Journal Issue

TURKEY: First and Second Reviews Under the Stand-By Arrangement, and Requests for Waiver of Nonobservance of Performance Criteria and Rephasing of Purchases

International Monetary Fund
Published Date:
July 2006
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This supplement provides an update on developments since the circulation of the staff report. The staff appraisal remains unchanged.

Economic developments

1. Recent inflation data remain consistent with achieving the 8 percent end-year target. In November, the consumer price index rose by 1.4 percent—largely reflecting seasonal food and clothing price increases—bringing cumulative year-to-date inflation to 7.3 percent. Meanwhile, the producer price index, which is more skewed towards tradables, declined by 1 percent, largely as a result of declining oil prices.

2. Trade data pointed to continued weakness on the external side. While the October trade deficit (US$3½ billion) was lower than in previous months, the improvement was less marked than programmed. A continuation of import buoyancy in the last two months of the year could result, ceteris paribus, in a current account deficit slightly above staff projections.

3. Fiscal performance improved slightly in October.1 The primary surplus at the consolidated budget level was about 0.1 percent of GNP above target, helped by strong revenues (particularly from direct taxes) and lower than programmed spending (especially on capital projects and defense).

4. Treasury continued to make efforts to lengthen borrowing maturities. This week, Treasury raised (i) Euro 350 million by re-opening its 2012 Eurobond, thus bringing this year's international bond borrowings to US$6½ billion (well above the programmed level of US$5½ billion); and (ii) YTL 3.7 billion from the domestic market by issuing a fixed-rate lira bond with a 5-year maturity—the first long-term fixed rate issue in lira since the beginning of the year—and carrying a record-low yield of 12¼ percent. On December 6, Fitch revised its outlook on Turkey's BB minus rating from stable to positive.

Policy implementation

5. The authorities have identified measures to achieve this year's 6.5 percent of GNP primary surplus target. To this end, they have blocked up to 0.2 percent of GNP in budget appropriations, with nearly half of the cuts borne by investment and the remainder spread across transfers and goods & services.

6. On December 5, the central bank announced the details of its inflation targeting framework. Specifically: (i) inflation targets for the headline CPI are to be jointly decided by the central bank and the government and will be announced at three-year horizons—the targets for end-2006 was retained at 5 percent, and the 2007 and 2008 targets were set at 4 percent; (ii) the central bank will attach an uncertainty range of plus or minus 2 percentage points around the inflation targets; (iii) quarterly Inflation Reports will replace the current monetary policy reports; (iv) responsibility for interest rate decisions will transfer from the central bank governor to the Monetary Policy Committee (MPC); (iv) the calendar of MPC meetings will be announced 12 months in advance; and (v) MPC decisions will be made public on the same day of the meeting, with a summary of the discussion published within 5 business days.

7. Consistent with the objective of accelerating reserve build-up, the central bank has announced that it will increase the size of scheduled daily foreign exchange purchases. Starting January 2, 2006, daily minimum purchases are to be increased from US$15 million to US$20 million. The optional amount that banks can sell will increase in tandem, bringing the daily maximum purchases of foreign exchange through auctions from US$45 million to US$60 million.

8. The social security administrative reform law was submitted to parliament on December 8 (prior action). The law will allow the three social security institutions to be unified and will facilitate timely implementation of the parametric pension reform. Although the normal working practice of ensuring that prior actions are met five days before the Board meeting was not observed, Fund and World Bank staffs have reviewed the draft law and found that it conforms to the understandings reached with the authorities.


Final end-September fiscal data for state economic enterprises remain unavailable. (The authorities have committed to delivering such data in a more timely fashion in the future.) Preliminary information suggests some underperformance, driven largely by greater-than-anticipated grain purchases by the government grain agency, whose costs were only partly offset by overperformance in other state enterprises.

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