Turkey economy: Investors fret over Turkey's IMF agreement

By Vincent Boland

Investors are starting to fret over whether Turkey will renew its standby economic agreement with the International Monetary Fund next year.

The IMF completed its latest review of Turkey's economic progress this week as part of an agreement comprising a $19bn (Euro15.7bn, Stg10.5bn) loan in return for a commitment to implement structural reforms. This is due to expire at the end of February next year.

With immediate financial problems overcome, analysts fear there will be a greater temptation to give in to demands to ease tight public spending restrictions if the government decides not to renew the IMF arrangement. They believe a new agreement, even a looser one, is necessary because the government has not yet completed the reforms to ensure a financial crisis, similar to the one that devastated the country three years ago, will not happen again.

"I think investors are hoping there will be a new standby agreement, and perhaps it can be less binding than the current one," said Sevin Ekinci, an economist at WestLB in Istanbul.

"But it will be very difficult to resist pressure for more populist spending measures without one."

Kemal Unakitan, Turkey's finance minister, sought to reassure the markets. He told the Financial Times that, regardless of its future relationship with the IMF, the government remained committed to fiscal discipline, repayment of the country's massive foreign debt and boosting measures to improve tax collection. He said: "I am sure that all portfolio investors know that our relationship with the IMF will continue."

Mr Unakitan also predicted there would be no reversion to "populism" despite increased public pressure for higher wages.

Nevertheless, this week the government agreed to raise the minimum wage by 5 per cent for the second half of the year in spite of IMF pressure not to do so after an increase of 38 per cent before the local elections in late March, which the ruling Justice and Development party won in a landslide. The IMF had also opposed the pre-election rise, which required an adjustment to other government spending to meet its cost.

The latest increase is below inflation, which hovers around 12 per cent, and is unlikely to have any detrimental effect on the public finances, analysts said. But it was nevertheless seen as a sign of the pressure the government is under to meet the expectations of the electorate as a period of tight fiscal policy and sharp cutbacks in state spending elsewhere start to bite.

There is a growing debate about whether a new standby IMF arrangement ought to allow the government greater flexibility than the current one, a $19bn accord reached after the financial crisis of 2001.

Mr Unakitan said the government expected the economy to grow by 5 per cent this year after gross domestic product expanded by more than 7 per cent in 2003.

Inflation is also likely to continue to decline, although it is unlikely to reach single figures before 2005, when the central bank expects it to fall below 10 per cent on an annual basis for the first time since 1972.

IMF officials praised Turkey's progress in achieving its macroeconomic targets. Reza Moghadam, head of the IMF's Turkey desk, said the country was likely to meet or exceed the inflation and economic growth targets for 2004 set out in the agreement.

There is continued anxiety in the financial markets about meeting revenue targets, especially from privatisation. The government's sale of a stake in the Tupras oil refining group to Russian and Turkish investors for $1.3bn remains in limbo. It has been halted by successive court decisions in favour of a trade union claim that the sale did not meet the proper criteria. Efforts to overturn these legal decisions have so far proved unsuccessful.