ANKARA - The letter of intent regarding the fifth review dated July 25, 2003 which was approved on Friday by International Monetary Fund (IMF) Executive Board said that economic program, supported by a stand-by arrangement with the Fund, was producing positive results.
The letter of intent consisting of 29 articles which was signed by State Minister Ali Babacan and Central Bank Governor Sureyya Serdengecti said, ''following the completion of the fourth review on April 18 and the end of hostilities in Iraq, market confidence has improved. Since end-March, benchmark bond rates have fallen by 15 percentage points and the Turkish lira has appreciated by 16.5 percent against a trade-weighted U.S. dollar and euro basket. This more benign environment has also been reflected in improved expectations for growth and disinflation in recent surveys, and should help in achieving our macroeconomic targets for 2003.''
The letter of intent said, ''we have achieved these successes through our strong policy implementation. All monetary performance criteria and indicative targets for end-April and end-June have been met. The performance criterion on the consolidated government sector primary balance for end-April has also been met, but the end-June performance criterion may have been missed by a small margin.''
''We have also made good progress in structural reform, in spite of a heavy parliamentary agenda. We met a structural performance criterion on April 9, when Parliament approved direct tax reform legislation. We have also met several structural benchmarks, by putting in place a general government and state economic enterprise (SEE) employment monitoring system; preparing an action plan to reduce banking sector intermediation costs; announcing the sale of an SDIF loan portfolio with a total face value of 250 million U.S. dollars; enacting a new law on Foreign Direct Investments (FDI); completing an internal Central Bank audit of foreign exchange management and program data as of end-2002; preparing legislation to strengthen the Banking Regulatory and Supervisory Agency's (BRSA) effectiveness; and enacting reforms to the Execution and Bankruptcy Act,'' it noted.
The letter of intent stated, ''we are also taking steps to complete a number of structural reforms which have faced delays. Although the end-June performance criterion on reductions in redundant positions in state economic enterprises (SEEs) was missed (since SEE workers delayed their decision to retire pending the outcome of the ongoing wage negotiations, which will entail higher retirement payments). We are taking steps to ensure that we are back on track toward meeting the end-September and end-December targets.''
''There have been delays in other elements of our structural reform agenda. Accordingly, we have rephased a number of structural benchmarks, including adoption of a privatization plan for Turk Telekom; passage of a second phase of direct tax reform; passage of the Public Financial Management and Control Law; passage of legislation improving state enterprise governance; and improving the public sector personnel system, including establishing an ethical code of conduct for civil servants,'' the letter stated.
''We expect our discussions with the United States on the terms of assistance, the grant-equivalent of 1 billion U.S. dollars convertible into loans of up to 8.5 billion U.S. dollars, to conclude shortly.''
The letter of intent stated, ''on this basis, we request completion of the fifth review under the Stand-By Arrangement. We request waivers for the nonobservance of the end-June performance criteria on reductions in SEE positions and the primary balance of the consolidated government sector.''
It said, ''As prior actions for the fifth review we are: taking measures to ensure that the budget will remain on course to achieve the 6.5 percent public sector primary surplus target for 2003; passing social security legislation in July. We have also approved the draft of the Public Financial Management and Control Law at a Ministerial meeting on July 17, taking into account the World Bank and the IMF comments. We are also taking action to accelerate the reduction of redundant SEE positions.''
''Finally, we are introducing a continuous performance criterion on refraining from any amnesty for public receivables,'' it said.
The letter of intent stated, ''in light of the delay in completing the fifth review and the rephasing of some policy actions, we propose a number of technical revisions to the program. First, we request that the schedule of program reviews be revised. Consistent with this revised schedule, the ceilings and floors for the quantitative performance criteria and indicative targets under the arrangement will be set for the respective test dates through December 31, 2003. Except for the cumulative primary balance of the consolidated government, these levels correspond to the indicative targets in our April 5, 2003 Letter of Intent.''
''For this criterion we propose a broader and more transparent definition and revised targets which remain consistent with our public sector primary surplus target of 6.5 percent of GNP,'' it noted.
The letter of intent said, ''with external uncertainties now much reduced, we believe that through continued strong program implementation we can achieve our main macroeconomic objectives in 2003,'' and stressed, ''the short duration of the military conflict in Iraq, strong performance of industrial production and exports in the first five months, and buoyant demand for consumer durables and intermediate goods in recent months suggest that 5 percent GNP growth in 2003 is readily achievable.''
It stated, ''as we expect private consumption and fixed investment to replace stock building as the main source of growth this year, fostering consumer and investor confidence with strict program implementation will be key to realizing our growth objective. Owing to prospects for stronger private demand and the effect of the Iraq war on tourism receipts, we have raised our projection of the external current account deficit to about 3 percent of GNP from the original 1.9 percent of GNP.''
''On inflation, although exceptional food price increases earlier in the year resulted in consumer price inflation somewhat above projections, the improved outlook for oil prices, the stronger lira, and the unclosed output gap should all contribute to keeping consumer price index (CPI) inflation within our end-year target of 20 percent,'' the letter said.
It said, ''we will use prospective bilateral financing to reinforce our debt reduction strategy of lowering interest rates and lengthening debt maturities. We expect our discussions with the United States on the terms of assistance, the grant-equivalent of 1 billion U.S. dollars convertible into loans of up to 8.5 billion U.S. dollars, to conclude shortly.''
''The presence of these funds would further boost market confidence, allowing the Treasury to lengthen debt maturities and lower interest rates on domestic debt. As we are determined to adhere to our primary surplus targets, additional bilateral assistance will not be used to finance additional government spending,'' the letter of intent said.
The letter said, ''we are taking steps to keep our fiscal program on track. We expect that the fiscal performance criteria for end-June was missed by a small margin.''
''Delays in implementing some measures, higher-than-expected tax rebates and wage increases, shortfalls in social security contributions, and our plans for higher transfers to agriculture have opened a fiscal gap relative to our full-year public sector primary surplus target of 6.5 percent of GNP,'' it noted.
The letter of intent said, ''moreover, while gross payments under the Tax Peace Plan have exceeded expectations, the plan has led to additional tax refund claims. To preserve our fiscal target, as a prior action we are taking measures to close this gap, equivalent to about 0.7 percent of GNP. These measures include: Cuts in current, transfer, and investment spending of 1.2 quadrillion TL, while safeguarding health and education spending; writing over of 0.5 quadrillion TL in special revenues to the budget, thus preventing the issuance of additional appropriations; and an increase in tobacco and alcohol prices yielding 0.25 quadrillion TL.''
''We stand ready to implement additional measures if needed to attain the 6.5 percent of GNP primary surplus target,'' it stressed.
''We propose to exclude foreign-financed in-kind military spending from the definition of the primary surplus performance criterion consistent with the Public Finance and Debt Management Law which was put into force in 2002.''
The letter of intent said, ''we are also taking steps to ensure that next year's primary surplus target is on a sound footing. To offset the expiration of some one-off measures and to ensure no increase in the overall tax burden, we will need to tightly restrict expenditure growth in 2004. To this end, in our budget call for 2004, we have provided indicative ceilings which restrict overall non-interest expenditure growth to zero in real terms.''
''In addition, pending further rationalization of the investment program, we will not introduce new investment projects, except in a limited number of cases including emergencies. These steps will help us formulate a budget consistent with next year's 6.5 percent of GNP primary surplus target in time for submission to the parliament in mid-October,'' the letter of intent said.
It said, ''Central Bank's monetary policy will continue to focus on reaching this year's 20 percent inflation target. Consistent with this goal, we met all monetary performance criteria and indicative targets for end-April and end-June.''
''With our main macroeconomic targets unchanged, we are retaining the monetary targets set out at the last review. Although inflation in the opening months of this year was somewhat higher than projected, the decline in world oil prices and the strengthening of the Turkish lira have already helped bring about a marked reduction in the inflation rate. This decline has resulted in the recent decline in private expectations of future inflation. In light of these favorable developments, the Central Bank lowered its interest rates in April and June, and again in mid-July,'' the letter of intent said.
''We are determined to build up a strong record of program implementation before introducing inflation targeting. With the new fiscal measures identified in this Letter of Intent, we believe that we will soon be able to demonstrate a track record of meeting our primary surplus targets, and establish a reputation for fiscal discipline. We are also directing our incomes policy towards supporting our inflation objective,'' it stressed.
The letter of intent said, ''while these efforts to fulfill the preconditions for inflation targeting continue, we are advancing our technical preparedness, including making further refinements to our modeling and forecasting of inflation.''
''We remain committed to the floating exchange rate regime. We demonstrated this commitment during the external tensions associated with the war in Iraq, when we made only modest foreign exchange lending operations, and the market soon stabilized,'' it said.
The letter of intent said, ''following the end of the hostilities, in light of the increased supply of foreign exchange as evidenced by the reversal of currency substitution, on May 6 we reintroduced our daily foreign exchange purchase auctions, consistent with our long-stated objective of strengthening our international reserve position. We have also intervened, on a few occasions, to dampen excessive exchange rate volatility. However, such discretionary intervention will be strictly limited.''
''We remain committed to implementing key fiscal structural reforms in the period ahead: Preparation of the second phase of direct tax reform is facing delay. We are still working towards a consensus on the general principles guiding the draft laws in this area (progressive reduction of benefits in free trade zones, and minimizing geographical, sectoral, and other investment incentives). We were therefore unable to meet the end-June structural benchmark to pass this legislation. Accordingly, we will complete the draft laws after a process of consultation, drawing on international practice. Preparation of the legislation will be a prior action for the sixth review. We intend to pass this legislation by end-November 2003 (prior action for the seventh review),'' it stated.
''While we missed the objective of eliminating 9,900 redundant SEE positions between end-January and end-June (structural performance criterion) by some 2,500 positions, we expect the process to gain speed as more employees seek early retirement following the completion of wage negotiations. Going forward, we will continue to rely on voluntary retirements, supplemented by implementation of the regulation adopted March 26, 2003 which lifted restrictions on retirement of public sector workers. To help ensure that the targets are met, we are intensifying our monitoring and enforcement of the reduction of redundant position at the level of individual SEEs. Our public employment monitoring system was put in place in late May, and it shows that our retrenchment and attrition program has reduced state enterprise staffing by 36,796 employees during January 2002-March 2003,'' the letter of intent said.
The letter of intent stated, ''we have finalized the draft Public Financial Management and Control law for submission to Parliament. Although Parliament's heavy workload has meant that it has been unable to pass this law (missing a structural benchmark for end-June), we now expect Parliament to do so by end-October (as a prior action for the sixth review).''
''We will also prepare new state enterprise governance legislation, with appropriate transparency and fiscal control arrangements. Owing in part to a legislative backlog, this legislation could not be passed by end-June as originally planned. We now expect Parliament to pass this legislation by end-2003 (accordingly, the structural benchmark for end-June 2003 has been rescheduled to end-December 2003),'' it noted.
''A new regulatory board law will be prepared to set standards and increase accountability (while preserving the financial and administrative autonomy of regulatory boards). New laws to regulate local governments will refine their budget systems, and ensure strict control of their borrowing,'' it added.
The letter of intent said, ''we are continuing to strengthen the banking system. Progress is being made in resolving Yapi Kredi and Pamuk banks, and in selling the assets held by the Collection Department of the Savings Deposit Insurance Fund (SDIF). We remain committed to privatizing the state banks, and to sustaining the financial and operational independence of the Banking Regulation and Supervision Agency (BRSA).''
''Yapi Kredi Bankasi's financial position has stabilized, with the integrity of its operations preserved. The special oversight committee created in February will soon present its first quarterly report to the BRSA and SDIF Board, and a summary of its findings will be published. The bank's financial performance has been in line with that of its peers. Its management, with the assistance of an advisory firm, is developing a restructuring plan that will facilitate the eventual divestiture of shares both held and represented by the SDIF,'' it noted.
The letter of intent said, ''the strategy for Bayindirbank will be evaluated once the sale of Pamukbank is concluded. Voluntary liquidation of Turk Ticaret Bankasi is still delayed by a court injunction in favor of the minority owner.''
''On July 3, the BRSA revoked the license of Imar, a medium sized-bank. The BRSA took this action after uncertainties increased about the financial condition of the bank, and depositors started to withdraw their funds,'' the letter said.
It stated, ''BRSA's financial and operational independence is being strengthened. Draft legislation setting out clear grounds and time limits for legal appeal of BRSA decisions has been prepared (meeting a structural benchmark) and is being reviewed by government agencies. Amendments will be made to the Administrative Procedures Law and the Banks Act to achieve the goals outlined in our Letter of Intent of April 5, 2003. We expect Parliament to pass these laws by end-October 2003 (a structural performance criterion).''
''The government will also ensure the BRSA's financial independence by providing for direct submission to the parliament of its budget in the new Public Financial Management and Control Law. The government would also consider favorably requests by BRSA to ease restrictions on its spending decisions in carrying out its operations,'' the letter of intent stated.
It said, ''the SDIF asset sales have commenced. The SDIF on June 30 announced the auction of loan portfolios with face value of at least 250 million U.S. dollars (meeting a structural benchmark), with bids to be submitted by November 20, 2003. After this first sale, we intend to put up new portfolios of loans (except small consumer loans) for sale every four months. The sales process should benefit significantly from our recent reform of the Execution and Bankruptcy Act.''
''The removal of the general bank guarantee has been announced. The BRSA announced on July 3 changes in the general guarantee protecting all depositors and other creditors in banks. The guarantee will be effective until July 5, 2004, after which it will be replaced by a limited deposit protection scheme. Until then, the following two schemes will be in place: the general scheme protecting all depositors and creditors in intervened banks, and a scheme fully protecting individual depositors, but not commercial deposits, in banks being liquidated directly without intervention,'' it noted.
The letter of intent said, ''the government will continue to refrain from interfering in the commercial decisions of state-owned banks. The Sworn Bank Auditors of the BRSA will complete the first of its new quarterly certifications of the State Banks in August 2003, covering the first six months of this year. Certifications thereafter will be made quarterly, and completed no later than two months after the end of each quarter.''
''A strategic study by independent consultants for the privatization of Halk Bankasi will be completed by end-September 2003. We intend to put Halk up for sale by end-2003, with Ziraat following in 2004,'' it noted.
The letter said, ''on Vakiflar Bankasi, the proposal to sell part of the bank to its pension fund proved unworkable. Alternative approaches to divesting the bank are now being considered in close consultation with the World Bank.''
''We have given privatization renewed impetus, making all tender announcements for the first half of 2003 as planned, although the actual sales of most of the large companies are still some time away: The winning bid for PETKIM (petrochemicals) was announced on June 6 and approved by the Privatization High Council. In June we made tender announcements for the privatization of TEKEL (tobacco and alcohol) and TUPRAS (petroleum refinery). In light of the strong interest shown by both domestic and international investors, we are confident of completing the sale of the two companies by end-2003.''
''A comprehensive privatization strategy for Turkey Sugar Plants was adopted by the Privatization High Council (PHC) on June 26, 2003. It envisages putting some plants up for sale in early 2004,'' it stated.
The letter of intent said, ''while the end-April benchmark relating to the privatization plan for Turk Telekom was missed, we have built on the Council of Ministers' principle decision of April 30, 2003 and have agreed with the World Bank on the next steps that need to be taken. We expect that the Council of Ministers will adopt the privatization plan by end-October 2003 (the structural benchmark will be moved accordingly, from end-April to end-October).''
It stated, ''along with the work on all these larger privatizations, we have also completed the sale of a number of smaller companies. As regards privatization revenue, cash proceeds in the first half were about 50 million U.S. dollars, below our indicative target. However, given the tender announcements already made, we are still confident that we will meet our 2.1 billion U.S. dollars end-year target.
According to the timetable in the letter of intent, the sixth review is expected to take place in October, the seventh review is expected to take place January 2004, the eighth review is expected to take place in April 2004, the ninth review is expected to take place in July 2004, the tenth review is expected to take place in October 2004 and the eleventh review is expected to take place in December 2004.
(EÖ-AÖ) 02.08.2003