IMF Letter Of Intent Announced

ANKARA - Turkey`s Letter of Intent, dated April 2, 2004 pertaining to Turkey`s seventh review, approved by International Monetary Fund (IMF) Executive Board, announced on Saturday. The letter recalled that petroleum, tobacco, alcohol and gas excises have all been increased to yield 2.4 quadrillion Turkish Liras (TL) (0.5 percent of Gross National Product GNP).
The letter says, ``we request a waiver of nonobservance for the end-December 2003 performance criterion on the elimination of redundant State Economic Enterprise (SEE) positions, in light of our strong record in reducing overall redundant positions in state enterprises. We also request a rephasing of remaining purchases. In light of the period of time available before the arrangement expires, we request the number of remaining reviews be reduced from four to three. The outstanding access is to be spread evenly, with a final test date of end-December 2004. The arrangement would now expire on February 3, 2005. To facilitate more timely monitoring within the new phasing, we have introduced an additional performance criterion on the primary fiscal balance excluding SEEs. We will continue to consult the Fund about the progress being made in implementing policies supported by the Stand-By Arrangement, and in advance of any changes to these policies.``
``We remain confident that our macroeconomic objectives for 2004 will be achieved. With lower real interest rates and increasing confidence, we expect private consumption and investment to be the main drivers of growth. Building on the recent impressive inflation performance, we believe that continued prudent macroeconomic policy will bring Turkey closer to achieving single digit inflation by meeting the program`s 12 percent inflation target by end-year,`` noted the letter.
The letter said, ``We are currently working on a strategy and detailed action plan on how to prepare Halk Bank and Ziraat Bank for privatization. The strategy would aim to increase the operational efficiency of these banks while ensuring a level playing field for competition in the banking sector. We will make public key elements and a timetable for the action plan by mid-June 2004 (a new structural benchmark). We have already announced that Pamuk Bank will be integrated with Halk bank (prior action). The integration will be completed by end-September 2004. If needed, Treasury will provide securities to facilitate the integration.``
The letter said, ``the outstanding access is to be spread evenly, with a final test date of end-December 2004. The arrangement would now expire on February 3, 2005.`` The letter added, ``the 6.5 percent of GNP public sector primary surplus target remains a cornerstone of our program.``
``We will write over to the budget an additional TL 0.5 quadrillion (0.2 percent of GNP) of special revenues during 2004, not appropriating them for the associated special expenditures. To help underpin the spending cuts, we will monitor public sector arrears carefully during the course of the year and will take early action if any pickup is detected. No further increases for pensions (other than the already announced 10 percent increase in July) are planned this year.`` noted the letter.
The letter said, ``We plan to upgrade revenue collection through tax administration reform. Planned legislation will transform the tax administration office into a semi-autonomous body within the Ministry of Finance with its Head reporting directly to the Minister. Importantly, the new body will be reorganized along functional lines and tax policy will be transferred to the Ministry of Finance. In addition, all local tax administration offices will be transferred to the new entity. We will submit draft tax administration legislation to Parliament by end-May and expect parliamentary passage by end-July (both new structural benchmarks). We have already set up a steering committee to oversee the implementation of these reforms and to prepare an action plan with clear delineation of responsibilities and targets by end-April 2004. The committee will then coordinate the implementation of the plan until the restructured tax office commences its operations in January 2005.``
``Social security deficits will be addressed to put the system on a sustainable path. We are updating our assessment of the fiscal implications of planned social security reforms as well as analysis aimed at identifying additional savings. In the area of pensions, this would include institutional reform of the three existing systems and parametric reform, to move the system to long-run sustainability. By end-June, we will develop a range of ambitious reform options, run the associated simulations, and present the findings to the Council of Ministers. Moving forward, we will adopt a rules-based approach to increasing pensions based on the new social security framework. Regarding the planned introduction of universal health insurance, we will put together a coherent and affordable reform package that seeks to offset the costs from wider insurance coverage by end-July. Also, by end-June we will abolish the minimum social security contribution base. Submission to Parliament of draft social security reform legislation consistent with sustainability objectives, along with separate legislation for compensatory measures, will be set as a new performance criterion during the Eighth Review,`` noted the letter.
The letter said, ``Having secured cabinet approval of a privatization plan for Turk Telekom last November, we expect to move ahead with the block sale of 51 percent of the shares by end-May 2004.``
``We plan to announce a new strategy for the sale of TEKEL`s tobacco unit by end-April 2004, and we will shortly hold fresh talks with potential investors in PETKIM (petrochemicals). This year we also plan to proceed with the privatization of SEKER (sugar refineries), up to a 15 percent stake in Turkish Airlines, and the National Lottery. We have adopted an electricity reform and privatization strategy, which envisages the launch of privatization tenders in energy distribution by March 2005. To expedite the privatization process, we will amend the public procurement and public contract legislation to allow for success fees and underwriting, and more flexibility in the hiring of consultants,`` noted the letter.
Noting, ``We will reassess the value of SDIF asset holdings to foster a better understanding of the recovery rates that might be expected from asset sales, `` the letter said, ``The new SDIF board is reconsidering the strategy for selling SDIF assets and will, by end-April 2004, announce revised strategies for the resolution of assets of intervened banks, including claims against former bank owners, and shares and companies taken over including those seized from the former owners of Imar bank (a new structural benchmark). The first asset disposal auction will be completed by end-July 2004.``
``We will reassess the value of SDIF asset holdings to foster a better understanding of the recovery rates that might be expected from asset sales,`` noted the letter. The letter added, ``To this end, for each intervened bank the SDIF will, by end-June 2004, announce the value of assets taken over at the time of intervention, accrued interest based on market rates as of end-June 2004, estimated market values (or recovery rates) and the costs borne by SDIF for restructuring or liquidating banks.``
The letter stressed, ``Treasury has already issued debt to cover all liabilities of the SDIF. As of end-December 2003 SDIF liabilities amounted to USD 36.2 billion, including USD 13.6 billion of accrued interest.`` It said, ``After the revaluation of assets and expected future recoveries, the SDIF and Treasury will, by end-December 2004, agree on the resolution of Treasury receivables from the SDIF.``
``We are also making progress in other important areas of banking reform: As previously announced, we intend to replace the blanket guarantee with a limited deposit protection scheme, in line with EU practices, on July 5, 2004. In preparation for this step, the BRSA will, by end-April 2004 present to the government a thorough assessment of the banking system (a new structural benchmark) and publish at the same time a summary of the presentation. In parallel, the CBT will also assess the effect of the abolition of the blanket guarantee on the Turkish payments system,`` noted the letter.
The letter said, ``We will submit, by the summer recess, legislation to Parliament enabling the transfer of the regulation and supervision of nonbank financial institutions from the Treasury to the BRSA, effective by January 1, 2005.``
The letter also added, ``following the recent amendments to the Execution and Bankruptcy Law, implementing regulations are expected to be introduced shortly (a December 2003 structural benchmark).``
The letter stressed that monetary policy of Central Bank of Turkey would continue to focus on annual inflation target of 12 percent.
``In light of increased real currency demand due to the fall in inflation and the increase in banks` required reserves, we propose raising our base money targets for the remainder of the year. The targets will continue to be kept under close review and further modification would be proposed if there is strong evidence of a shift in base money demand,`` the letter said.
The letter noted that the strength of the Turkish lira, the decline in inflation expectations, and the deceleration of inflation in recent months meant that prospects for meeting this year`s 12 percent target were very good.
``In January we re-introduced daily foreign exchange purchase auctions and in March and April increased the purchase amounts. This will further bolster our international reserves. While we have intervened on a few occasions to dampen excessive exchange rate volatility, such discretionary intervention will continue to be strictly limited,`` the letter stated.
The letter said that Turkey was undertaking a comprehensive review of the Banking Act and noted that by end-April, Turkey would complete the review of the Banking Act and prepare draft amendments to strengthen the Act in line with European Union (EU) standards.
``Areas that will receive particular attention include: (i) ``fit and proper`` criteria for bank owners; (ii) on-site inspections; (iii) legal protection of Banking Regulation and Supervision Agency (BRSA) and Savings Deposits and Insurance Fund (SDIF) staffs for actions taken during the course of their duties; and (iv) delineation of responsibilities between BRSA and SDIF. We will submit a revised Banking Act to the Council of Ministers by mid-May 2004 and to Parliament by the summer recess (a new structural benchmark).`` the letter of intent said.
The letter of intent noted, ``further progress is being made on the Imar bank case. Upfront cash payments were made to depositors in January, and passbooks, which will be repaid according to the announced schedule over the next 36 months, have been issued for the remaining deposits. The Imar bank inquiry will start shortly with the appointment of its chairman and approval of its terms of reference (prior action for the Seventh Review), and we will make public its findings by end-August 2004 (a new performance criterion).``
``We are currently working on a strategy and detailed action plan on how to prepare Halk bank and Ziraat bank for privatization. The strategy would aim to increase the operational efficiency of these banks while ensuring a level playing field for competition in the banking sector. We will make public key elements and a timetable for the action plan by mid-June 2004 (a new structural benchmark),`` the letter of intent added.

(BRC) 17.04.2004