table 1 apply to the stock of debt of original maturity of one year or less, owed or guaranteed by the consolidated government sector (as defined in Annex D). The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to External Debt or Borrowing in Fund Arrangements (Decision No. 6230-(79/140), August 3, 1979 as amended by Decision Nos. 11096-(95/100), October 25, 1995, and 12274-(00/85), August 24, 2000). Excluded from this performance criterion are external program financing, sales of treasury bills denominated in Turkish lira or foreign exchange to nonresidents in either the domestic primary market or the secondary market, normal import-related credits, reserve liabilities of the Central Bank of Turkey, and forward contracts, swaps, and other future market contracts. Debt falling within the limit shall be valued in U.S. dollars at the program cross exchange rates specified in Annex I.
Medium- and Long-Term Debt Ceilings
Table 1. Turkey: Performance Criteria and Indicative Ceilings on Contracting and Guaranteeing of New External Debt
|
Limits |
Actual | |
|
Cumulative flows from end-December 2002 |
||
|
October 31, 2003 (performance criterion) |
13,000 |
7,042 |
|
December 31, 2003 (performance criterion) |
15,000 |
7,269 |
|
Cumulative flows from end-December 2003 |
||
|
March 31, 2004 (performance criterion) |
7,000 |
... |
|
June 30, 2004 (performance criterion) |
13,000 |
... |
|
September 30, 2004 (indicative target) |
16,000 |
... |
|
December 31, 2004 (indicative target) |
17,500 |
... |
1. The limits specified in Table 1 apply to the contracting or guaranteeing by the consolidated government sector (as defined in Annex D) of new, nonconcessional external debt with an original maturity of more than one year. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (adopted by the Executive Board of the International Monetary Fund on August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received. The term "nonconcessional" means containing a grant element of less than 35 percent on the basis of the currency-specific discount rates based on the OECD commercial interest reference rates in place at the time at which the contract is entered into, or guarantee issued. Excluded from this performance criterion are credits extended by the IMF, adjustment lending from the World Bank, and other external program financing, long-term liabilities of the Central Bank of Turkey and sales of treasury bills and bonds denominated in TL or FX to nonresidents in either the domestic primary market or the secondary market. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract is entered into, or guarantee is issued.