After its meeting on February 4th, the IMF board approved an additional $12bn loan package for Turkey, bringing the total over the next three years to $16.3bn. Of this total, $9.3bn was made immediately available.
The conditions for the loan are that Turkey's economic performance will be under constant review, while on January 31st, Turkey fulfilled the last of the preconditions set by the IMF when President Necdet Sezer approved the new banking law. However, as analysts and investors had been expecting the additional funds from the IMF since mid-October, the news of the approval of the loan did not particularly affect the markets, with the Istanbul Stock Exchange 100 index falling largely on January inflation news.
The approval of this latest stand-by agreement makes Turkey the largest borrower from the fund, with a total of $31bn, and indicates IMF satisfaction with progress in Turkey's economic rehabilitation. Under the terms of the IMF's previous stand-by agreement with Turkey, signed in December 1999, the fund was to have provided a total of $19bn for the duration of the agreement- at the time touted as the last time Turkey would be bailed out. Only $15bn of this was released during the course of the period, with the remaining $4bn to be included in the new 2002-04 programme to top up the additional $12bn.
The IMF has said that it will release some $9.3bn immediately to Turkey, significantly higher than the $7bn analysts had expected as the maximum in what was always going to be a front-loaded programme. On February 5th, the Turkish Treasury said that it would spend $6.1bn of the total to pay back the IMF loan released under the supplementary reserve facility. As the cost of that loan is high, Turkish officials are keen to repay it as soon as possible. This new line of credit has to be repaid in four years time, with a grace period of just over two years, at an interest rate 200 basis points above the (currently) stand-by credit interest rate of around 2.67%. This is because Turkey uses more than 300% of its loan quota.
The main reason behind the latest request for a new stand-by agreement with the IMF was the effect on Turkey of the terrorist attacks on the US in September. These harmed Turkey's tourism income, "reduced its access to international financial markets" and led to "weaker privatisation and foreign direct investment prospects" according to the IMF. By November 2001, this had led to an external financing gap of around $10bn for 2002, with gaps of $1bn in each of the following two years.
Over the course of the rest of this year, some $5bn will be made available to Turkey in four separate tranches, each of them allowing the IMF some form of supervision over reform progress. This follows the same system as during the course of previous year. Turkey has to fulfil certain critical conditions before each review, with these taking place in March, May and July and quarterly thereafter, while other conditions have been flagged as not so central. Amongst the former type are the passage of laws, and among the latter, 'structural benchmarks' and 'structural performance criteria'. Prior to the IMF approval of a new loan discussions had surrounded Turkey's 2002 budget - a primary budget surplus of 6.5% was a point of contention- and the contents of a new letter of intent sent to the IMF.
According to the letter of intent that Turkey submitted to the IMF in November, it has promised to continue with its rehabilitation of the banking sector, provide for more transparency in public procurement, pass laws to enhance public finances and provide revised plans for the privatisation of Turk Telekom and the alcohol and tobacco monopoly Tekel, amongst other measures. Furthermore Turkey expressed its intention to implement monetary policies that would see the country achieve its inflation target of 35% by the end of 2002. Most bankers and analysts believe this to be an optimistic target, although economy minister Kemal Dervis is confident that it can be achieved.
In his speech on February 4th announcing the new loan IMF Managing Director Horst Koehler said that "lowering inflation on a lasting basis will be central to the achievement of a stable macroeconomic environment" and that the Turkish central bank was finalising preparations for a transition to a formal inflation targeting system. The IMF is largely impressed by Turkey's economic reform efforts so far, with Koehler noting that the fund's decision to provide more loans was in recognition of Turkey's success in implementing a "bold and comprehensive economic reform programme". He also said progress was "impressive".
One of the most important preconditions that Turkey fulfilled before the IMF approved the new agreement was the passage of the banking law. This would allow the treasury transfer funds to ailing banks. The passage of the law had caused some difficulties, with President Necdet Sezer vetoing three articles of the bill that parliament had approved. Parliament forced the law through in time for the IMF board meeting by again approving the three articles, which concern the legal status of employees and managers at state banks, and reporting regulations for bank regulators. This forced Sezer, who has no further veto right, to sign the bill into law.
However, the IMF's belief that Turkey's economy is on track to recovery has not been reflected in the stock markets, which had been expecting the loan since October. Rather, January inflation data- and more recently, concerns over possible military action in Iraq- have brought the Istanbul Stock Exchange 100 index down well below the 12 000 points mark, from January highs of around 15 000 points. January inflation figures were disappointing, with consumer prices (CPI) rising by around 5.2% month-on-month, rather than the expected 4.1%, and wholesale prices (WPI) were up 4.2%. This brought the annual rates to 73.2% and 92% respectively.
