Press Release No. 07/103

Press Release: IMF Executive Board Completes Sixth Review Under the Stand-By Arrangement for Turkey and Approves US$1.1 Billion Disbursement

May 18, 2007

The Executive Board of the International Monetary Fund (IMF) today completed the sixth review under the three-year SDR 6.66 billion (about US$10 billion) Stand-By Arrangement for Turkey, which was approved on May 11, 2005 (see Press Release No. 05/104). The completion of the sixth review will enable Turkey to draw immediately an amount equivalent to SDR 749.5 million (about US$1.1 billion).

The Board also approved Turkey's request for waivers of nonobservance of the end-April 2007 quantitative performance criteria in the fiscal area (primary balances of the consolidated government sector including and excluding state economic enterprises, overall balance of the social security institutions, and consolidated primary spending of the central government and social security institutions) and of the end-February 2007 structural performance criterion on parliamentary approval of personal income tax reform.

At the conclusion of the Executive Board's discussion, John Lipsky, First Deputy Managing Director and Acting Chairman, stated:

"Turkey's macroeconomic performance has remained strong. Economic activity has been resilient to increased financial market volatility and elevated interest rates. At the same time, growth has become more broad based, with reduced reliance on domestic demand. Foreign direct investment has surged, allowing a further build-up of reserves, and the net public debt ratio has continued to fall rapidly.

"However, inflation remains well above target, the current account deficit is high, and elections are approaching. Against this background, Turkey must continue anchoring investor sentiment.

"In light of this, persevering with disciplined macroeconomic policies will be essential to preserve market confidence. In this regard, the authorities' commitment to a 6.7 percent of GNP primary surplus target for 2007 is welcome. Substantial discipline will be required to keep spending in line with the programmed path. At the same time, maintaining a tight monetary policy will be key to bringing inflation down to target. Given the challenging inflation outlook, a continued tightening bias is appropriate until inflation is firmly on a downward path.

"In the coming period, Turkey should press ahead with structural reform. On the fiscal side, efforts to implement the revised social security reform, bolster efficiency in the health and energy sectors, and strengthen tax collections will be key to safeguard the medium-term fiscal position and make room for tax cuts on labor and financial transactions. In the financial sector, close supervisory oversight and further building of cushions in balance sheets will help safeguard against risks inherent in rapid credit growth. Advancing privatization, especially in the banking and energy sectors, will further improve the investment climate. In this regard, the successful public offering of Halkbank shares is a welcome initial step.

"Disciplined economic policies combined with comprehensive structural reforms are required to entrench recent macroeconomic gains, contain vulnerabilities, and lay the basis for high and stable growth. The authorities' commitment to maintaining prudent monetary and fiscal policies and renewing impetus to structural reform in the coming months deserves the support of the international community," Mr. Lipsky said.