Turkey Economy: Making The Case For IMF Credits

Bankers and investors are hoping that a new IMF mission to Turkey will put an end to months of uncertainty in Ankara's relations with the Fund as war clouds gather over neighbouring Iraq. Weighing in Turkey's favour is the evident desire of the US to reward the government for its decision to co- operate in the preparations for the Iraq campaign.

The IMF delegation, headed by country desk chief Juha Kahkonen, arrived in the Turkish capital on February 7. It is expected to make an assessment of the draft budget for 2003 and to finalise the wording of a letter of intent incorporating the government's latest economic reform pledges.

All this could pave the way for the release of a US$1.6bn credit tranche under the US$16bn standby accord of February 2002. Disagreement, however, would cast further doubt on the ultimate ability of the government to service its costly domestic and foreign debts, equivalent to around 85% of GNP.

IMF lending has been on hold since Mr Kahkonen's team left Ankara in mid- October, ahead of the November 3 general election, leaving the "fourth review" of the standby accord incomplete. The Justice and Development Party (AKP) swept into office amid widespread economic disenchantment, promising lower taxes and higher spending on infrastructure, agriculture and welfare.

Although the new administration expressed willingness to cooperage with the IMF, it simultaneously proposed to loosen fiscal policy, reverse last year's reform of public procurements and reduce the powers of independent regulators such as the banking watchdog BRSA. In early January, it announced a one-off increase in many state pensions.

Orders from above?

The return of the delegation, which was announced suddenly on the eve of a week-long public holiday, may have been dictated by Washington. On Wednesday, the prime minister, Abdullah Gul, abandoned efforts to broker a peaceful solution for Iraq. On Thursday the Turkish parliament gave permission for US military personnel to modernise air bases and transport infrastructure in south-eastern Turkey, to be used as a launching pad against Iraq. John Taylor of the US Treasury also met Mr Gul to discuss possible US compensation for the damage which the Iraq campaign will inflict on the Turkish economy via high oil prices, loss of revenue from trade and tourism and weakened financial, business and consumer confidence.

However, the past month has also brought signs of greater government commitment to the IMF recipe of belt-tightening and market reform. When IMF first deputy managing director Ann Krueger visited Ankara on January 16,Mr Gul was adamant that a primary public sector surplus (PPSS) equivalent to 6.5% of GNP would be achieved in 2003. The PPSS is the central fiscal indicator tracked by the IMF. The Fund insists that the target has to be achieved to convince financial markets that the government debt is sustainable.

Banks and budgets

In January, taxes on tobacco and alcohol were raised, a privatisation plan was unveiled and even the AKP's controversial pardon for tax arrears was toned down. Another obstacle to the resumption of IMF lending appeared to be overcome on Monday, when the BRSA signed an accord with the indebted former owners of troubled Pamukbank. Tough treatment of wayward banks has been a key demand of the IMF ever since the currency and banking crisis of February 2001.

The budget will not now be presented to parliament until after the holiday. Following disappointing budget performance figures for 2002, IMF officials are said to be demanding additional savings measures in addition to those already announced by the government-such as health cutbacks and compulsory retirement for public servants at 61.

Separately, Mr Kahkonen and his colleagues will undoubtedly insist on the rapid adoption of a swathe of long-delayed reform legislation in areas such as public financial management, taxation, bankruptcy and foreign investment.

Unpredictable

The AKP is under pressure to meet IMF demands. Typical lira-denominated government bond yields have been hovering around 58%, compared to 26.4% consumer price inflation (CPI). Lower rates are needed both to lift the threat of debt crisis and to spur economic activity. In 2002, GNP is believed to have grown by 6% as the economy bounced back from the deep recession of 2001 with the help of inventory-building and exports. Meanwhile, inflation was halved. Nevertheless, this year's targets of 5% growth and 20% CPI are considered ambitious.

Besides reassuring private lenders, agreement with the IMF would help to secure the release of delayed World Bank loans-and possibly of the proposed US bilateral assistance. Yet the government remains unpredictable, and this uncertainty is exacerbated by the prospect of charismatic AKP leader Recep Tayyip Erdogan taking over the post of prime minister from Mr Gul next month.

Mr Erdogan is currently ineligible for the premiership because he is not a member of parliament, but he has been nominated to take part in a re-run of the election in the south-eastern province of Siirt on March 9. The re- run was ordered due to alleged irregularities.

Turkey already owes the IMF over $20bn. Its staff will not be easily impressed by promises or half-measures.