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.
1. This statement provides an update on economic and policy developments since the staff report (EBS/02/61, 4/4/02) was issued. The new information does not change the thrust of the staff appraisal.
2. The authorities have now met in substance all the outstanding structural conditions relevant for the first review:
They have fully met the prior action regarding the Law on Public Debt Management The Law was passed by parliament on March 28 and signed by the President on April 8. Two supporting communiqués—one on government debt guarantees and the other on nonguaranteed foreign borrowing by state entities outside the central government—were issued on April 12. While this was within five days of the scheduled Board meeting, the World Bank and Fund staffs did review the regulations, and found them to be to their satisfaction.
Satisfactory progress has been made toward completing the prior action regarding the identification of redundancies in state economic enterprises (SEEs). As noted in the staff report, all open, unfilled, redundant positions in SEEs have been eliminated. Based on an aggregate study the authorities have tentatively identified the number of remaining redundant workers in SEEs as 40,000-60,000. However, these estimates need further refinement. The authorities have committed themselves to producing final estimates by end-May, using company-specific information. Moreover, the authorities have reaffirmed their commitment to reduce the number of redundant workers by one third by end-June and two thirds by end-October 2002, and completely by end-June 2003. On this basis, the staff views progress in meeting this prior action as satisfactory.
All six structural benchmarks relevant for the first review have been met. Three of them had been observed by the time the staff report was issued. The three remaining benchmarks have since been met, as follows. On April 10, the BRSA appointed the third-party auditing firms that are needed as part of the banking restructuring plan. On April 8, the government appointed the board of the independent procurement agency. And by April 12 all SEEs had in place budgets in line with mandated cost reductions.
3. Market sentiment has remained quite positive, and interest rates have been reduced further on the heels of another low inflation outcome in March. Between end-March and April 12, the Turkish lira appreciated by a further 4 percent relative to the U.S. dollar (to a shade below TL 1.3 million to the U.S. dollar), the interest rate on the benchmark treasury bill (maturing in February 2003) declined by 5 points to 57 percent, and stock prices increased by 6 percent. The favorable March inflation outcome (monthly CPI increase of 1.2 percent) helped to reduce inflation expectations further (by about 4 points, to 39 percent for end-2002 in the survey conducted by the CBT in early April) and prompted the CBT to reduce its overnight rate by 300 basis points on April 8, to 66 percent.
4. The staff supports the authorities’ request to waive the applicability of the end-March performance criterion on the cumulative primary balance of the consolidated government sector. The relevant full information is not yet available. Partial data for the central government suggest that the performance criterion is likely to have been met.