Turkey
2002 Article IV Consultation and First Review Under the Stand-By Arrangement-Staff Report; Staff Statement; Public Information Notice and News Brief on the Executive Board Discussion
Author: International Monetary Fund
Publication Date:
05 Jul 2002
eISBN:
9781451838107
Language:
English
Keywords:
ISCR; CR; government; march inflation outcome; inflation expectation; staff appraisal; Turkish lira; net profit; market share; exchange rate; foreign exchange; Inflation
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This paper examines Turkey’s 2002 Article IV Consultation and First Review Under the Stand-By Arrangement (SBA). In response to September 11, the Turkish government initiated a new intensified IMF-supported program, both to protect the economy against future crises, and to continue Turkey’s ambitious reform agenda. Under the 2002–04 Program, the continuation of the float will limit the potential for speculative attacks. Ongoing financial sector reform together with corporate sector restructuring will help strengthen the banking and business sectors, and continued fiscal discipline should foster medium-term debt sustainability.

Abstract

This paper examines Turkey’s 2002 Article IV Consultation and First Review Under the Stand-By Arrangement (SBA). In response to September 11, the Turkish government initiated a new intensified IMF-supported program, both to protect the economy against future crises, and to continue Turkey’s ambitious reform agenda. Under the 2002–04 Program, the continuation of the float will limit the potential for speculative attacks. Ongoing financial sector reform together with corporate sector restructuring will help strengthen the banking and business sectors, and continued fiscal discipline should foster medium-term debt sustainability.

I. Introduction

1. In the attached letter, the authorities request the completion of the first review under the Stand-by Arrangement (SBA). The Fund is supporting Turkey’s economic program under an SBA covering 2002-04, approved by the Executive Board on February 4, 2002. Total access under the arrangement is SDR 12.8 billion, or 1,330 percent of quota (Appendix I). The next purchase, in an amount equivalent to SDR 867.6 million, is contingent on the completion of this review. The World Bank supports Turkey under a Country Assistance Strategy envisaging lending of up to US$6.2 billion during FY2001-03 (Appendix II).

2. At the time of the last Article IV consultation, concluded in December 1999, Directors welcomed Turkey’s economic program for 2000-02, although subsequent crises have forced a deepening of reform efforts. Directors commended the authorities’ decision to embark on a strong program designed to free the country from high inflation, to strengthen macroeconomic fundamentals, and to address long-standing structural weaknesses. They found the program well balanced, commending the wide-ranging structural reforms, and agreeing that upfront fiscal adjustment was needed to restore fiscal solvency, and that the preannounced exchange rate path would help anchor inflation expectations. In the event, against a background of a fragile banking system and a widening current account deficit, bank liquidity problems led to a serious financial crisis in November 2000. And, in February 2001, Turkey was forced to float its currency after a public dispute between the Prime Minister and the President prompted a further speculative attack. Since then, the authorities have redoubled their reform efforts, first under a strengthened program adopted in May 2001 and now under the new three-year SBA.

3. The quality, coverage, and timeliness of statistical reporting by Turkey are generally adequate for program monitoring and surveillance, although some deficiencies remain in fiscal statistics (Appendix III).

II. Background

4. Turkey is in the midst of a determined campaign to turn around decades of weakening performance (Figure 1). Not only has growth been on a downward trend since the 1970s (and inflation on an upward one), it has also become increasingly volatile. Since 1994 alone, Turkey has experienced three severe recessions, two of them triggered by financial crises. Turkey’s performance is also weak in comparison with other emerging market countries (Figure 2). In particular, Turkey is the only major emerging market country that has failed to bring inflation firmly under control.

Figure 1.
Figure 1.

Turkey: The Long View, 1964-2001

(in percent)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Sources: IMF, International Financial Statistics; and IMF, World Economic Outlook.
Figure 2.
Figure 2.

Growth and Inflation in Turkey and Developing Countries, 1974-2001

(in percent)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source: IMF, World Eonomic Outlook; and Fund staff calculations.

5. The disappointing performance is rooted in pervasive structural rigidities, weak public finances, and low policy credibility. It was not until the 1980s that Turkey turned away from an inward-looking import substitution strategy and embarked on a path of economic liberalization. Despite many achievements since then, deep-rooted structural problems remain a drag on growth, in areas as diverse as banking, state involvement, and foreign direct investment1. At the same time, past disinflation attempts have had little success. At first, the limited structural component of fiscal adjustment served to undermine efforts to reduce inflation, with the failure to rein in public expenditures leading to continued reliance on monetary financing. Although the fiscal position began to improve in the mid-1990s, by then, in the absence of a credible nominal anchor to guide expectations, inflation had taken on a life of its own. Appendix IV reviews Turkey’s inflation experience and analyzes the underlying causes in more detail.

6. The past couple of years have witnessed three major attempts at addressing underlying weaknesses.

7. The first was during 2000 under the three-year SBA initiated in December 1999. The program instituted strong fiscal adjustment and a preannounced exchange rate crawl to restore debt sustainability and to break entrenched inflation expectations. The program also included a wide-ranging structural reform agenda—especially in banking, social security, privatization, and agriculture—to set Turkey on a higher sustainable growth path.

8. Despite some notable achievements, after only 14 months Turkey had experienced two major economic crises. In 2000, the authorities succeeded in implementing an array of structural reforms, in turning around the public sector primary balance, and in reining in inflation. However, with a worsening current account and a fragile banking system, in late 2000 a liquidity crisis affecting a few domestic banks turned into a full-blown crisis, with a massive loss of reserves. Prompted by political infighting, this was followed by another speculative attack in February 2001, forcing the government to float the currency amidst sky-high interest rates and a renewed acceleration in inflation.

9. The second phase was the adoption in May 2001 of a strengthened program aimed at restoring investor confidence by addressing the roots of the crises, with the help of additional Fund support. The authorities’ revised program featured a fundamental restructuring of the banking sector (a key source of vulnerability in the past), a commitment to a floating exchange rate (reducing vulnerability to shocks), continued disinflation, further massive fiscal adjustment to underpin debt sustainability, and an enhanced role for the private sector.

10. Just as the revised program was beginning to show results, September 11 intervened. In the wake of September 11, the goal of permanently lower inflation with sustained higher growth remained elusive. In 2001, annual inflation rose sharply, and Turkey was in the midst of its deepest recession since the 1940s, complete with steep increases in unemployment and widespread difficulties in the corporate sector. Meanwhile, Turkey continued to suffer from an inefficient public sector, barriers to private sector development, a banking sector damaged by the earlier crises, and from a high public debt burden, fuelled in part by publicly funded bank recapitalization. At the same time, deteriorating market sentiment saw the re-emergence of serious financing problems.

11. In response to September 11, a new intensified medium-term Fund-supported program was initiated, both to protect the economy against future crises, and to continue Turkey’s ambitious reform agenda. Under the 2002-04 program, the continuation of the float will limit the potential for speculative attack, ongoing financial sector reform together with corporate sector restructuring will help strengthen the banking and business sectors, and maintained fiscal discipline should foster medium-term debt sustainability. The program’s strong structural reform agenda should, once macroeconomic stabilization is achieved, finally set the stage for sustained economic growth (Table 1 and Annex B of the attached Letter of Intent).

Table 1.

Turkey: Selected Indicators, 1999-2004

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Sources: Data provided by Turkish authorities; and IMF staff estimates.

Average of monthly nominal interest rate divided by 12 month ahead CPI inflation. With average maturity of newly issued debt less than one year, and with FRNs paying quarterly coupons, this measure overstates the effective real interest rate when inflation is declining.

On a commitment basis, excluding profit transfers from the CBT, interest receipts, and privatization proceeds.

Interest payments minus interest receipts plus profit transfers from the central bank.

Interest payments minus interest receipts plus CBT profits before transfers to the government.

Defined as the sum of quarterly GNP in the last two quarters of the year and in the first two quarters of the following year.

Change in reserve money in percent of GNP, where reserve money is defined as currency issued plus reserve requirements.

12. Developments under the new program have been promising:

  • Financial market conditions have improved markedly from their post-September 11 lows (Figures 3 and 4). The benchmark bill rate has fallen by some 30 percentage points to the low 60s, and the Turkish lira has appreciated by more than 20 percent to around TL 1.35 million to the U.S. dollar. Against this background, the trend toward dollarization has abated, and even shown signs of reversal in recent months. The stock market, despite recent declines linked to regional security concerns, has risen by almost 50 percent in lira terms since mid-September. Also, the hemorrhaging of external interbank credits (which amounted to US$8 billion in 2001) has ceased.

  • Short-term concerns about the public debt rollover have also largely abated. This is evident in the consistently high demand in the last few months’ treasury bill auctions, and the successful resumption in January of the issuance of floating rate notes with a two-year maturity. The Treasury has also tapped the Eurobond market for US$1.45 billion so far in 2002, while seeing a 120 basis point reduction in benchmark Eurobond spreads over U.S. Treasuries.

  • Inflation has started to decline (Figure 5). Seasonally adjusted CPI inflation persisted at 4 percent per month (annualized 60 percent) from September to January, as the impact of the currency appreciation was offset by weather-related increases in food prices and adjustments in administered prices. With the influence of the latter two factors diminishing, seasonally adjusted inflation came in at 2½ percent (annualized 35 percent) in February. This helped inflation expectations for end-2002 to decline markedly (to 44 percent in early March), and contributed to the decision of the Central Bank of Turkey (CBT) to reduce the overnight rate by 8 points (to 72 percent) in two steps in February-March. Monthly inflation slowed further to a seasonally adjusted 1½ percent in March.

Figure 3.
Figure 3.

Turkey: Market Developments, 2001-02

(in percent; unless otherwise indicated)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source: Data from the Turkish authorities.
Figure 4.
Figure 4.

Turkey: Monetary Developments, 1998-2002

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Sources: Central Bank of Turkey; and State Institute of Statistics.1/ Turkish residents’ TL deposits.
Figure 5.
Figure 5.

Turkey: Inflation, 1996-2002

(in percent)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source: Data provided by the Turkish authorities.

13. Policy performance under the new program has also been good (Annexes A and B in the attached Letter of Intent). In January, the authorities met the more than ten prior actions in the fiscal and structural areas needed for the approval of the SBA. Subsequently, all quantitative performance criteria relevant for the first review were met. Base money came in below the end-February ceiling, while NIR and NDA targets were met comfortably (Figure 6). The public sector primary surplus target of 5½ percent of GNP for 2001 was exceeded by almost ½ percent of GNP, and in January the consolidated government sector exceeded its primary surplus target comfortably. Solid progress is also being made in meeting the program’s structural conditionality (Table 2). By the beginning of April, the authorities had met three of the six structural benchmarks relevant for the review (relating to anti-corruption and fiscal transparency efforts). Moreover, they were on track to complete shortly the two prior actions for the review (relating to the Law on Public Debt Management and redundancies in state economic enterprises) and the outstanding structural benchmarks (in the banking, fiscal, and expenditure management areas).

Table 2.

Turkey: Prior Actions and Benchmarks Relevant for the First Review

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Figure 6.
Figure 6.

Turkey: Monetary Program, 2001-02

(In quadrillions of TL)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source: Data from the Turkish authorities.1/ As explained in Annex J of the Janury 18, 2002 Letter of Intent, the end-February test date was calculated as the four-day average of February 11-12 and March 11-12, to correct for the temporary increase in demand for base money due to the Bayram holiday. All monetary performance criteria and indicative ceilings were met.2/ In billions of U.S. dollars. Data discontinuity at February 6, 2002 reflects the revised definition of NIR in the new program, which now includes the Treasury’s NIR position, and which is calculated at new program cross exchange rates.

14. However, near-term risks remain:

  • Growth prospects remain unclear (Figure 7). Real GNP fell by 9.4 percent in 2001, largely owing to a sharp decline in the first half of the year. However, there were no clear signs of recovery in the second half, with seasonally adjusted GNP rising by 1 percent in the third quarter and falling by a similar amount in the last quarter. More recent indicators of activity have been mixed. On the domestic side, capacity utilization in manufacturing has continued to increase and the latest business survey data show some signs of optimism, but real bank credit to the private sector has continued to fall and industrial production has been stagnant. On the external side, export growth has slowed, reflecting both the weakness of the global economy and the recent rapid rebound in the Turkish lira. Spending has also been held back by weak workers’ remittances which contributed to a steeper drop in GNP than GDP in 2001 (9.4 vs. 7.4 percent).

  • Markets remain fragile, largely because of concerns about military action in neighboring Iraq (Appendix V and Table 3). In early February the currency depreciated and the benchmark bond rate increased by 4 percentage points. Although markets have since recovered, they continue to view the possibility of a military intervention in Iraq as a key source of vulnerability.

  • The program’s ambitious agenda could test the cohesion of the government coalition. Since the onset of the recent crises, unemployment has increased markedly in Turkey (Box 1). Although the authorities have responded with increased and better-targeted social spending, resultant social tensions could test the mettle of the government. Also, the new program, which calls for major, politically difficult reforms in the months ahead (including reducing public employment, privatizing state enterprises, and restructuring private banks) requires the undivided support of the coalition partners. Moreover, the fiscal and monetary restraint foreseen under the program could face resistance, especially if the economy does not recover soon.

Table 3.

Turkey: Indicators of External Vulnerability, 1998-2004 1/

(In percent, unless otherwise noted)

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Sources: Data provided by the Turkish authorities; and IMF staff estimates and projections.

For 2002-04, program projections.

As of end-January 2002, reserves stood at US$20.0 billion.

By residual maturity.

Interest plus medium- and long-term debt repayments as percent of current account receipts (excl. off. transfers).

As of August 2001.

As of September 2001; November 2001 for nonperforming loans.

Deflated by the CPI.

For 2002, as of April 2, 2002.

Figure 7.
Figure 7.

Turkey. Output and Demand, 1992-2002

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source; Data provided by the Turkish authorities.1/ The stock of loans has been adjusted for the shift to nonperforming loans of the loans of the banks taken over in December 1999 by the Saving Deposit insurance Fund.2/ Seasonally adjusted; the total VAT has been adjusted for tax changes.

Turkey: Labor Market Developments

Turkey has generally flexible labor markets. While Turkey suffers from a high tax wedge—estimated by the OECD at about 40 percent in the late 1990s—it nevertheless exhibits many signs of labor market flexibility. The tax base is narrow, and only a small share of the workforce is covered by collective wage agreements. Out of a total of 20 million employees, union coverage is just 2½-3 million, of which only 1 million are covered by collective bargaining agreements. The unemployment insurance system is new, and started making payments only in March 2002. The ratio of unemployment benefits to the average wage earned in the last four months employed is low, at 50 percent, and the duration for unemployment benefit payments is limited to six months. Minimum wages are set far below the average wage (presently about one-fifth of the average formal sector wage), and have not kept pace with real wage increases over the past decade (see the first figure below). According to both labor force survey evidence in Turkey and independent OECD estimates, about half of the workforce is employed in the informal sector. Labor protection legislation is deemed to be fairly liberal by OECD standards, although new legislation now in the pipeline will make firing procedures more restrictive.

Nevertheless, the severity of the recent economic crises has contributed to a sharp rise in unemployment (see the second figure below). Overall unemployment, measured on a households’ survey basis, increased to 10½ percent in the fourth quarter of 2001 from 5½ percent in the third quarter of 2000 (before the first crisis broke). Both urban and rural areas have been badly hit, although hidden unemployment in the agricultural sector tends to mask the true scale of the problem in rural areas.

The authorities have responded by enhancing and better targeting their social spending. Despite a tight budget, the authorities are committed to increasing social spending substantially in real terms in 2002. The impact of public sector retrenchment is being addressed through the labor redeployment and reinsertion program (supported under the World Bank’s Privatization Social Support Project), and through unemployment insurance payments. The authorities are also implementing a World Bank supported Social Risk Mitigation Project, which seeks to enhance safety net resources available to the poorest households in Turkey.

Looking ahead, transition to a system of wage determination more responsive to underlying economic conditions will help economic efficiency and employment growth. While a small share of those employed is covered by collective wage agreements, such agreements have had an important influence on formal sector wage developments. Also, labor demand in the formal sector may have been constrained by hikes in real wages for unionized workers. There remains considerable scope to reduce the role of indexation in wage contracts, and the public sector could set the example in this regard.

A01ufig01

Real Net Wage Indexes

(1939=100)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

A01ufig02

Unemployment Rates

(in percent, annual averages)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

III. Report on the Discussions

15. Against the background of a promising start to the program, but with risks remaining, the discussions focused on keeping policies oriented toward raising Turkey’s long-term growth. The authorities expressed concern about the uncertain prospects for near-term recovery, but agreed with the staff that unwavering implementation of the program was required to allow Turkey to break free from its inflationary past, curb real interest rates, and grow strongly over the medium term. With the macroeconomic framework left broadly unchanged, the authorities stressed their continued commitment to meeting the program’s ambitious monetary and fiscal targets. The staff agreed that the improved inflation outlook provided a solid basis for the recent interest rate cuts, and argued that prospects for an early move to inflation targeting had improved. On the fiscal side, the authorities had undertaken some adjustments to policies, but were confident that the 2002 primary surplus target of 6½ percent of GNP would be achieved. They acknowledged that strict adherence to the program’s reform agenda was also needed for sustained higher growth. In this regard, the staff stressed the need to move quickly with the bank recapitalization scheme, to move in parallel with corporate debt restructuring, and to press ahead with public sector reform and improving the business climate.

A. Macroeconomic Framework

16. The authorities and staff concurred that program objectives for 2002 remained feasible, although subject to risks:

  • Despite acknowledged downside risks, it was agreed to maintain the 3 percent growth projection. While the evidence so far remained mixed, international and past Turkish experience suggested that the growth target was realistic, especially in light of the improvements in market confidence, and the resulting reduction in interest rates (Box 2). However, both sides thought that the balance of risks was likely to be on the downside, and that the strength of the recovery over the next several months would be particularly important in determining growth prospects for the year. The authorities expressed concern that the recent appreciation of the Turkish lira could hamper already weak net external demand, but the joint assessment was that competitiveness remained broadly adequate (Box 3).

  • Prospects for meeting the 35 percent inflation target had improved. Noting the favorable February inflation outcome, most private sector representatives met by the mission regarded the 35 percent target as feasible, even though their expectations were for an outcome in the 40-45 percent range. The CBT was committed to meeting the target, which according to the staffs analysis remained realistic (as discussed in Appendix IV). Nevertheless, it was agreed that the difficulty of achieving the year-end target should not be underestimated, given the extent of backward indexation, the higher-than-anticipated oil prices, and the resilience of market expectations.

Turkey: Growth Prospects

Although growth prospects for 2002 remain uncertain, Turkey can still achieve 3 percent real GNP growth in 2002. In 2001 Turkey endured its deepest recession since 1945, weakening the economy severely. Despite this, the experience of other countries and of Turkey itself after earlier financial crises indicates that a relatively rapid turnaround in economic activity is possible (Figure 8). However, counting on such a favorable outcome for Turkey in 2002 would seem premature, given the fragile condition of the economy before the crisis, and the need for continued progress in bank and corporate restructuring. National accounts data for the fourth quarter of last year are, as yet, unavailable, let alone information on 2002. Even so, a modest recovery would still seem feasible, with a pickup in economic activity supported by a gradual recovery in domestic demand.

Private consumption and stock building are expected to be the main sources of growth in 2002. Lower inflation, a more stable exchange rate, gradually decreasing interest rates, continued progress in financial sector restructuring, and improved market confidence should support domestic demand in 2002 by boosting real income and wealth, lowering debt-servicing costs, and enhancing credit availability. As a result, private consumption, while remaining well below the level reached during the 2000 boom, should gradually recover in 2002 (Figure 9 shows the recent history of the components of demand). With inventories depleted, stock building is also expected to stimulate growth in 2002. Inventory adjustment has played a major factor in earlier economic recoveries in Turkey—contributing as much as 5 percentage points to growth in 1995, following the previous crisis-induced recession. However, fixed investment will likely be held back by the high corporate debt burden, while small- and medium-size enterprises will continue to suffer from a lack of working capital and weaker balance sheets, although to a lesser degree than in 2001. Net external demand is unlikely to drive growth, given the disappearance of last year’s over-depreciation, as well as the mixed outlook for partner country demand. Fiscal policy will be largely neutral in 2002, after being strongly contractionary last year.

Turkey: Sources of Growth, 2000-02

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Over the medium term, structural reform and a steady improvement in domestic saving can lead to 5 percent annual real growth. With significant scope for catch-up, both with respect to its own output potential and to output levels in other OECD countries, Turkey can reach this 5 percent target provided that it can break away from the stop-and-go policies of the past, and achieve macroeconomic stability and further progress in structural reform. With the baseline macroeconomic framework conservatively assuming foreign savings that are broadly constant, increased domestic saving will be needed to support the return of investment to pre-crisis levels. While banking sector and structural reform can enhance the prospects for private saving, to ensure this improvement, public saving will need to strengthen, notably through maintenance of the authorities’ strong fiscal adjustment efforts. In addition, continued structural reform will be needed to remove the barriers to growth, and to raise total factor productivity. Staff simulations indicate that raising the private investment rate to 20 percent (2 points higher than the average for 1997-2000), expanding employment by 2 percent annually (slightly faster than population growth), and achieving total factor productivity growth of 2 percent annually (compared with the average for of 0.6 percent for 1980-2000) would yield an annual growth rate in the 5-6 range.

Figure 8.
Figure 8.

Recovery after Crises in Turkey and Selected Emerging Economies 1/

(Seasonally Adjusted; Quarter 0=100)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source: National Statistical Authorities, and Fund staff calculations.1/ list five quarters for Turkey 01 are projections.
Figure 9.
Figure 9.

Turkey: Aggregate Demand, 1995-2001

(seasonally adjusted; in trillions of Turkish liras at 1987 prices)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source: State Institue of Statistics

Turkey’s Competitiveness

The rapid rebound in the Turkish lira in recent months has prompted renewed concerns about Turkey’s external competitiveness. This box assesses Turkey’s export performance, real effective exchange rate (REER) indicators, and wider supply-side competitiveness.

From the 1980s onward overall export performance has been impressive, with the result that Turkey has steadily gained market share in its major partner markets (Figure 10). For most of the 1980s, Turkey’s market share increased, helped by a steadily declining REER, but also reflecting a shift away from an inward-looking trade regime to an export-led growth strategy (Figure 11). Despite a rapid REER appreciation from the late 1980s through 1994, fuelled by large capital inflows after the liberalization of the capital account, export performance in EU markets remained strong through 1999. However, during 2000, while following a quasi-currency board monetary rule, Turkey’s REER appreciated rapidly. This, combined with a rapid rebound in domestic demand, was reflected in a widespread loss of market share.

Moving to recent developments, price-based REER indicators suggest that the competitiveness gains following the February 2001 devaluation have largely been unwound, although the ULC indicator paints a more favorable picture (Figure 12). The staff estimated that, before the February 2001 devaluation, the Turkish lira was overvalued by about 15 percent using the CPI-based REER, the most commonly used competitiveness measure. On this basis, while it appears that the lira is not yet overvalued, further real appreciation could justify competitiveness concerns. At the same time, however, the considerable improvement in cost competitiveness should act as a counterbalance to any further real, price-based appreciation.

Econometric studies undertaken by both the staff and the authorities support these findings:

  • Updating the fundamental balances approach used at the time of the last SBA, the staff estimates that the real exchange rate could appreciate by about 15 percent on average in 2002—broadly in line with program assumptions—while remaining consistent with long-run solvency (see SM/99/294 for a description of this methodology). Using previous baseline assumptions for growth, interest rates, transfers, and real exchange rate movements, it is found that stabilizing the current net debt to GDP ratio is consistent with a current account deficit of some 2¾ percent of GDP. Estimates of short-run export and import REER elasticities indicate that, as the domestic output gap is closed fully—not projected to happen within a single year—a real appreciation of about 15 percent over the 2001 level would be consistent with a current account balance that stabilized the net debt/GDP ratio in Turkey over the medium term.

  • The Treasury has found, using econometric estimates of the equilibrium real exchange rate, that the REER was significantly overvalued prior to the February 2001 devaluation and that the lira has now returned to equilibrium levels.

  • The CBT has undertaken a disaggregated analysis of competitiveness across a variety of Turkish industries, and has found that the positive impact of exchange rate devaluations can be quite short lived, and that structural improvements are needed to boost competitiveness over the medium term.

Price-based real exchange rate movements must ultimately be underpinned by supply-side reforms if competitiveness in the wider sense is to be achieved. The new three-year SBA recognizes this, and aims to promote Turkey’s competitiveness and growth by bolstering reforms in such diverse areas as banking, fiscal policy, private sector development, and foreign direct investment. The World Competitiveness Report attempts to summarize supply-side competitiveness in a single rating. In 2001, Turkey was ranked 33 out of 75 countries, with positive factors such as labor market flexibility and free capital markets offset by problems with red tape and macroeconomic instability.

Figure 10.
Figure 10.

Turkey: Export Market Shares in Selected Partner Imports, 1970-2000

(in percent)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source: IMF, Direction of Trade Statistics.
Figure 11.
Figure 11.

Turkey: Export Performance and Real Effective Exchange Rate, 1980-2001

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source; DMF, Information Notice System; and data from the Turkish authorities.
Figure 12.
Figure 12.

Turkey: Competitiveness Indicators, 1990-2002

(1990=100)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Sources: Data from the Turkish authorities; and Fund staff estimates.

  • As for the balance of payments, the current account projections were left broadly unchanged, with the unanticipated real exchange rate appreciation and higher oil prices offsetting the impact of the better-than-projected 2001 outturn (Table 4 and Figure 13). On the capital account side, it was agreed to retain fairly conservative assumptions: projected Eurobond drawings in 2002 were increased by US$½ billion to reflect Turkey’s improved capital market access, while projected declines in interbank credit lines have been lowered by US$1 billion to reflect the improved rollovers in recent months. Gross reserves were, as a result, set to increase by US$4½ billion in 2002, US$1¼billion higher than predicted earlier.

Table 4.

Turkey: Balance of Payments, 1998-2005

(In billions of U.S. dollars)

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Sources; Data provided by the Turkish authorities; and IMF staff estimates and projections.

The decline in other receipts between 1998 and 2000 partly reflects a methodological change in the compilation of this item.

Including privatization receipts.

Nonbank external debt less the NFA of the banking system.

Interest plus medium- and long-term debt repayments as percent of current account receipts (excluding official transfers).

Figure 13.
Figure 13.

Turkey: Balance of Payments Indicators, 1995-2001

(in millions of U.S. dollars)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Sources: State Institute of Statistics; and IMF, International Financial Statistics.

17. The staff and authorities discussed a baseline medium-term scenario illustrating how strong implementation of the government’s economic program could deliver sustainable growth of about 5 percent, as well as a reduction in inflation to single digits (Table 5). With the framework deliberately centered around a conservative current account projection, the key to achieving the medium-term targets would be a strong pick-up in national saving, which would finance higher private investment, while allowing for a reduction in net external debt from its current 53 percent of GNP to 33 percent by 2006. This would also strengthen Turkey’s capacity to repay the Fund (see paragraph 19 below). Both sides agreed that fiscal discipline and continued reform of the financial and corporate sectors were required to support private saving and factor accumulation. The staff also stressed that factor accumulation had to be complemented by stronger productivity growth, which would require further structural reforms to modernize the economy and attract foreign direct investment. The authorities agreed on the importance of such a strategy for achieving debt sustainability, and for improving the prospects for EU accession. Under the baseline scenario, net public debt would decline steadily from last year’s 93 percent of GNP to below 60 percent by 2006.

Table 5.

Turkey: Medium-Term Macroeconornic Framework, 1997-2006

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Sources: Turkish authorities; and IMF staff projections.

Defined as the sum of quarterly GNP in the last two quarters of the year and in the first two quarters of the following year.

18. Strong policy implementation is essential for such a favorable outcome (Figure 14). The staff presented an alternative scenario (Scenario 1 in the figure) where reform fatigue set in, and policy implementation weakened. The resulting relaxation in fiscal policy and reduction in public saving, together with delays in structural reform, would raise real interest rates, inflation, and ultimately hurt output growth. External and domestic vulnerability indicators would weaken significantly. The staff and authorities agreed that such a scenario is highly unlikely to materialize under current conditions, provided program implementation remained strong. Strong implementation would also stand a fair chance of insulating Turkey from moderate external shocks. In such circumstances, temporary reduced access to international capital markets (Scenario 2) would only result in a slight delay to non-inflationary, sustainable growth in the medium term, without compromising the gradual reduction of the public debt ratio projected under the baseline scenario.

Figure 14.
Figure 14.

Turkey: Medium-Term Scenarios, 1997-2006

(in percent; unless otherwise stated)

Citation: IMF Staff Country Reports 2002, 137; 10.5089/9781451838107.002.A001

Source: Data from the Turkish authorities; and Fund staff projections.

19. Although Fund exposure is very high, the macroeconomic framework indicates that Turkey would be in a position to discharge its obligations to the Fund in a timely manner (Tables 6 and 7). Turkey’s unblemished record of payments to the Fund, the authorities’ continued commitment to its intensified reform program, and the increasing evidence of better access to the international capital markets provide assurances in this respect. Turkey’s obligations to the Fund will, however, continue to be substantial over the medium term, with payments to the Fund projected to peak at US$10 billion, or 15 percent of exports of goods and nonfactor services in 2006. Close monitoring of Turkey’s capacity to repay the Fund will therefore continue, and corrective measures will be called for if projections turn out less favorable than expected.

Table 6.

Turkey: Indicators of Fund Credit, 2000-2006

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Sources: Data provided by the Turkish authorities; and Fund staff estimates and projections.
Table 7.

Turkey: External Financing Requirements and Sources, 1997-2005

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Sources: Data provided by the Turkish authorities; and Fund staff estimates and projections.

General government and Central Bank of Turkey.

Errors and omissions.