Abstract
Turkey showed strong implementation of macroeconomic policies and economic reforms under the Stand-By Arrangement (SBA). Executive Directors commended the disinflation, debt reduction, and sustained economic growth, and stressed the need to safeguard macroeconomic stability and accelerate structural reforms. They welcomed the European Union-related legislation, and commended The Central Bank of Turkey for its monetary policy and the Banking Regulation and Supervision Agency in its supervision of banks. They agreed that Turkey has successfully completed the fifth review under the SBA, and granted waiver.
This supplement provides an update on developments, and on the implementation of the prior actions since the circulation of the staff report. The staff appraisal remains unchanged.
Economic and Market Developments
1. Market expectations are converging toward the program’s 2003 inflation and growth targets. Two surveys released in the past week—the CBT’s bi-monthly survey of domestic analysts and the consensus forecast of domestic and foreign analysts—show that market expectations about the 2003 outturn are converging towards program targets. While the market still expects end-2003 inflation to exceed the 20 percent target, expected inflation has fallen steadily since April. In the same vein, growth forecasts have risen over the last several months, with the CBT’s survey now showing expected growth at the program projection of 5 percent. Strong growth is supported by the recently released figure for June capacity utilization, which exceeded market expectations and marks the highest level since October 2002.
Capacity Utilization
(in percent)
Citation: IMF Staff Country Reports 2003, 324; 10.5089/9781451838046.002.A003
Capacity Utilization
(in percent)
Citation: IMF Staff Country Reports 2003, 324; 10.5089/9781451838046.002.A003
Capacity Utilization
(in percent)
Citation: IMF Staff Country Reports 2003, 324; 10.5089/9781451838046.002.A003
Macroeconomic Projections for 2003
Macroeconomic Projections for 2003
| July 2003 | |||
|---|---|---|---|
| Staff baseline | CBT survey | Consensus forecast | |
| Growth | 5.0 | 5.0 | 4.6 |
| Inflation (end-year CPI) | 20.0 | 23.7 | 23.0 |
| Current account deficit (US$ billion) | 7.5 | 6.5 | 6.3 |
Macroeconomic Projections for 2003
| July 2003 | |||
|---|---|---|---|
| Staff baseline | CBT survey | Consensus forecast | |
| Growth | 5.0 | 5.0 | 4.6 |
| Inflation (end-year CPI) | 20.0 | 23.7 | 23.0 |
| Current account deficit (US$ billion) | 7.5 | 6.5 | 6.3 |
2. There has been little change in financial markets over the past week. The lira has remained relatively stable at just over TL 1,400 thousand per dollar, and the benchmark bond rate remains at just below 50 percent. The yield curve has also been stable since mid-July. Standard and Poor’s upgraded Turkish debt, citing “the progress that the new government has made under its IMF-supported program, albeit with delays”. The rating agency also held out prospect of a further upgrade if the government perseveres with fiscal adjustment through the upcoming local elections.
Financial sector update
3. Following the decision to liquidate Imar bank in early July, the BRSA has uncovered potentially serious wrongdoings in the bank, and has intervened a second bank controlled by the same group. The BRSA has discovered that Imar bank had unregistered deposits several times its official deposit base of close to TL 1 quadrillion. However, the BRSA also believes that a large part of the unregistered deposits is likely fraudulent. Legitimate individual depositors would be eligible to benefit from the blanket guarantee on bank liabilities. The staff has been in close contact with the authorities on the resolution of this problem. It has emphasized the importance of honoring the guarantee and acting promptly to address the problem. The direct fiscal impact of dealing with this problem is likely to be small in 2003; and the authorities have re-confirmed their intention to take whatever corrective action needed to keep the program on track, hi line with standard regulatory practices, on July 25, the BRSA also replaced the board and management of Adabank, another bank controlled by the same group.1
Progress on prior actions
The authorities have completed all the prior actions for Board consideration of the Fifth Review:
4. The authorities have implemented fiscal measures equivalent to 0.7 percent of GNP to safeguard the 6½ percent of GNP primary surplus for 2003 (prior action, ¶8)2:
On July 25, the Ministry of Finance issued a circular (N 310) cutting TL 1.2 quadrillion (about 0.4 percent of GNP) of spending by making permanent part of the spending freeze that had been put in place earlier in the year. The staff have suggested to the authorities to identify clearly the projects and programs to be cut, with a view also to protect health and education spending.
On July 21, the state owned tobacco an alcohol company (TEKEL) increased the prices of tobacco and alcohol products. These increases will provide additional revenue of some TL250 trillion (about 0.1 percent of GNP) for the rest of the year.
On July 24, the authorities confirmed in writing that TL 480 trillion of special revenues had been written over to the budget (this amounts to cutting off-budget spending by an equal amount). Instructions have also been given for another TL 100 trillion to be transferred to the budget by September, in line with earlier understanding with the staff (bringing the total impact of this measure to about 0.2 percent of GNP).
In addition, on July 17, the Council of Ministers had revalued some specific excises by 60 percent. The final decision was printed in the official gazette on July 22. This is expected to increase revenues by TL 210 trillion (under 0.1 percent of GNP) for the remainder of the year.
5. Although not formally a prior action, the authorities have also passed new legislation to ensure that the additional motor vehicle tax, introduced at the time of the Fourth Review, can be collected fully. On July 23, the Constitutional Court had declared this tax unconstitutional, since it only applied to those who had purchased cars prior to April 11, 2003. Revised legislation, applying to all car owners, was passed by parliament on July 29, thereby securing the TL 1.1 quadrillion (0.3 percent of GNP) expected to be collected from this source in 2003. (Because it is so recent, this issue is not covered in the Letter of Intent.)
6. The three social security reform legislations have been passed by parliament, without any amnesty provision (prior action, ¶16).3 The final legislations are in line with the understandings reached with the staff.4 The laws reform collections administration, and enable the restructuring of arrears in line with international best practice and without another amnesty. The staff will be working closely with the authorities on the implementing regulations that will be put in place over the next month.
7. Finally, the authorities had completed on July 17 the prior action on Public Financial Management and Control law(¶4). Since then, the staff has received written confirmation that the ministerial agreement on the content of the new draft is in line with the description in the main staff report. The staff will review the final draft version ahead of its submission to parliament (Parliamentary approval of this law is a prior action for the next program review.)
The banks are owned by the Uzan family’s conglomerate. This group won the privatization bid for PETKTM (petrochemicals) in June, and has until August 6 to make the first payment and finalize the contract. Given that the government has earlier taken over the group’s electricity generation and distribution assets, which were Imar bank’s main earning assets, and now Adabank, the group may not have the financial resources needed to finalize the PETKIM purchase.
¶ refers to the relevant paragraphs of the Letter of Intent.
The SSK legislation was formally approved by parliament on July 29 (less than five days before the scheduled Board meeting) but all individual articles of the law had been approved on July 25, enabling the staff to assess its content. The Bag-kur legislation was approved on July 24, and the Is-Kur law was passed in early July.
The only exeption is the staffs recommendation on introduction of a graduated penalty system. Instead, the authorities opted for introducing a single penalty.
