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IMF Publishes Conclusions Of Article IV Consultation With Turkey

by Robert Lee,, London

15 June 2007

The International Monetary Fund (IMF) on Tuesday published the conclusions of its Article IV Consultation with Turkey, which was completed on May 18.

The IMF Executive Board observed that Turkey has experienced an impressive economic revival in recent years.

Sound economic policies anchored to Fund arrangements, as well as political stability and favorable external conditions, have resulted in average annual growth of 7.5% since 2002, the IMF revealed.

It further explained that private consumption and investment have been the main drivers, fueled by declining real interest rates, surging capital inflows, rapid credit expansion, and rising productivity. Meanwhile, inflation has dropped dramatically over the past five years.

In a statement, the Executive Board elaborated:

"Turkey's macroeconomic performance in recent years has been impressive, combining strong growth with a sustained reduction of inflation. This owed much to the authorities' disciplined macroeconomic policies, strengthened economic institutions, and structural reforms, in a context of favorable external conditions, political stability, and firm commitment to Fund arrangements. Directors considered, however, that Turkey needs to manage vulnerabilities carefully and address structural challenges to increase the economy's growth potential and resilience to shocks."

"Directors welcomed the significant progress made in addressing the large imbalances inherited from the 2001 crisis. They called on the authorities to build on this progress by further reducing public debt and bringing inflation to the low single digits. They observed that new vulnerabilities have arisen as a byproduct of the recent strong performance. In particular, large capital inflows fuel lira appreciation and a widening current account deficit, exposing Turkey to sudden shifts in market sentiment. This calls for maintaining fiscal and monetary discipline and preserving the floating exchange rate as a useful shock absorber. It also puts a premium on continuing to build buffers in balance sheets and improve financing structures. In this regard, Directors supported the authorities' plan to increase gradually and predictably the level of international reserves."

"Directors agreed that a tight fiscal policy has been key to achieving the primary fiscal surpluses and the recent economic successes, but considered that too much reliance may have been placed on revenue increases and investment restraint. Going forward, fiscal discipline—possibly underpinned by a fiscal rule—will continue to be needed to reduce debt, support disinflation, and buttress market confidence. Tight control over current spending will facilitate efforts to ease the heavy tax burden, especially on labor and financial transactions. Noting the spending overruns in early 2007, Directors welcomed the plans to bring the fiscal position back on track, and encouraged the authorities to adhere closely to them in order to achieve the 2007 primary surplus target of 6.7 percent of GNP."

It continued:

"Directors supported the measures to increase fiscal transparency and the reform of personal income taxation. They called for further fiscal reforms to contain nondiscretionary spending. Revised social security legislation that preserves the savings targeted in the 2006 reform law should be adopted as soon as possible. Social services efficiency should be improved, and civil service pay rationalized. Continued reforms to improve tax collection will be essential to create fiscal space. In that connection, Directors called for continued efforts to reduce fragmentation in tax administration and make the large taxpayer unit fully effective."

"Directors underscored the importance of achieving a low single-digit inflation rate to reduce still-high real interest rates. They endorsed the central bank's tight monetary stance, and its intention to defer interest rate cuts until inflation is firmly on a path toward the 4 percent target. Directors emphasized that preserving central bank independence will be essential for the success of inflation targeting."

"Directors stressed the need to deepen financial intermediation while preserving the soundness of the financial system. They commended the authorities for adopting the mortgage law and beginning the privatization of Halkbank. To ensure that rapid credit growth does not compromise bank soundness, they called for stepping up supervisory oversight, tightening provisioning requirements further, and improving the timeliness of corporate balance sheet data."

The IMF Executive Board assessment concluded:

"Directors considered that removing impediments to employment creation and labor productivity growth is crucial for enhancing the economy's growth potential, with an easing of labor regulation a priority. Reductions in labor taxes are needed, provided that they do not compromise the debt reduction objective. Directors encouraged the authorities to advance the privatization program. Restructuring the energy sector, by privatizing electricity distribution companies and allowing better cost-recovery pricing, will be particularly important."

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