News Brief No. 01/121

News Brief: IMF Approves US$3 Billion to Turkey Under Stand-By Arrangement

November 28, 2001

The Executive Board of the International Monetary Fund (IMF) today completed the tenth review of Turkey's economic program supported by a three-year stand-by arrangement (see Press Release No. 99/66). The Board's decision will enable Turkey to draw SDR 2.4 billion (about US$3 billion) immediately from the IMF.

The stand-by arrangement was approved in December 1999 for SDR 2.9 billion (about US$3.6 billion). In December 2000, SDR 5.8 billion (about US$7.3 billion) in additional financial resources were made available under the Supplemental Reserve Facility (see Press Release No. 00/80). On May 15, 2001, the IMF approved the increase of the stand-by credit (see Press Release No. 01/23) by SDR 6.4 billion (about US$8.1 billion), bringing the total available resources from the IMF to SDR 15 billion (about US$19 billion). So far, Turkey has drawn a total of SDR 9.3 billion (about US$11.7 billion) from the IMF.

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

"Executive Directors commended the Turkish authorities on their continued strong implementation of a challenging economic reform program. The fiscal position has greatly improved and an ambitious legislative agenda has established central bank independence, enhanced transparency in economic policy making, and laid the basis for privatization of large state enterprises. In addition, important progress has been achieved in dealing with the problems of the banking sector.

"The results of this policy effort had begun to appear in August, when financial markets stabilized and the economy seemed to be bottoming out, but have been set back by the events of September 11. The authorities have appropriately recognized that the impact of the events on the Turkish economy calls for an even stronger policy response, including maintaining a high public sector primary surplus, and a renewed focus on banking sector reforms, public resource management, and private sector development. Directors agreed that an appropriately strong response would warrant additional support from the international community.

"Turkey's fiscal policy performance so far has been strong, and the closing of extra-budgetary funds and the new public procurement law submitted to parliament will help to improve fiscal transparency. It is critical that the authorities continue these efforts, and in particular reach the targeted public sector primary surplus of 6.5 percent of GNP in 2002, which will help ensure that the government debt position remains sustainable. Looking ahead, Directors saw a need for further reform of agricultural subsidies, retrenchment of public sector employment, and public sector wage restraint to underpin lasting fiscal adjustment over the medium term. They welcomed in particular the government's keen attention to protecting spending on social services, education, and health services.

"As current conditions are not conducive to the successful introduction of formal inflation targeting, the Fund agrees that a delay until 2002 is warranted. The authorities should use this additional time to extend the necessary technical work, further strengthen the fiscal position, bring down inflation, and resolve the remaining problems in the banking system, so that a successful launch of inflation targeting can take place at an early date. In the meantime, the program will continue to be anchored by base money, with firm implementation of the program providing a good basis for a reduction in interest rates.

"The authorities have made considerable progress in their ambitious structural reform agenda, including in bank restructuring. The banking supervision agency is making continued efforts to improve the regulatory environment, enforce regulations, and deal with problem banks, and the operations of state banks are being restructured rapidly under greatly improved management. Given the weak economic environment, the supervision agency will need to remain vigilant and put appropriate measures in place, if needed. Directors also looked forward to greater progress in privatization, and to more determined efforts to improve the business climate," Ms. Krueger said.