Abstract
Turkey’s Fifth Review and Inflation Consultation under the Stand-By Arrangement and a Request for Waiver of Nonobservance and Applicability of Performance Criteria are discussed. Despite sharply higher interest rates, a weaker lira, and lower asset prices, economic activity has remained robust and foreign direct investment inflows buoyant. Balance sheets have also proven resilient. Achieving efficiency gains in the provision of health services and strengthening tax enforcement are crucial for the sustainability of public finances.
This supplement provides an update on the status of implementation of the prior actions for the review. The thrust of the staff appraisal remains unchanged.
1. Two out of three prior actions have been implemented. A satisfactory 2007 budget and the second-stage personal income tax reform have been submitted to Parliament.
2. However, the announcement of a timetable for the privatization of Halkbank, the remaining prior action, had to be delayed. On December 6, the High Administrative Court issued an injunction on the sale of Halkbank, suspending the process indefinitely. Overcoming this legal impediment will require approval of new legislation extending parliamentary mandate to the government to carry forward the sale of the bank. New legislation has already been submitted and the authorities expect it to be approved sometime in January, in which case it would be still feasible to complete the tender process for Halkbank by end-May (structural benchmark).
3. Staff supports completion of the fifth review, notwithstanding the nonobservance of the prior action on Halkbank. Staff considers that the legal challenge to the privatization of the bank is beyond the authorities’ control and that the prompt submission of legislation needed to overcome the legal obstacle is a tangible demonstration of their commitment to the privatization process.