Debts and Programmes

Amidst this year's positive news on inflation, economic growth, exports and industrial output, certain Turkish officials could perhaps be forgiven a little for allowing themselves a little slack earlier this year when they wondered out loud if the country really needed a new IMF programme. Yet talk of the Fund's imminent departure from Turkish affairs - after several decades of involvement - now seems highly premature. As the Treasury geared up to meet this week's huge domestic debt redemption, it was time to remember that while the recovery may have been underway for some time now, there are still some significant burdens for the country to shoulder - and for which the IMF still seems badly needed.



With a domestic debt redemption of some TL3.7 quadrillion ($2.46bn) to make on June 16, the Treasury held a succession of auctions, first of a reference bill and then two bond issues. The 91-day bill succeeded in raising its targeted TL912 trillion, while the bond auctions fell short of the mark, leaving the total amount raised at TL2.2 quadrillion. With all this going on while the IMF was in town for its eighth review of the economic programme, it was an opportune moment for Fund officials to comment on the country's $130bn domestic debt.



IMF European Director Michael Deppler told journalists on June 12 that while the government seemed committed to lowering the debt burden, there was concern at the Fund over high interest rates.



"If you compare other emerging markets with Turkey," he said, "except for Brazil, Turkey still has high real interest rates."



Monday's reference bill auction had seen compound interest rate yields of around 24.94%, while more general overnight rates are currently around 22%. Inflation, meanwhile, is less than half that, recently dropping below double digits in some cases for the first time in decades.



Higher rates are, of course, indicators of higher perceived risks. In this instance, earlier government uncertainty over whether it would go for another IMF agreement also added substantially to that risk. In consequence, both the Turkish Industrialists' and Businessmen's Association (TUSIAD) and the Turkish Union of Chambers of Commerce (TOBB) made public statements over the last few days urging a continuation of the IMF programme after its due expiry date in February next year.



"In terms of budget discipline and continuance of structural reforms," TUSIAD's Omer Sabanci declared last week, "the IMF programme has made a great contribution. Thus, TUSIAD believes [in] another one- or two-year economic programme with the IMF."



The TOBB, meanwhile, had suggested a new programme of at least three years. As for the IMF itself, it has sought to play down the issue of whether there will be a renewal, and if so, in what form.



"We are not worried about the timing issue [for a new accord]," Deppler told reporters June 11. "There's no particular urgency."



The government has, however, indicated that it will continue to have some kind of relationship with the IMF after February 2005. The only question is what form that will take. Certainly, there are few market watchers who do not think it necessary, with the programme giving a restrictive framework for the government that many analysts consider still essential, given the major political pressures the country's rulers are under.



Targets such as shrinking a large public sector, tackling a widening social security deficit, reforming the banking sector and rationalising the tax system all have political consequences, as well as economic ones. While the current government of Prime Minister Recep Tayyip Erdogan enjoys more popular support than any Turkish government in recent memory, it will need to draw heavily on this goodwill if it is to carry out some painful cuts.



So far, some of the deepest cuts have yet to happen. The government's privatisation programme has been beset with difficulties, while being a central plank of the existing agreement with the IMF.



However, Finance Minister Kemal Unakitan has been keeping a brave face on things, suggesting last week that tenders for 2004 would be worth some $2.3bn and would bring $468m into the country before the year's end. This is, of course, entirely hypothetical, and short of what many analysts have claimed as the government and IMF's unofficial sell-off target of $3bn for the year.



Coming soon among these tenders, Unakitan said, would be a fresh attempt to sell off petrochemicals firm Petkim, while other planned privatisations this year include tobacco, sugar, telecom and power companies. Public offerings of shares in Turkish Airlines (THY) and leading steel producer Erdemir are also projected.



Unakitan also referred to the troubled TUPRAS refineries sell off, which has been blocked, unblocked and then blocked again by the Turkish courts, after being won by the Tartar firm Tatneft and Turkey's Zorlu Holding.



"The TUPRAS tender has been in conformity with the law," he told reporters on June 10, "[and] principled and transparent from start to finish."



He also said that consultants were about to be hired for the Erdemir sell off, while invitations had been issued to nearly 20 firms regarding consultancy services in the planned block sale of a 51% stake in phone company Turk Telekom.



Yet despite all these positive noises, many analysts are still awaiting some concrete results. In their absence, risks - and rates - are likely to remain higher than they otherwise might be. Under such circumstances, IMF backing is widely regarded as essential to keep the economy on course.