Journal Issue

Turkey: Eighth Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance of Performance Criterion Supplementary Information

International Monetary Fund
Published Date:
May 2005
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This supplement provides an update on developments and on the implementation of program measures since the circulation of the staff report (July 16, 2004, ( The authorities have now informed the staff that they intend to publish the Eighth Review staff report. The staff appraisal remains unchanged.

Recent developments

1. Financial market sentiment has steadily improved. After depreciating by 15 percent against the U.S. dollar in April and early-May, the Turkish lira has since re-gained some ground. The benchmark bond rate has fallen to 26 percent, after having risen to 30 percent in May, while Eurobond spreads have again fallen to about 400 basis points.

2. First-quarter national accounts data released in end-June confirm that output has continued to grow strongly:

  • Real GDP increased by 10.1 percent year on year, and real GNP by 12.4 percent. Although agricultural output again declined, strong activity in manufacturing, and in domestic wholesale and retail trade contributed to the high overall output growth (Table 1). Construction experienced positive growth for the second quarter in a row, following eleven quarters of decline. In seasonally adjusted terms, GDP grew by 1.4 percent quarter on quarter (close to 6 percent annualized), similar to the last quarter of 2003, though seasonal factors are quite volatile.

  • Private sector demand continues to drive growth. Private (fixed) investment increased by more than 60 percent year on year, and private consumption by more than 10 percent. After declining steadily in 2003, government consumption increased by 2.4 percent. In the data, inventory accumulation continues to make a significant contribution to growth. However, this likely reflects either an over-estimation of GDP from the production side or an under-estimation of the expenditure components.

  • Real sector indicators in the second quarter also remain strong. Industrial production grew by 16.5 percent year on year in May, while capacity utilization increased in June to more than 84 percent. Motor vehicle production remains strong, rising more than 80 percent year on year in May, though the detailed June capacity utilization figures have tentative signs that this may be slowing down. However, output growth in lower value added sectors, such as textiles, has been weak.

Table 1.Turkey - Quarterly Real Output and Expenditure, 2002-2004
(year on year growth rate, in percent)
Gross National Product0.610.
Gross Domestic Product (production side)
Wholesale and retail commerce1.311.78.210.311.0-0.317.3
Gross Domestic Product (demand side)
Domestic Demand-0.714.
Gross Investment2.158.927.757.935.925.223.913.120.520.447.0
Gross Fixed Investment-28.5-2.05.620.5-
Exports of goods & nonfactor services10.65.115.912.511.114.512.319.416.916.010.3
Imports of goods & nonfactor services2.520.419.222.115.822.024.728.333.027.131.2
(contributions to growth)
Gross Domestic Product (production side)
Wholesale and retail commerce0.
Statistical Discrepancy-0.1-0.10.4-0.10.1-
Gross Domestic Product (demand side)
Domestic Demand-0.814.
Gross Investment0.511.84.610.
Gross Fixed Investment-6.9-
Change in Stocks7.312.
External Balance3.2-5.10.5-2.1-0.9-2.8-4.7-0.9-4.8-3.1-9.8
Exports of goods & nonfactor services4.
Imports of goods & nonfactor services1.
Sources: State Institute of Statistics; SPO; and CBT.
Sources: State Institute of Statistics; SPO; and CBT.

Real GDP

(y-o-y growth rate)

Real GDP, Seasonally Adjusted 1/

(q-o-q growth rate)

Source: Central Bank of Turkey.

1/ Using Tramo-Seats.

Contributions of Domestic Demand and Net Exports to GDP Growth

(In percentage points)

Contribution of Components to Growth of Domestic Demand, Excluding Stockbuilding

(In percentage points)

3. The current account deficit continues to weaken, but has been financed by capital inflows.

  • The current account deficit in April and May remained large. A surge in import growth (mostly finished consumption and investment goods), not matched by growth in exports, widened the current account deficit to US$8.8 billion in the first five months of 2004.

  • The deficit has been financed by higher private capital inflows, albeit mostly short-term. After an outflow of nearly US$Y2 billion in non-resident holdings of equities and treasury bills in April (the first significant monthly outflow for over a year), inflows returned in June. At the same time, domestic banks increased their open foreign exchange position (excluding forwards) during June by about US$1.5 billion.

4. Although the authorities have not yet revised their official projections, the data suggest that both output growth and the current account deficit are likely to be higher than projected. Given positive carry-over from the last quarter of 2003, rapid growth in the first quarter of 2004, and demand and output indicators pointing to a strong second quarter, the 5 percent annual target for 2004 is likely to be exceeded by at least 1-2 percentage points. At the same time, current staff estimates suggest that the external current account deficit will also increase to at least US$11 billion, or around 4 percent of GNP (about ½ percentage point higher than in the staff report).

5. June inflation data are consistent with achieving the 12 percent annual target. In June consumer prices fell by 0.1 percent month on month, wholesale prices by 1.0 percent, both well below market expectations. Annual consumer price inflation remained at 8.9 percent, as in May, while wholesale price inflation rose slightly to 10.5 percent. While the latest increase in petroleum prices has yet to feed through, the low June figures together with the recent stability of the exchange rate suggest that the end-year target is likely to be met. This is borne out by the latest CBT survey of market expectations, which projects end-year inflation of 10.9 percent.

6. Although the primary surplus in June was slightly below program, the consolidated budget for the first half of 2004 continued to overperform. Although strong domestic demand meant that direct tax and VAT revenues remained strong in June, spending on investment and current transfers was higher than expected. Also, delays in adjusting petroleum excises in the first half of the year have cost 0.2 percent of GNP. Despite some slight weakening in June, the budget still seems well on track. In the first six months, the cumulative primary surplus of the consolidated budget reached TL 13.3 quadrillion (an overperformance of TL 1.8 quadrillion (0.4 percent of GNP)), more than 60 percent of the annual target.

Turkey: Primary surplus (program definition), Jan-June 2004(in TL trillions)
Consolidated budget primary surplus11,54813,3041,756
Primary expenditures35,69534,535-1,160
Rest of Public Sector primary surplus (CGS)1/2,7111,806
Soc Sec413109

Actual data is as of April. SEEs April data is provisional.

Actual data is as of April. SEEs April data is provisional.

7. The High Planning Council approved the 2005 budget call. Main macroeconomic parameters for preparation of the 2005 budget include: 5 percent real GNP growth, 8 percent year-end inflation, 10.1 percent GNP deflator, and an average dollar exchange rate of TL 1.67 million. The budget call does not specify any target for the primary surplus, but it does set ceilings on certain expenditure categories, and would imply a decline in primary spending of 0.5 percent of GNP. Key categories such as personnel and purchase of goods and services are assumed to rise with end-year inflation (but below average inflation). Investment spending is projected to increase, but only modestly.

8. Banking sector developments have been mixed. The Cukurova Group (the former owners of Yapi Kredi and Pamuk banks) reached agreement in principle with the BRSA and SDIF that would reduce its payments from US$6.2 billion over 15 years to US$4 billion over less than 2 years. Yapi Kredi’s balance sheet will be further strengthened by the Group’s purchase of US$1 billion in non-core assets. Although the full details (including the safeguards in case of non-compliance) are not yet known, market reaction has been positive. However, negotiations on the sale of a majority stake in Garanti bank to Banca Intesa have failed, a set-back to foreign involvement and restructuring of the banking system. The authorities passed legislation to allow the merger of Halk and Pamuk banks; they are expected to announce further details of their new state bank strategy shortly.

9. Since completion of the review discussions, the authorities have passed new EU reform legislation. The 9th EU harmonization package was passed by Parliament on July 14. This removes the death penalty from the penal law and eliminates the seat reserved for the military on the higher education, radio/television, and communications boards.

Program implementation

10. The prior action on write-over of TL 1.2 quadrillion of special revenues to the budget was met by July 14, not by end-June as indicated in the Letter of Intent. The authorities informed staff and management that while the official circular instructing the write-over was issued by end-June, the associated transactions were only completed by July 14.

11. With regard to progress in other areas of structural reform:

  • The law integrating 15 extra budgetary funds into the central government budget was passed by Parliament on July 14. This law abolishes off-budget special revenues and expenditures and fully incorporates them into the budget so that formal write-over would no longer be necessary.

  • To reduce further financial intermediation costs, a Cabinet decision abolishing the 3 percent Resource Utilization Support Fund (RUSF) levy on all commercial transaction is expected to be approved this week.

  • The Imar Commission has submitted its preliminary report to the authorities and appears on course to complete its work by end-August

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