IMF Loans Turkey Yet More Money

The International Monetary Fund approved a further $1.1bn loan tranche for Turkey on April 15th amidst reports cautioning that economic indicators were not showing signs of recovery. The IMF’s World Economic Outlook report revealed both external and internal risks to Turkey’s recovery prospects. Although foreign officials have been praising Turkey's recent economic performance and its efforts to reform, the country’s apparent inability to attract new foreign investment remains a concern. However there have been indications that the US - one of Turkey's strongest supporters in recent months, may take steps to increase trade.



The $1.1bn was the latest instalment of the $16.3bn IMF rescue package put together last year in the wake of Turkey’s economic meltdown in February last year, which saw the government forced to abandon the currency peg and float the Turkish Lira. The package was implemented to help redress serious structural weaknesses and end the increasingly volatile growth and inflation that have plagued the country for decades.



Continued IMF support is dependant on Turkey successfully implementing reforms which are subject to regular review. Upon completion of the first review of Turkey’s economic performance, Anne Krueger, First Deputy Managing Director and Acting Chair of the IMF’s Executive Board, reported that the country’s "considerable progress" has been rewarded by a strong balance of payments position and a decline in interest and inflation rates. However she advised that further structural reforms are still needed, particularly in the area of corporate debt restructuring and regarding the further development of money and foreign exchange markets. She also cautioned that as market conditions were looking increasingly favourable, greater efforts should be made to push ahead with privatisation plans. Krueger concluded by cautioning that the independence of Turkey’s regulatory institutions should be maintained, which has been widely read as a response to Prime Minister Ecevit’s criticisms last month that IMF-backed regulators, along with the state banks, the Central Bank and other state institutions, possessed too much autonomy.



Turkey’s progress, however, is still plagued by risks. The World Economic Outlook report, released at the same time of the IMF-World Bank spring meetings, pointed to tensions in the Middle East as a result of the September 11th attacks and the Israeli offensive in the West Bank, substantial government debts and a record of high inflation as impediments to economic recovery. Although the report anticipates a 3.6% gross domestic product (GDP) growth for Turkey in 2002 encouraged by low interest rates and rising consumer confidence, other indicators offer less reasons for optimism.



Bankers and analysts also question whether the IMF loans totalling $3.8bn this year and a further $2bn for 2003-2004 are sufficient to enable the government to continue to implement substantive economic reforms. In May the government is expected to produce a targeted list of all redundant positions at state-owned firms in the hope of concluding a major rationalization by June 2003 while over the coming months at the behest of the IMF the Banking Regulation and Supervision Agency aims to facilitate a re-capitalization of the private sector banks. Successful conclusion of both moves would be a clear indication of Turkey’s resolve.



With a reputation of weakening reformist policies at any indication of improved economic forecasts, the government is in an ill position to stray far from the IMF’s stringent guidelines. Continued loan tranches are based on adherence to the fund’s guidelines, but most reforms introduced in 2001 were only passed after considerable argument between the three parties that make up the coalition government. Prolonged wrangling in July last year resulted in the IMF postponing a $1.7bn loan tranche. The prospect of further political infighting leading to further delays in introducing reforms and the postponement of further loan tranches continues to worry the markets. Both the Turkish Lira and Istanbul Stock Exchange (ISE) are vulnerable to negative IMF reviews. Turkey is due to be assessed again by the IMF in May and in July then moving to a quarterly basis in October. The release of funds this summer remains contingent upon IMF conditions such as cutting 800 branches of Halk and Ziraat, two state-owned banks, by June 2002. Despite the problems however, Economy Minister Kemal Dervis remains hopeful, stating that the most recent loan tranche is the first time Ankara has had enough money to grant "fairly generous" severance pay to workers who agree to voluntarily retire



With the mixed news of economic recovery, Turkey looks forward to increased foreign investment prospects as Thomas J. Donahue, head of the US Chamber of Commerce, and Ecevit reaffirmed plans for Qualified Industrial Zones (QIZs) during Donahue’s visit to Ankara on April 19th. Whilst praising Turkey for implementing "necessary but painful steps" under the IMF programme, Donahue said that Turkey could do more to attract foreign investment, a cornerstone of the fund’s aims in which the country has under-performed. Donahue believes that with the QIZs Turkey has the potential to triple trade with the US, which last year stood at $7bn.



Ecevit told reporters, "With the establishment of QIZs, economic and commercial relations between Turkey and the US will pick up significantly." Turkey and the US agreed on the plan in February under an Economic Partnership Commission following Ecevit's visit to Washington. The QIZ, which involves Israel, will allow Turkey to sell duty-free goods to the US thanks to the free trade agreement between Israel and the US.



Donahue, who also met with Rifat Hisarckiklioglu, head of TOBB, the Union of Chambers of Commerce and Commodity Exchanges of Turkey, announced that an agreement has been reached over the US-Turkey Business Partnership Initiative. The initiative, which increases technology transfer and investments between the countries’ small and medium sized companies, will further enhance trade relations and encourage much-needed foreign investment.