Abstract
Although Turkey’s economic performance has been strong, growing external imbalances exposed the country to a reversal of sentiment. In the wake of recent market turbulence, the authorities have recommitted to strong policies and stepped up program implementation. The authorities’ commitment to tighter fiscal policy will help preserve market confidence and resume disinflation. These delays are wide ranging, including on the landmark pension reform, tax reform, bank supervision, and state bank privatization. Political developments added to market concern, and discussions focused on the appropriate monetary policy response.
This supplement provides an update on policy implementation since the circulation of the staff report. The thrust of the staff appraisal remains unchanged.
1. The central bank raised the overnight policy rate by a further 25 basis points—to 17.5 percent—on July 20. The accompanying statement maintained the hawkish tone of last week’s letter to the IMF (Staff Report, Appendix II), noting that some further tightening may be needed to rein in inflation expectations and secure the medium-term inflation targets. Analysts welcomed the move as a signal of the CBT’s resolve.
2. The authorities have reallocated spending in favor of higher farmer subsidies. Income support was increased by just under 0.2 percent of GNP, with offsetting cuts targeting capital spending. This shift is undesirable from a structural perspective, but the fact that the authorities took steps to keep spending within programmed levels is welcome.
3. With all prior actions already completed, progress has also been made on meeting pending end-July benchmarks (Staff Report, Annex B).
The tax policy unit at the Ministry of Finance was made operational by assigning staff and drawing up work programs. The associated benchmark was therefore met.
The functional reorganization of the Revenue Administration has been completed at the headquarters level, but restructuring of local offices will take more time. As a result, the associated benchmark will not be fully met by end-July. The authorities viewed this as a temporary delay and reiterated their commitment to the tax administration reform goals. FAD technical assistance scheduled for early August will assess prospects in this and other reform areas.
On state bank reform, the authorities have adopted a timetable for phasing out special privileges and obligations, thus meeting the associated benchmark.
The authorities have informed staff that they plan to announce a detailed privatization strategy for Halkbank on July 31, in line with the letter of intent.