Journal Issue

Turkey: Seventh Review Under the Stand-By Arrangement, Requests for Waiver of Applicability and Nonobservance of Performance Criteria, Rephasing of Purchases, and Extension of Arrangement Supplementary Information

International Monetary Fund
Published Date:
July 2004
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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. The staff appraisal remains unchanged.

Recent developments

1. National accounts data released at the end of March confirm that economic growth in 2003 was strong, outperforming both program projections and market expectations:

Real GDP

(y-o-y growth rate)

Real GDP, Seasonally Adjusted

(q-o-q growth rate)
  • In the fourth quarter of 2003 real GNP increased by 7.2 percent year on year, and real GDP by 6.1 percent, bringing growth for the whole year close to 6 percent (Table 1). In seasonally adjusted terms, the economy grew at an annualized rate of around 8 percent during the second half of the year. Carryover from this will help in meeting this year’s 5 percent growth target.

  • Growth was led by a rapid increase in private sector demand. Private investment grew by 30 percent year on year in the fourth quarter, and private consumption by more than 10 percent. In contrast, government spending was weak, reflecting tight incomes policy and attempts to meet the primary surplus target. Inventory accumulation continues to be reported as an important component of growth, even though this most likely represents measurement error. However, its importance has become steadily less significant through the year.

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)
Table 1.Turkey - Quarterly Real Output and Expenditure, 2002-2003
(year on year growth rate, in percent)
Gross National Product0.610.
Gross Domestic Product (production side)
Other, including services2.48.17.811.
Gross Domestic Product (demand side)
Domestic Demand-0.714.
Gross Investment2.158.927.757.935.925.223.913.120.520.4
Gross Fixed Investment-28.5-2.05.620.5-
Exports of goods & nonfactor services10.65.115.912.511.114.512.319.416.916.0
Imports of goods & nonfactor services2.520.419.222.115.822.024.728.333.027.1
(contribution to year on year GDP growth (production side), in percentage points)
Gross Domestic Product (production side)
Other, including services1.
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
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.

2. The authorities continue to make progress in disinflation. In March, consumer prices increased 0.9 percent month on month, in line with market forecasts and program projections. The bulk of the increase came from volatile food prices, which increased by 3 percent. With the high inflation months of last year dropping out, year on year inflation fell to 11.8 percent, already below the 12 percent end-year target. Although wholesale prices increased by 2.1 percent month on month, driven by a 3 percent increase in public sector prices, the year on year rate has fallen to 8 percent.

3. Good progress is also being made in building international reserves. End-March net international reserves exceeded the program target by US$2¾ billion, due to higher-than-anticipated purchases by the CBT at its foreign exchange purchase auctions and bringing forward the Treasury’s international bond issues to the first few months of the year. Reflecting the gathering strength of the balance of payments, the CBT has twice increased its maximum purchases at its daily foreign exchange purchase auctions in recent weeks, to US$140 million effective April 7.

4. The fiscal program targets remain within reach. While expenditures remained under tight control in the first two months, revenues were below target, with shortfalls on personal income tax, VAT and excises, in part due to the shift in payment dates from February to March. Reflecting these shifts, and remedial measures taken during the Seventh Review discussions, the March outturn appears to have exceeded program projections, with preliminary outturns suggesting that the central government primary target was also exceeded in the first quarter.

5. Banca Intesa, Italy’s largest bank, entered into exclusive talks to purchase a majority stake in Garanti, Turkey’s third-largest private bank.

6. On April 10, the World Bank and the authorities announced progress on loan discussions. The Bank board is expected to consider, by end-April, the US$375 million second tranche of the Economic Reform Loan (ERL) to Turkey. The ERL provides support for public sector reform, energy sector restructuring, and privatization. Bank staff has also reached agreement in principle with the authorities on the matrix of policy conditions under the US$1 billion Programmatic Financial and Public Sector Loan (PFPSAL 3). Discussions should be finalized by end-April, with Board consideration expected in June.

7. Against this generally favorable background, financial markets have remained broadly stable. Key financial indicators, including benchmark bond interest rates and the Turkish lira exchange rate, have been stable.

8. A number of significant political developments have taken place since the review discussions:

  • The governing AKP dominated the local elections, held on March 28. In doing so, it increased its share of the vote by 8 percentage points compared to the November 2002 general election, to more than 40 percent. The main opposition party, CHP, saw its share of the vote fall slightly to 18 percent. Both the MHP (a partner in the previous government coalition) and DYP (in power for much of the 1990s), made modest gains, closing in on the 10 percent threshold they would require in parliamentary elections to attain representation.

  • Formal negotiations on Cyprus have been completed. The Turkish government has informed the United Nations that it has accepted the Annan Plan being put to referenda in Cyprus on April 24. It has also committed to signing the Plan by April 29 should it be passed in the referenda.

  • While the European Council Parliamentary Assembly recently recommended that Turkey be taken off its monitoring list, the European Parliament adopted a report on April 1, 2004 containing a more mixed message. While the report praised recent reforms in Turkey, it indicated that Turkey was not yet in accord with the Copenhagen political criteria and called for revisions to the constitution.

Table.Turkey: Election Outcomes, 2002-04
General ElectionLocal Election
(November 2002)(March 2004)
AKP (Justice and Development Party)3442
CHP (Republican’s People Party)1918
MHP (Nationalist Action Party)810
DYP (True Path Party)1010
DEHAP (People’s Democratic Party)65
Sources: Turkish authorities.
Sources: Turkish authorities.

Program implementation

9. As a prior action for the Seventh Review, the authorities have now appointed the chairman of the Imar inquiry and approved its terms of reference. Mr. Jean-Louis Fort, former Director General of the Banking Commission in France, has been appointed as the chairman of the inquiry. The terms of reference for the inquiry confirm that the findings are expected to be made public by end-August 2004 (a new performance criterion, ¶15).1

10. The authorities have confirmed the implementation of the agreed measures to close the TL 7 quadrillion fiscal gap. The staff has raised concerns regarding ad hoc adjustments in petroleum excises to smooth pump prices, and delays in adjustment of excises in line with the budget assumptions, which could jeopardize the fiscal targets. In response, the authorities have proposed a new structural benchmark aimed at ensuring that excises are adjusted in line with the WPI prior to the completion of the next review (¶8). They have also agreed to review the mechanism for pass through of world oil prices to pump prices before the next review.

11. Progress has been made on state bank reform. The authorities have agreed to reduce the excess capital of Ziraat bank by the end of April, based on its final 2003 accounts. The authorities have also instructed state banks to bring their deposit rates in line with the average in the private banks.

12. The authorities have completed ahead of schedule their action plan for the implementation of tax administration reform. The plan, which has been shared with Fund staff, sets clear objectives and a timeline for key elements of the reforms, including the preparation of enabling legislation, revenue department functional reform, and the launch of a Large Taxpayers Unit.

13. Finally, the authorities observed the end-March performance criteria on contracting and guaranteeing of new external public debt and on the stock of short-term external public debt outstanding. At end-March the stock of short-term public external debt was zero, compared with the US$1 billion program ceiling. US$3.382 billion of medium- and long-term public external debt had been contracted, well below the program’s US$7 billion ceiling.

¶ refers to the relevant paragraph in the authorities’ Letter of Intent, dated April 2, 2004.

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