World Bank Releases Loan to Turkey

Following the IMF’s most recent loans to Turkey, the World Bank has approved a $1.35m loan to strengthen the country’s economy. After the loan’s signing, cautionary reports of an overvalued lira rallied dollar purchases, indicating further concerns over Turkey’s economy. February export figures and April inflation data also pointed to mixed signs of economic recovery.



Turkey’s Minister of Economy Kemal Dervis signed the second agreement of the PFPSAL II, the Programmed Financial and Public Sector Adjustment Loan, with World Bank Vice President Johannes Lynn in Washington on April 24th. Dervis, who was in the US for the spring IMF and World Bank meetings, reassured reporters that changes within Turkey’s political system would not effect the country’s economic structure and commitment to well-balanced reforms. Appearing alongside Dervis, Lynn stated that Turkey’s current economic programme was on track, adding that the World Bank was specifically interested in supporting Turkey’s commitment to agricultural, health and educational reforms.



The PFPSAL II, which follows the first PFPSAL for $1.1bn approved in July of 2001, supports Turkey’s macroeconomic framework to establish financial stability and growth whilst restoring public confidence in the banking sector. This second loan ensures that adequate funding is provided for social reform programmes and allows the country to draw three tranches of $450m, dependent upon the bank’s approval of each. A portion of the loan, $500m, will reach maturity in 15 years, including a five-year grace period, while $800m will be repaid in five years, with another five-year grace period. The loan’s credit interest rate is subject to LIBOR interest settings. The financial section of the PFPSAL II strives to restructure and privatise the state banks, strengthen the institutional development undertaken by the Banking Supervisory and Regulatory Council, and restructure the budget planning, accountability and management of Turkey’s substantial debts. Public sector reforms seek to create structural fiscal policies to support sustainable fiscal adjustment, reform public expenditure management, including budget planning and execution, and strengthen public sector governance, including curbing corruption and initiating civil service reforms. Turkey, which has weathered numerous economic crises, was forced to abandon the currency peg and float the Turkish Lira last February, resulting in the inflation, high unemployment and economic stagnation which the World Bank and IMF-backed plans aim to rectify.



In addition to the most recent loan, the World Bank, which has committed over $4.2bn to achieve the above goals, will give Turkey a further $2bn as promised during discussions of the World Bank’s Executive Board in July of 2001. The World Bank stated that it aims to continue financial support to Turkey as long as it continues to achieve its goals. World Bank Turkey Director Ajay Chhibber applauded Turkey’s "ambitious and aggressive" economic reforms, stating, "With this programme, Turkey will improve and become a country with a high standard of living." World Bank Vice President Lynn added, "We believe that the Turkish economy will improve with the implementation of the programme. Turkey is on its way to recover its economy."



Though the World Bank’s loan approval is positive news for Turkey’s commitment to economic recovery, the IMF released a cautionary report stating that the Turkish Lira has been overvalued and suggested that the Central Bank implement regular dollar auctions to bolster foreign exchange reserves. Supporting the CBT decision to hold dollar auctions as of April 1st of $20m daily, the report indicated that the lira was overvalued by 20% in the past six months and warned that the overvaluation could potentially hurt Turkey’s export driven recovery. World Bank Turkey Director Ajay Chhibber stated on April 23rd that the real exchange rate constituted a major problem for the country, specifically for exports and tourism. In real terms, the lira is at pre-crisis levels against the dollar, he warned. Dervis, speaking to reporters after the PFPSAL II signing ceremony, said that he expected the Turkish Lira to reach a more "realistic value" shortly. "The Turkish Lira will rise and fall...but what matters is the way we are heading." The lira plummeted to a record low of TL 1.67m against the dollar on October 10th, but recently reached its nine-month high of TL 1.287m on April 16th because of lower inflation expectations targeted under Turkey’s agreements with the IMF.



Following on the heels of Chhibber and Dervis’ comments, as well as statements by Central Bank Governor Sureyya Serdengecti and Treasury Minister Faik Oztrak, a wave of foreign currency purchasing swept through London and state banks. On April 24th, the dollar started the day at TL 1.32m, but institutional buyers’ purchases for imports through state owned banks and purchases by London-based banks raised the level to TL 1.34m. On the April 25th, state banks, as well as foreign banks, companies, and Turkish banks continued to buy, thus moving the dollar to TL 1.38m. The Central Bank’s rates closed the day at TL 1.356m, the highest rate since March 19th. Though the dollar has slightly receded since the rally because of increased profit-taking, expectations that the dollar will remain between TL 1.35m and TL1.4m by the end of June 2002 have strengthened. Analysts also predict that the lira’s value at yearend will fall between TL 1.57m and TL 1.8m.



Prior to the lira’s most recent fluctuations, investors enjoyed a short period of the lira’s stability, but coupled with weaker than expected first quarter corporate results, that brief period is now over. The release of the quarterly report on April 29th renewed recession fears, as the ISE-100 National Index fell 3.2% when the report was released. The banking sector, a market barometer, fell 4.9%, indicating that Turkey’s economic woes are far from over.



As Chhibber stated, the overvaluation also raises concerns about Turkey’s exporters. Both the Turkey Exporter’s Association (TIM) and the State Institute of Statistics (DIE) released reports regarding recent exports figures. According to TIM, exports rose by 8% in year-on-year estimates in April, reaching $2.6bn. A 4.6% year-on-year rise in exports in January as estimated by TIM (14.5% by DIE) was followed by a 6.9% drop (7.0% by DIE) in February. According to TIM, exports jumped again to 18.3% in March year-on-year figures before reaching 8% in April. An analysis of April’s figures reveals a decline in agricultural products’ exports because of weather conditions as a major factor in the declining increase from March. The SIS announcement also revealed that the foreign trade deficit, which was $1.78bn last February, dropped 56.1%, falling to $473.6m this February. Furthermore, the ratio of exports to imports increased to 83.2% from last year’s 72%. The bulk of exports consisted of manufacturing industry goods totalling 92.1%. The largest drop in imported goods occurred in the capital goods sector at 27.1%.



April inflation figures were also released by the State Institute of Statistics on May 2nd. Though month-on- month figures were largely parallel with market expectations, analysts raised concerns about an unexpected rise in private sector manufacturing inflation. The wholesale price index, or WPI, increased by 1.8% while the consumer price index, or CPI, increased by 2.1%. The WPI met analysts’ expectations, but the CPI figure was thought to have been slightly lower. The figures brought year-on-year inflation in April to 58.0% for the WPI and 52.7% for the CPI, while year-to date inflation was 10.8% and 10.7%, respectively.



The rise in consumer inflation is blamed on the rise in clothing sector prices, which were markedly high in April. Ahmet Orhun Akarli, Finansinvest economist commented, "Retailers are apparently taking the opportunity of seasonal factors, although there hasn’t been an increase in cost factors. That’s a negative signal in terms of the inflation inertia." The rise also could be due to the fact that clothing exports have been performing well.