Press Release No. 99/49

Press Release: IMF Approves US$501 Million in Emergency Assistance for Turkey

October 13, 1999

The International Monetary Fund (IMF) today approved SDR 361.5 million (about US$501 million) in emergency assistance for Turkey in support of the government's efforts to limit the adverse effects of the devastating earthquake that struck the country on the night of August 17, 1999. This amount is available immediately. The financial support from the IMF complements the generous response from the international community that will become available in the coming months.

At the conclusion of the Executive Board's discussion of the request by Turkey, Shigemitsu Sugisaki, Deputy Managing Director of the IMF, made the following statement:

"Directors expressed their deepest sympathy for the people of Turkey following the devastating earthquake that hit the Marmara region, causing immense human suffering and extensive material damage. Directors considered that the drawing from the IMF will help complement the resources that Turkey needs to sustain the reconstruction, and to meet the immediate financing needs associated with relief and reconstruction, while ensuring an adequate level of reserves.

"Directors commended the authorities for their skillful management of the crisis thus far, which had been well received by markets. While the attention of the authorities was naturally focussed on the immediate need to ameliorate the impact of the earthquake, Directors were encouraged that the authorities' policy response had been cast within an overall policy framework oriented toward strengthening the public finances and reducing inflation. In this context, Directors welcomed the submission to Parliament of a revenue package to help defray some of the additional budget costs arising from the earthquake and encouraged its early approval. More generally, Directors also welcomed the authorities' intention to achieve the original fiscal targets set for the second half of this year under the current staff-monitored program, excluding earthquake-related fiscal costs. These actions attest to the authorities' continued commitment to adhere to the pursuit of sound macroeconomic and structural policies, despite the serious challenges they now faced. Looking ahead, Directors were hopeful that this general policy direction would be maintained, and encouraged the authorities to formulate policies for 2000 and beyond that could be supported by a stand-by arrangement from the IMF.

"Directors also welcomed the authorities' commitment to ensure that all relief expenditure programs will be well targeted and managed in a fully transparent and accountable way. Directors noted with satisfaction the key steps that the government has already taken in the area of structural reform. They observed that the pension reform will reverse the trend deterioration of the past few years in the position of the social security system. Directors encouraged the authorities to continue with their efforts in other structural reform areas, including that of agricultural support and the restructuring of the banking system," Sugisaki said.

Background

The Marmara earthquake has been one of the most severe in the last 20 years, claiming the lives of 15,600 people, injuring more than 25,000, and leaving about 500,000 homeless. Shops and other microenterprises took the brunt of the damage to businesses, and, although production in most large enterprises was interrupted, permanent damage to industrial capacity was modest.

Although estimates of the economic effects of the earthquake remain tentative, preliminary assessments by the World Bank put the loss of physical capital in the range of US$3-6.5 billion. The impact on output is significant, as the earthquake struck the economic heartland of the country, which contributed about 7% to the country's GDP. The output loss in 1999 related to the earthquake could be in the order of 0.5-0.75%. In 2000, however, economic growth is likely to exceed expectations by 1%-1.25% as a result of higher demand stemming from reconstruction efforts.

The effects of the earthquake on the external current account in 1999 arise from a number of factors, including declining exports, lower tourism receipts, and slowing import demand. Overall, the external current account balance is expected to weaken by some US$800-900 million in 1999 and by about US$2.5 billion in 2000, compared with estimates prior to the earthquake.

Despite the initial negative reaction from financial markets, the authorities were able to restore confidence with prompt policy responses that included revenue measures and a steadfast commitment to the reform agenda. The earthquake's impact on the banking sector is expected to be limited.

The authorities remain committed to achieving the fiscal targets set for the second half of this year under the current Staff-Monitored Program, which began in mid-1998. They have expressed their intention to pursue in 2000 and beyond policies that would lead to rapid disinflation and that could be supported by a Stand-By arrangement from the IMF.

Turkey joined the IMF on March 11, 1947 and its quota¹ is SDR 964 million (about US$1.336 billion). Its outstanding use of IMF financing currently totals SDR 103 million (about US$143 million).