Turkey
Second Review Under the Stand-By Arrangement-Staff Report; Staff Statement; News Brief on the Executive Board Discussion; and Statement by the Authorities of Turkey

This paper evaluates Turkey’s Second Review Under the Stand-By Arrangement (SBA). Since the completion of the Article IV Consultation and the first review in April 2002, macroeconomic policies have remained in line with the program. All quantitative performance criteria for end-March and end-April have been met. In light of continued strong program implementation, the IMF staff recommends the completion of the second review. Strict implementation has already produced tangible economic gains, and the authorities are determined to stay the course.

Abstract

This paper evaluates Turkey’s Second Review Under the Stand-By Arrangement (SBA). Since the completion of the Article IV Consultation and the first review in April 2002, macroeconomic policies have remained in line with the program. All quantitative performance criteria for end-March and end-April have been met. In light of continued strong program implementation, the IMF staff recommends the completion of the second review. Strict implementation has already produced tangible economic gains, and the authorities are determined to stay the course.

I. Introduction

1. In the attached letter, the authorities review developments and policies under the program, and request the completion of the second 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, of which SDR 8.2 billion has been purchased so far (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).

II. Performance under the Program

2. Since the completion of the Article IV consultation and the first review in April 2002, macroeconomic policies have remained in line with the program. All quantitative performance criteria for end-March and end-April have been met (Annex A of the attached Letter of Intent). The Central Bank of Turkey (CBT) has kept monetary aggregates well within program limits, and has secured a higher-than-programmed reserve position (Figures 13). Fiscal outturns also remain on track, although overperformance has diminished since early this year. The end-March performance criterion on the consolidated government sector primary surplus was met by a relatively small margin, as overperformance by the central government of 0.4 percent of annual GNP was almost completely offset by a much smaller than expected primary surplus in state economic enterprises (SEEs) due to higher energy costs and delays in raising prices. The end-May performance criterion is also expected to have been met: the non-SEE consolidated government sector (for which provisional data are available) has produced a primary surplus slightly exceeding that targeted for the whole sector, and indications are that SEEs (for which full data will be available in mid-July) will show a small primary surplus in April-May.

Figure 1.
Figure 1.

Turkey: Monetary Program, 2001-02

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.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/ Data discontinuity at February 6, 2002 reflects the revised definition of NTR in the new program, which now includes the Treasury’s NTR position, and which is calculated at new program cross exchange rates.
Figure 2.
Figure 2.

Turkey: Monetary Developments, 1998-2002

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Sources: Central Bank of Turkey; and State Institute of Statistics.1/ Turkish residents’ TL deposit.
Figure 3.
Figure 3.

Turkey: Balance of Payments Indicators, 1995-2002

(in billions of U.S. dollars)

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

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

3. The program’s extensive structural conditionality for this review has been largely met (Table 1). All three end-April benchmarks (on preparing an external audit of the Savings Deposit and Insurance Fund (SDIF), passing indirect tax legislation, and establishing a steering group and subcommittee for public sector reform) were observed, albeit with some delay. The end-May benchmark on submitting a draft Foreign Direct Investment Law to parliament was also observed, with a two-week delay. As regards prior actions, in mid-June parliament passed the required amendments to the Public Procurement Law, and the Bank Regulation and Supervision Agency (BRSA) sent letters to banks after having completed its capital adequacy evaluations. Finally, although the privatization plan for Türk Telekom has not yet been adopted, substantial progress has been made toward meeting this prior action. The board of the company has approved a World-Bank endorsed corporatization plan, which envisages splitting the company into subsidiaries under a holding company. As this plan requires a more complex privatization strategy than originally envisaged, including amendments to the Telecommunications Law, adoption of the privatization plan will not be possible until this fall. However, the authorities have taken immediate action, including approving a road map of events leading to the privatization plan and initiating a new valuation of the company, to make the revised timetable feasible.

Table 1.

Turkey: Prior Actions and Benchmarks Relevant for the Second Review

article image

January refers to the January 18, 2002 Letter of Intent for approval of the Stand-by Arrangement; April refers to the updated April 3, 2002 Letter of Intent for the First Review.

4. More generally, with the exception of privatization, the authorities are making good progress with their ambitious structural reform program (Annex B of the Letter of Intent):

  • Although the banking system remains under stress, reforms have continued. The private bank recapitalization exercise has faced only minor delays, and is expected to be completed by end-August. State bank performance has improved markedly, and operational restructuring is well advanced. The SDIF has continued to make progress in resolving the remaining four banks under its control.

  • The authorities have also made progress in the related area of corporate debt restructuring. In early June, the Istanbul Approach started to become operational, with financial institutions signing a Framework Agreement for debt workouts. The BRSA has followed this up by issuing supporting regulations for the provisioning of restructured loans, in line with international best practice.

  • Further advances have been made on public sector reform. Beyond the above-mentioned advances in public procurement and indirect taxation, the authorities have compiled final estimates of redundancies (some 46,000 identified positions) in SEEs.

  • In contrast, privatization continues to disappoint. The second public offering of POA§ (the petroleum distribution company) has been the only significant actual sale so far this year, and the third public offering of TUPRA§ (oil refinery) scheduled for the second quarter has been delayed. Preparations for the privatization of Türk Telekom, electricity assets, and gas companies have also been delayed.

5. With generally strong policy implementation, the program delivered encouraging results up until end-April (Figures 46). Benchmark bill rates fell well below (conservative) program projections, and the maturity of government debt was extended. Turkey also tapped international markets successfully, with total issues of US$2.2 billion so far this year, compared with the program assumption of US$3 billion for the year. With low inflation outturns through April, inflation expectations fell markedly—to 37 percent forend-2002—allowing the CBT to cut its overnight rate in four steps to 62 percent compounded at end-April, from 80 percent in mid-February. Meanwhile, the Turkish lira was broadly stable against the U.S. dollar. Finally, on the growth side, various indicators, including industrial production, capacity utilization, business confidence, VAT receipts, and export growth have shown marked improvement in recent months, suggesting the beginning of an economic recovery.

Figure 4.
Figure 4.

Turkey: Market Developments, 2001-02

(in percent; unless otherwise indicated)

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Source: Data from the Turkish authorities.
Figure 5.
Figure 5.

Turkey: Inflation, 1996-2002

(in percent)

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Source: Data provided by the Turkish authorities.1/ In April 2001, the TL/US dollar exchange rate depreciated by 29.5%.
Figure 6.
Figure 6.

Turkey: Output and Demand, 1996-2002

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Source: Data provided by the Turkish authorities.

6. Amidst increased political uncertainty, financial markets have since fallen back, although this has not yet affected activity or inflation. Since early May, concerns about the Prime Minister’s health and the stability of the governing coalition have caused nervousness in financial markets. Between end-April and mid-June, benchmark bill rates rose by 18 percentage points, stock prices fell by 20 percent, and the Turkish lira weakened by 15 percent against the U.S. dollar. Also, after falling through April, the CBT’s overnight borrowing position increased in May as banks increased their preference for liquidity. However, financial market weaknesses have yet to be reflected in indicators for the rest of the economy. CPI inflation in May fell to 0.6 percent month on month, helping end-year inflation expectations to fall to slightly below 35 percent. Recently released industrial production figures for April show a 14 percent increase year on year—the second successive month of strong performance.

7. While the new program has helped strengthen Turkey’s resilience to economic shocks, key vulnerabilities remain. Strict adherence to the program has helped lower market rollover and debt sustainability concerns, and has contributed to a progressive strengthening of the financial sector and general improvement in external vulnerability indicators (Appendix III and Table 2). At the same time, the flexible exchange rate system has garnered greater acceptance and credibility in the eyes of market participants, acting as a useful shock absorber, while the CBT’s standing has continued to improve on the back of the fall in inflation. Better-than-programmed developments also helped the government build up by end-April a cushion of TL 5¼ quadrillion in deposits at the CBT (although this has fallen to below TL 3 quadrillion by mid-June), while net international reserves have remained more than US$2 billion above program over the past two months. Nevertheless, the domestic political environment is uncertain, regional instability is a threat, and the program will continue to test the coalition, especially if the economic recovery stalls. And, despite recent improvements, the financial system remains weak and public debt high, allowing policymakers little leeway.

Table 2.

Turkey: Indicators of External Vulnerability, 1999–2004 1/

(In percent, unless otherwise noted)

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

For 2002-05, program projections.

As of end-May 2002, reserves stood at US$22.4 billion (measured at program exchange rates).

By residual maturity.

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

For 2002 as of May 2002.

As of September 2001; November 2001 for nonperforming loans.

Deflated by the CPI.

For 2002 as of June 18, 2002.

III. Report on the Discussions

8. After a successful start to the program, but with vulnerabilities remaining and against a backdrop of renewed financial market volatility, discussions focused on the need to continue with full implementation of the program to sustain its success. Both sides agreed that the program’s good start had helped strengthen the economy’s resilience to shocks, but noted that recent political uncertainty was having a sizeable impact on financial markets which could later hurt the economy. The staff emphasized that in light of remaining vulnerabilities it was important to avoid complacency, a key failure of past stabilization attempts. The authorities agreed, and reaffirmed their commitment to the program’s ambitious macroeconomic and structural objectives. The CBT stressed that it would continue to pursue prudent monetary policies, in preparation for the early introduction of formal inflation targeting, and was confident that this year’s inflation target would be met. The authorities also confirmed that the public sector primary surplus target of 6½ percent of GNP remained a central objective both for this year and next, as this would address a key vulnerability by helping to consolidate Turkey’s improved debt sustainability prospects. The authorities also underscored the need to bring the bank recapitalization scheme to an early conclusion and to facilitate corporate debt restructuring, while also promising to press ahead with public sector reforms and privatization.

A. Macroeconomic Framework

9. The authorities and staff agreed that, despite recent financial market uncertainties, it would be premature to change the main macroeconomic targets (¶2 and Table 3):1

  • With signs of a recovery increasing, the projection of 3 percent GNP growth for 2002 remained feasible. While the negative carryover from worse-than-expected fourth-quarter national accounts last year made it more difficult to meet this year’s target, the improvement in both real sector indicators and business confidence strongly suggested that a moderate recovery had started in the first quarter, and looked set to continue. If the slowdown in real credit growth were to persist, this could eventually pose a threat to the sustainability of the recovery. However, both international and historical experience suggested that credit growth should not pose a constraint in the early stages of recovery (Box 1). Thus the staff agreed with the authorities that the 3 percent growth target for 2002 was attainable.2 However, if sustained, the impact of the recent increase in real interest rates would later need to be considered.

  • Inflation was on track to meet the 35 percent target. Strict policy implementation, a stronger currency, and a steady decline in monthly inflation have enhanced the credibility of the disinflation effort, leading to a marked decline in inflation expectations. While increases in public sector prices and faster-than-anticipated currency depreciation remained risks, the authorities expected these to be offset by a larger-than-usual fall in agricultural prices over the summer, owing to a projected good harvest. There was even the prospect that inflation would end the year considerably below target, although this now seems unlikely in light of the recent depreciation. In any case, it was agreed that continued strong policy implementation would be key to ensuring that the end-year inflation target is met.

Table 3.

Turkey: Selected Indicators, 1999–2004

article image
Sources: Data provided by Turkish authorities; and Fund 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 base money in percent of GNP, where base money is defined as currency issued plus reserve requirements.

Understanding Credit Developments in Turkey

Turkey’s recession has been marked by a sharp reduction in real private credit, raising the issue of whether credit growth, and the health of the banking system, are preconditions for renewed economic growth.

Even after correcting for measurement issues which understate the true stock of credit, the 2001 recession was still marked by a substantial decline in credit (Figure 7). Published credit aggregates exclude (i) nonperforming loans (which banks put into a “legal proceedings” account); (ii) loans transferred from intervened banks to the SDIF’s collection department; and (iii) interest due (but not paid) on loans improperly classified as performing. Adding back nonperforming and transferred loans (there is insufficient data on accrued interest), the stock of real credit still fell markedly in 2001: 16 percent, as compared to the reported 25 percent.

Both supply and demand factors have contributed to this sharp reduction in credit:

  • Banks’ lending capacity was limited by reduced funding. Although deposits remained on average almost constant in real terms, syndicated loans from abroad were cut by almost half (about USS8 billion) between late 2000 and end- 2001.

  • Banks have shown a reduced willingness to lend, in part because the recession and high real interest rates have reduced the number of creditworthy borrowers. While the financial sector’s balance sheet has contracted by 3 percent in real terms, at 16 percent the drop in real credit to the private sector was much steeper.

  • After suffering two financial crises in the space of three months, bank profitability and capital have been seriously weakened, reducing banks’ ability to lend and to undertake risk. Depositors have responded to the increased uncertainty by shortening maturities. In response, banks have increased their preference for liquid assets, as evidenced by the large stock of claims against the CBT, and reduced their appetite for private loans.

  • The recession and the increase in real interest rates have reduced the demand for credit. Real lending rates (measured using 12-month ahead inflation) increased to around 30 percent in 2001, compared to less than 10 percent in 2000. Consistent with this, survey evidence from the Chambers of Commerce (TOBB) showed that 87 percent of small firms and 66 percent of large firms did not expect to borrow in 2002.

  • Corporate financial distress has worsened. Istanbul stock exchange data show that the number of companies at medium or high risk of default increased in the last two years. As a result, unless corporates can be made creditworthy (including through debt restructuring), firms will be forced to finance themselves through retained earnings.

While both demand and supply factors play a role, experience from other emerging market countries generally points to a link between economic growth and restoration of credit flows. Among the Asian crisis countries, Korea’s recovery has been strongest, and has been associated with an increase in real credit. In contrast, recovery in Thailand and Indonesia has been much slower, as too has been real credit growth, although part of this may reflect an adjustment to (lower) equilibrium levels of credit. For many Latin American countries, slower growth in 1999–2000 was associated with declines in real credit growth.1 The main exception is Mexico, where economic growth has accelerated since 1995 despite a sharp fall in real credit. However, much of Mexico’s recovery has been in the traded sector, where firms can borrow overseas, using dollar receivables as collateral. In contrast, Mexico’s nontradable sector has suffered a credit crunch and recovery has been slow.2

For Turkey, short-run growth should not run into financing constraints, but sustained recovery will likely depend on restoration of credit growth. Unlike in Asia, there is little evidence in Turkey of excessive bank finance: financial intermediation to the private sector is limited, with low private credit to GDP ratios due to crowding out by the government. Historical evidence and Granger-causality tests suggest that credit growth is more volatile than economic growth, and has typically followed economic recovery—that is, while the first stages of recovery can proceed without credit growth, sustained recovery is usually associated with more credit (Figure 8). However, unlike Mexico, only the largest Turkish firms have access to international capital markets, and even then typically require guarantees from domestic banks. Restoring credit flows will require successful bank recapitalization, lower financial intermediation costs, and—for there to be creditworthy borrowers—corporate debt restructuring.

1Barajas and Steiner, “Credit Stagnation in Latin America,” IMF Working Paper 02/53.2Krueger and Tornell, “The Role of Bank Restructuring in Recovering From Crises: Mexico 1995–98,” NBER WP No. 7042.
Figure 7.
Figure 7.

Turkey: Credit Developments, 1999-2002

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Source: Data from the Turkish authorities.
Figure 8.
Figure 8.

Turkey: Real GDP and Real Credit, 1987-2001

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Source: State Institute of Statistics.
  • Balance of payments projections were also left unchanged from the first review (Table 4). During the first review, an improved capital account outlook allowed gross reserve estimates for 2002 to be increased by more than US$ 1 billion relative to original program projections. This improved balance of payments outlook remains in place. The impact of higher oil prices is expected to be largely offset by stronger export growth, while a better services balance—due to brighter tourism prospects and lower projected interest payments—should outweigh lower-than-envisaged worker remittances. And, although individual capital account item projections have changed—improved bank flows, and lower net private sector flows and net errors—the overall balance is close to previous projections.

  • Although the CPI-based real effective exchange rate has, until recently, continued to appreciate, the joint assessment was that competitiveness remained broadly adequate (Figures 9 and Figure 10). Consistent with the findings of recent CBT surveys, exporter representatives indicated that the current level of the lira did not pose a serious threat to Turkey’s export performance, but that renewed currency volatility would be problematic. Meanwhile, labor costs continue to be contained, with unit labor costs in U.S. dollars still well below their pre-crisis peak.

Table 4.

Turkey: Balance of Payments, 1998–2005

(In billions of U.S. dollars)

article image
article image
Sources: Data provided by the Turkish authorities; and Fund 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 9.
Figure 9.

Turkey: Competitiveness Indicators, 1992-2002 1/

(indices, 1990=100)

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Sources: Data from the Turkish authorities; and Fund staff estimates.1/ As of April 2002
Figure 10.
Figure 10.

Turkey: CBT Tendency Survey Findings, Export Prospects for the Second Quarter of 2002

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Source: Central Bank of Turkey.

10. With interest rates and exchange rates still within program projections, this year’s decline in the public debt ratio should be somewhat larger than programmed (Box 2). As in the original program projections made at the beginning of the year, there should be a sharp fall in the debt ratio in 2002, as higher prices from the nominal depreciation in 2001 (which instantaneously increased the Turkish lira value of foreign currency debt) result in higher full-year nominal GNP only in 2002. On top of this, even taking into account recent setbacks, financial market developments in 2002 have been more favorable than anticipated, particularly for interest rates and the exchange rate. These have reduced projected interest costs and lowered the Turkish lira value of the foreign exchange linked debt stock. In light of these developments, and despite lower than expected privatization proceeds and cautious assumptions for interest rates on Turkish lira debt, the debt-to-GNP ratio is projected to fall to 77 percent by end-2002, compared to 81 percent in the original program. Over the medium term, Turkey’s debt ratio is estimated to decline markedly, provided real interest rates decline moderately and the primary surplus remains strong. However, although debt sustainability assumptions appear robust to individual shocks—such as permanently lower growth, higher interest rates, and lower primary surpluses—a combination of such factors could produce an unsustainable path for public debt over the medium term. Moreover, the large portion of foreign exchange linked debt increases Turkey’s vulnerability to real exchange rate changes, while making the debt dynamics less sensitive to domestic interest rate shocks.

11. In light of remaining vulnerabilities, the discussions covered key program risks and possible responses. Recent financial market nervousness served as a reminder of the program’s vulnerability to domestic shocks. A major external shock, such as a large military campaign in the region, would also test the program. The latter would most likely entail capital outflows, lower tourism revenues, higher interest rates, and renewed rollover concerns, together with sharply higher oil prices. While developments in the first part of the year had strengthened budget financing prospects for 2003, the outlook remained vulnerable to a weakening of market confidence. This could result in a sustained increase in interest rates and a shortening of maturities for new borrowing, triggering renewed rollover difficulties. Both sides agreed, however, that the design of the program, and in particular the floating exchange rate and the strengthening of the banking system, left the economy less vulnerable than before. Continued strong policy performance and use of any favorable market opportunities to build up cushions for international reserves and government financing would further increase the economy’s resilience to future shocks. Speedy and clear resolution of the recent political uncertainty could make a crucial contribution to restoring financial market confidence.

Turkey’s Public Debt Dynamics

By end-2001, net debt of the overall public sector reached an estimated 93 percent of GNP, up from 58 percent of GNP at end-2000. As discussed in previous staff reports (for example, Box 2 of the January staff report for the SBA, EBS/02/8, 1/18/02), the increase in the debt stock mainly reflects the one-off recapitalization of state and SDJJ? banks and the impact of the devaluation on Turkey’s foreign exchange linked debt. In addition, last year’s real output decline, through its effect on the denominator alone, increased the debt-to-GNP ratio by over 7 percentage points.

While many analysts focus on central government debt, assessing Turkey’s debt dynamics requires a broader concept of net debt incorporating the assets and liabilities of the rest of the public sector (Table 5). State enterprises, extrabudgetary funds, and local governments have in the past received large amounts of external project financing with Treasury’s guarantee; these loans now account for a significant portion of the central government’s external debt service. At the same time, public sector indebtedness would be overstated if Treasury’s debt held within the public sector were not taken into account. Beginning in 2000, the Unemployment Insurance Fund (UDF) has channeled its primary surpluses mainly into treasury bills and reinvested the interest income. The UIF’s assets are expected to grow further over the next several years. More significantly, the CBT’s net domestic claims on the Treasury amounted to nearly 17 percent of GNP at end-2001. Interest from those claims contributes to CBT profits which are transferred to the Treasury annually. Consolidating the assets of the CBT and UJF with the debts of the central government provides a more complete picture of net public sector debt.

The decline in the public debt ratio in 2002 and over the medium term is now expected to be even larger than programmed. As under the original program, a sharp fall in the debt ratio is expected in 2002, largely reflecting the one-time effect of the nominal depreciation in 2001.1 However, favorable financial market developments in 2002, particularly for interest rates and the exchange rate, have reduced projected interest costs and lowered the Turkish lira value of the foreign exchange linked debt stock, improving debt prospects for end-2002 and beyond (Table 6). Despite cautious assumptions for real interest rates on Turkish lira debt for the remainder of the year, the debt-to-GNP ratio is projected to fall to 77 percent, compared to 81 percent in the original program. Continued strong public sector surpluses and moderate declines in real interest rates are also expected to help lower the debt-to-GNP ratio over the medium term, to the low 60s (Table 7).

While debt sustainability (that is, a declining stock of debt relative to GNP) is robust to a range of macroeconomic disturbances, a combination of several shocks could jeopardize the medium-term debt outlook. Annual growth at 1½ percentage points below the baseline would still result in a stabilizing debt dynamic, albeit with an increase in the debt stock relative to the baseline of about 5 percent of GNP by 2006 (Figure 11). Likewise, higher real interest rates of 5 percentage points above the baseline raise the debt stock by 7 percent of GNP by 2006, as would a primary surplus of 5 percent of GNP (instead of the program’s 6½ percent) over the medium term. A real exchange rate 10 percent weaker than the baseline would increase the debt stock in 2002 by 5 percentage points, and by a further 2 percentage points above the baseline by 2006 if the weakness in the real exchange rate persists. But none of these shocks in and of itself changes the dynamic toward sustainability. However, in a worse case scenario, a combination of poor fiscal performance, low growth, high interest rates, and a weaker exchange rate would produce an unsustainable path for public debt over the medium term.

1As highlighted in previous staff reports, conventional debt-to-GNP ratios overstate the rise in debt when inflation increases following a devaluation (as in 2001), and the fall when inflation declines. One simple way to correct for this bias is to use a measure of GNP that is centered around the end of the year. Indeed, using centered GNP, the debt ratio increases by less in 2001 (from 52 percent to 76 percent), and falls by less in 2002 (from 76 percent to 67 percent) than when using annual GNP.
Table 5.

Turkey: Composition of Public Sector Net Debt

article image

Debt issued for budget financing. The end-2001 figure values the fx-indexed bonds issued as part of the June 2001 debt swap at the end-2001 exchange rate, resulting in a higher figure than reported by Treasury which values these bonds at the lower issue.

Including debt issued for bank recapitalization. The end-2000 total includes unsecuritized dutylosses of state banks.

Contingency for possible additional public sector support for bank recapitalization.

Central government deposits at the CBT, and in commercial banks as reported in the monetary survey.

Defined as net claims on banks minus free TL and FX reserves, minus liabilities (mostly deposits) to other public sector institutions.

Table 6.

Turkey: Public Sector Borrowing and Net Debt in 2002

article image

Includes differences in cash and accrual accounting between the CBT and the rest of the public sector.

Table 7.

Turkey: Medium-Term Public Debt Dynamics, 2001–06

(In percent of GNP)

article image

Adjusts for the impact of inflation on the debt stock. Since interest payments are measured on a cash basis, the operational balance will adjust to changes in interest rates and the underlying fiscal position with a lag.

Ex ante real interest rate using 12-month ahead program inflation.

Figure 11.
Figure 11.

Turkey: Public Debt Sensitivity Analysis, 2001-06

Citation: IMF Staff Country Reports 2002, 229; 10.5089/9781451838121.002.A001

Source: Data from the Turkish authorities.

12. Although Fund exposure remains very high, the macroeconomic framework indicates that Turkey should be in a position to discharge its obligations to the Fund in a timely manner (Tables 8 and Table 9). Turkey’s unblemished record of payments to the Fund, the authorities’ commitment to their reform program, continued favorable access to international capital markets, and better-than-projected reserves buildup all 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 about USS9J4 billion, or 14 percent of exports of goods and nonfactor services, in 2006. Turkey’s capacity to repay the Fund will therefore need to be monitored closely, and corrective measures will be called for if projections turn out less favorable than expected.

Table 8.

Turkey: Indicators of Fund Credit, 2000–06

article image
Table 9.

Turkey: External Financing Requirements and Sources, 1998–2006

(In billions of U.S. dollars)

article image

General government and Central Bank of Turkey.

Errors and omissions.

B. Fiscal Policy and Supporting Reforms

13. Owing to additional measures to offset weaknesses in SEEs, the authorities remain on track to meet the 2002 public sector primary surplus target of 6.5 percent of GNP (¶5 and Table 10):

  • While commending the authorities on continued strong fiscal outturns, the staff noted a number of concerns. The staff welcomed the authorities’ resolve to stick to fiscal targets, and noted that their ability in the past to take decisive measures to correct emerging deviations had played a large role in helping them to meet targets. The staff also noted that the authorities would need to draw on their resolve once more, since the buffer provided by central government overperformance could soon be more than offset by underperformance at SEEs, where margins had been squeezed by rising energy prices and delays in raising administered prices. The fiscal program had been further pressured by unforeseen reversals and shortcomings in expenditure measures: a generic drug program and the elimination of electricity discounts had been delayed, regional directorate closures did not yield significant savings, and investment spending in SSK (a social security fund) could not be cut as planned. Finally, overruns were projected in the civil service pension fund, and the authorities had decided to increase foreign-financed investment spending. While for the full year revenue overperformance would largely offset the impact of expenditure pressures, SEE underperformance—if not addressed—would result in a gap of about ½ percent of GNP relative to the 2002 public sector primary balance target.

  • The authorities agreed with this assessment, and decided to take further measures to eliminate the projected fiscal shortfall. They would institute an upfront catch-up of administered prices in May-July (with an estimated first-round impact on the CPI of 1 ½-2 percent), and follow with a renewal of the neutral price change strategy for SEEs (setting prices to closely track WPI inflation). They would also scale back some of the intended increase in investment spending. Moreover, to improve the underlying performance of SEEs, the authorities indicated their intention to revise the law governing SEEs to improve the independence of their Boards of Directors, and to clarify their financial relations with the government. The authorities also thought it useful to review the coverage of the fiscal performance criteria, once more data on SEE performance became available later in the year. The staff welcomed these initiatives, although their benefits would be felt only from next year on.

Table 10.

Turkey: Public Sector Primary Balances, 2000–02

article image
Sources: Turkish authorities; and Fund staff estimates.

Excluding privatization proceeds, transfers from the CBT, and interest receipts.

Excluding recapitalization of state banks.

Excluding severance payments for retirees amounting to TL 201 trillion (0.1 percent of GNP).

Added to the public sector balance for 2002. Not included in the 2001 primary surplus calculation.

World Bank definition, including education, health and social security.