Press Release No. 03/53

Press Release: IMF Approves US$701 Million Disbursement Under Stand-By Credit to Turkey

April 18, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Turkey's economic performance under the Stand-By Arrangement. This will enable Turkey to draw SDR 510.6 million (about US$701 million) immediately from the IMF.

The Stand-By Arrangement was approved on February 4, 2002 (see Press Release No. 02/7) in a total amount of about SDR 12.8 billion (about US$18 billion). So far, Turkey has drawn about SDR 10 billion (about US$14 billion) under the current Stand-By Arrangement.

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

"The government's strong commitments to stabilization and economic reform are welcome, and essential given the economic challenges Turkey faces. The government has indicated its intention to adhere to the broad principles of the existing economic program and to achieve its main economic goals of disinflation, debt reduction, and sustained economic growth. These commitments provide a good basis for regaining market confidence in the government's economic management, and for putting government finances on a stronger footing.

"Recent policy slippages have been costly. In particular, the government needs to rebuild its credibility in financial markets to ensure a smooth roll-over of domestic debt. While the contribution of the war in Iraq to current economic difficulties should not be underestimated, policy mistakes have also played a role in weakening confidence. To reverse this development and foster credibility, the authorities must build up a track record of sustained and concrete policy action and strict implementation of the program. Sustained implementation is also required if the strong performance foreseen under the program-growth of 5 percent in 2003 with inflation declining to 20 percent-is to be realized.

"Fiscal restraint is central for promoting debt sustainability, boosting market confidence, and supporting continued disinflation. In this regard, it is essential that the government achieve the program's fiscal target and demonstrate that it is prepared to take additional measures as needed. Budget restraint should focus on cutting unproductive spending, restructuring state enterprises, and strengthening tax administration. The government's commitment to forego future tax and other amnesties is welcome. To help ensure that the fiscal adjustment is durable, fiscal restraint needs to be underpinned by an array of reforms, beginning with rapid completion of the direct tax reform, and continuing with initiatives in public financial management, tax administration, social security institutions, and civil service.

"The Central Bank of Turkey is to be commended for its prudent conduct of monetary policy and its successful floating of the exchange rate, which were instrumental in meeting the inflation target for 2002. To build on this success, monetary policy will need to remain focused on disinflation, and independent. Banking supervision also needs to remain strong through the independent banking supervision agency (BRSA). The authorities should act quickly to limit the damage to the BRSA's authority stemming from recent legal challenges, by strengthening its legal powers and operational and financial independence. It is essential that the government continue to refrain from interfering in the commercial decisions of state-owned banks. Privatization and reforms to improve the business environment need to be reinvigorated, and accordingly the government's commitment to an ambitious and revitalized privatization program is welcome.

"The need for unwavering policy implementation is reinforced by major uncertainties regarding the impact of the war in Iraq. Given these uncertainties, the government's commitment to block discretionary spending and to take new measures should circumstances warrant is an appropriate short-run response. While the recently announced prospective U.S. financing will ease Turkey's immediate debt rollover situation considerably, Turkey's public debt remains high, and financing cannot substitute for unwavering policy implementation.

"Although significant risks remain, implementation of strong policies and a more benign external environment provide the basis for market credibility to be regained, which will allow Turkey to achieve its macroeconomic targets and maintain a viable debt position over the medium term. While a consistent record of program implementation has yet to be established, the government's recent focus on its underlying economic objectives has prompted renewed commitment to strong policies of stabilization and reform. On this basis, Turkey's adjustment and reform efforts deserve continued support," Ms. Krueger said.