The Executive Board of the International Monetary Fund (IMF) announced late
last week that it has completed the seventh and final review under the three-year
SDR6.66bn (about USD10.8bn) Stand-By Arrangement for Turkey, which was approved
on May 11, 2005.
The completion of this review enables Turkey to draw immediately the remaining
balance under the arrangement, equivalent to SDR 2.25bn (about USD3.65bn).
The Board also approved Turkey's request for waivers of non-observance of the
end-December 2007 quantitative performance criteria in the fiscal area (primary
balances of the consolidated government sector including and excluding state
economic enterprises, overall balance of the social security institutions, and
consolidated primary spending of the central government and social security
institutions).
At the conclusion of the Executive Board's discussion on Turkey, Mr. Dominique
Strauss-Kahn, Managing Director and Chairman, stated:
"The Turkish economy has continued to perform reasonably well despite
a challenging external environment, with economic activity showing resilience
and foreign direct investment inflows remaining buoyant. However, supply shocks
have raised inflation, and turbulence in global credit markets has heightened
Turkey's external financing risks. Recent domestic political developments have
also weighed on investor sentiment. In response to these external and domestic
developments, Turkish financial markets recently unwound some of last year's
large gains.
"The authorities have responded to these challenges by taking important
steps to bring their economic program back on track. Adoption of the social
security reform is a major achievement that will contribute to the long-run
sustainability of public finances. Recent actions to strengthen tax administration,
reform the energy sector, and enhance bank prudential requirements are also
welcome," he explained, further adding:
"Short-run macroeconomic policies will need to balance carefully the desire
to support growth with the need to contain inflation and the current account
deficit. From this perspective, it will be essential that the authorities adhere
closely to their updated plans for this year to target an unchanged primary
surplus relative to 2007 of at least 31⁄2% of GDP. This revised target
creates room to decompress infrastructure spending and bring forward a worthy
but costly cut in labor taxes. New initiatives that further erode the structural
fiscal position should be resisted to preserve the downward path of public debt
and avoid further unwarranted pressure on monetary policy to stem inflationary
pressures. From this perspective, it is important to make the envisaged reform
of subnational governments' finances fiscally neutral.
"The central bank has revised upwards its inflation forecasts in response
to a series of shocks to food and energy prices as well as a weakening in the
lira, while reaffirming its medium-term target of 4%. It has also appropriately
adopted a tightening bias. Entrenching the credibility of the inflation targeting
regime requires that the central bank respond promptly to broadening price pressures
by tightening monetary policy and avoid lifting prematurely its tightening bias
once inflation is back on a declining path.
"To anchor fiscal policy expectations, the authorities have announced
a new medium-term fiscal framework that aims to cut gross public debt by some
10 percentage points of GDP within five years. This objective is underpinned
by a policy commitment on the primary surplus, which is targeted to decline
from 3% of GDP in 2009 to 21⁄2% of GDP in 2012. Achieving these targets
will require continued efforts to enhance revenue collection and significant
discipline in restraining current spending. The authorities are encouraged to
formalize their medium-term fiscal framework by adopting an explicit fiscal
rule," Strauss-Kahn continued, concluding:
"Turkey has achieved considerable success by adhering to the Fund-supported
program that is now drawing to a close. Looking ahead, Turkey's challenge will
be to press forward on the reform path to further entrench macroeconomic stability
and decisively lift potential growth to facilitate convergence toward EU income
levels."
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