Press Release No. 03/223

Press Release: IMF Completes Sixth Review, Grants Waivers, and Approves Disbursement of US$502 Million Under Stand-By Arrangement with Turkey

December 18, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the sixth review of Turkey's economic performance under the Stand-By Arrangement, and approved the disbursement of an amount equivalent to SDR 340.2 million (about US$502 million). In completing the review, the Executive Board granted Turkey's request for waivers for the non-observance of two structural and one quantitative performance criteria.

The waivers relate to the end-September structural performance criterion on reducing overemployment in state economic enterprises; and the end-October criteria for legislation improving the effectiveness of the Banking Regulation and Supervision Agency (which was later passed in December) and the cumulative primary balance of the consolidated government sector.

Turkey's Stand-By Arrangement was approved on February 4, 2002 (see Press Release No. 02/7) in a total amount of SDR 12.8 billion (about US$19 billion). So far, Turkey has drawn SDR 10.8 billion (about US$16 billion) under the arrangement.

Following the Executive Board discussion, Horst Köhler, Managing Director and Chairman, said:

"Turkey's economic program has delivered a remarkable strengthening of market confidence, while interest rates have fallen sharply. For the second year running, both economic growth and inflation look set to surpass program projections. The Central Bank of Turkey has increased its international reserves, while the Treasury's debt rollover has also improved. Financial market reaction to the terrible bombings in Istanbul has been relatively limited-a sign of the economy's greater resilience to outside shocks. Nevertheless, a significant reform agenda lies ahead, and there is no room for complacency.

"The government's commitment to meeting the 6½ percent of GNP primary surplus targets for 2003 and 2004 has contributed importantly to recent positive developments. The recent passage of a supplementary budget with strict controls over spending for the remainder of the year demonstrates the government's commitment to meeting the 2003 target. The government has also proposed the budget for 2004 consistent with meeting the primary surplus target. Maintenance of fiscal discipline will remain of paramount importance in demonstrating full program ownership, and facilitating lower interest rates and debt sustainability.

"The Central Bank of Turkey's conduct of monetary policy has been impressive, with inflation rates falling to their lowest levels in twenty-five years. The growing credibility of the Central Bank, the government's continued commitment to fiscal discipline, and wage moderation in the public and private sectors, all should help in achieving next year's 12 percent inflation target, with the prospect of single digit inflation soon thereafter.

"The Turkish authorities have made considerable progress in direct tax and other fiscal structural reforms. The decision to limit regional tax incentives to new employment and to curtail gradually the benefits in free trade zones will help in eliminating distortions in the tax system. Passage of the Public Financial Management and Control Law is a landmark in fiscal reform that will help to strengthen the framework for budget preparation, execution, and control.

"Recent amendments to the banking law should help boost the effectiveness of the Banking Regulation and Supervision Agency (BRSA). In the coming year, the authorities need to build on this by taking further steps to speed up banking reform, including by resolving Pamukbank and by restructuring and privatizing the state banks. While the new banking law amendments should allow the Savings Deposit and Insurance Fund (SDIF) to focus more clearly on asset recovery, it will be important that SDIF independence is preserved. Finally, the creation of an independent commission to identify the causes of the Imar bank scandal is welcome, and its findings need to be used quickly to enhance the quality of banking supervision.

"Ongoing strong efforts to keep the program on track and vigorously pursue structural reforms in fiscal and banking should underpin a continued strengthening of market confidence and an improvement in economic performance going forward. These strong efforts deserve the continued support of the international community," Mr. Köhler said.