ANKARA - Turkey's letter of intent was made public after the International Monetary Fund (IMF) Executive Board completed the eighth review of Turkey's economic performance under the Stand-By Arrangement, and released another tranche of loan worth of 661 million U.S. dollars.
The letter of intent signed by Turkish Minister of State for Economic Affairs Ali Babacan and Turkish Central Bank Governor Sureyya Serdengecti said, ''adherence to our macroeconomic program has enabled Turkey to ride recent market turbulence with limited adverse effects. Our floating exchange rate regime as well as our strong fiscal position have helped us adjust promptly to a combination of tighter international capital markets and pressures on the current account balance resulting from strong import demand and higher oil prices. We have continued to experience broad-based growth from the production side as well as the demand side, and we confidently expect to meet, or exceed, our program projection of 5 percent growth this year. Consumer price inflation has fallen to 9 percent, a new decades-long low.''
''We are determined to end the 'stop-go' economic policies of past years. The recent pace of consumer demand growth as well as related imports, if continued, could have posed risks for the sustainability of our growth trajectory. However, a rise in market interest rates and slowing of credit growth should contain domestic demand while lira depreciation will impact the current account balance. The over performance of budget revenue should help to dampen demand pressures,'' it said.
The letter of intent noted, ''In order to sustain rapid growth over the medium term we are also pressing forward with our ambitious economic policy agenda. We have met or exceeded most fiscal and monetary targets set under the program. In the area of structural policies, we have moved forward decisively in most areas although some unavoidable delays have arisen. SDIF has revalued its assets and announced a new strategy for asset sales, excess capital in state banks has been removed and key elements of a strategy for restructuring and eventual privatization will be announced shortly. The wholesale revision of the Banking Act, however, is delayed to ensure adequate consultation with stake holders and will be passed on to parliament in September.''
Stressing that Turkey remained on course to achieve macroeconomic objectives for 2004, the letter of intent said, ''Consumer price inflation has fallen to single digits, while growth in the first part of the year has been stronger than anticipated. Although higher world oil prices and the depreciation of the exchange rate in April and May could raise the level of consumer prices temporarily, we are well on track to meet our target of 12 percent inflation at end-year. These same factors, together with the recent increase in interest rates, should slow domestic demand growth in the coming months, bringing output growth more closely in line with the 5 percent program projection. On the external side, we expect a current account deficit of some 3.5-4 percent of GNP with strong exports and tourism receipts in large part offsetting higher imports. In light of strong net capital inflows early in the year our net international reserves position will be maintained.''
''For 2005 and beyond, our emphasis will be on maintaining disinflation and debt reduction through sustaining our high primary surplus. This environment should permit growth to continue at around 5 percent. We expect inflation to further slow to 8 percent by end-2005. In order to continue reducing real interest rates we will maintain our tight fiscal policy in 2005. Our 2005 budget call will be consistent with our medium term debt reduction strategy,'' it said.
Pointing out that they were finalizing the medium-term program aimed at accelerating economic convergence with the European Union (EU), the letter of intent said, ''Our economic policy priorities ahead are focused on tax reform aimed at base broadening and rate reductions, affordable health and social security reform, and completing restructuring of the banking sector. We will continue our close policy dialogue with the Fund in 2005 and beyond.''
''Fiscal policy remains on track to meet, or exceed, our 6.5 percent of GNP public sector primary surplus target in 2004. Strong revenues as well as expenditure shortfalls have contributed to this performance through end-May. We intend any revenue over performance to provide a cushion to help ensure that the 2004 budget can be fully implemented.''
''To ensure full implementation of the approved budget and an appropriate fiscal stance we have written over to the budget 1.2 quadrillion Turkish liras (TL) of special revenues cutting the scope for extra budgetary spending appropriations as a prior action for this review. While this amount is slightly lower than previously envisaged, our intention remains to transfer 2.5 quadrillion TL special revenues for the whole year. We have increased petroleum excises. In light of the exceptional increase in world oil prices in recent months, excises were lowered temporarily to limit the pass through to domestic prices. As oil price increases now appear not to be temporary, we have increased petroleum excises effective June 29, only narrowly falling short of budget assumptions (structural benchmark for the review). Adjusting excises in line with budget assumptions remains a structural benchmark. The petroleum product market will be liberalized on January 1, 2005 with prices determined by market forces,'' it said.
-INCOMES POLICY-
Noting that Turkey had maintained its incomes policy consistent with its inflation objective, the letter of intent said, ''public sector wages and salaries have been increased in line with the inflation target. The Minimum Wage Commission announced the minimum wage for the remainder of 2004, with an increase in line with those of public workers and civil servants and with no budget compensation for employers. We have submitted the draft decree to the Council of Ministers to eliminate the RUSF levy on commercial credits later this month as a further step to reduce financial intermediation costs. Finally, significant future changes in tax policy will be aligned with the budget cycle.''
-STRUCTURAL REFORM PROGRAM-
''We are moving forward in implementing our structural reform program to support a sustained improvement in Turkey's fiscal performance. Draft revenue administration restructuring legislation, including provisions to make GDR a semi-autonomous agency within the Ministry of Finance, reorganization along functional lines, and to move tax policy functions into the Ministry of Finance has been finalized. It is expected to be submitted to parliament by end-October 2004. Our strategy for enhancing state enterprise governance is complete. We will complete the legislative changes in line with the strategy by end-2004,'' it said.
-SOCIAL SECURITY REFORM-
Recalling that the Ministry of Labor had developed a framework for analyzing social security reforms, the letter of intent said, ''over the summer, we will work on a range of reform options. We will decide our preferred pension system reform strategy by end-September 2004 (new structural benchmark). This strategy will include unification of the existing three pension institutions and an objective to place the pension deficit on a firm downward path by 2007 and to reduce it to 1 percent of GNP over the long term. In the area of health insurance, we plan to have a phased introduction of universal health coverage with any additional expenditures covered by compensatory measures. We will submit this reform package to parliament in mid-December 2004 (performance criterion) with a view to passage by January 2005 and a phased implementation during 2005-07.''
-PROVINCIAL ADMINISTRATIONS-
''In the context of preparing legislation for the decentralization of some central government functions to municipalities and special provincial administrations we will ensure that budgetary discipline is maintained. The legislation will limit municipalities and special provinces debt stock to no more than annual revenue. Metropolitan municipalities debt stock will be limited to 1.5 times annual revenue. Debt limits will be reviewed and tightened, if necessary, in the context of forthcoming legislation concerning intergovernmental relations. New domestic borrowing of all local governments in excess of 10 percent of annual revenues will require central government authorization. The legislation will also require local governments to disseminate timely and accurate fiscal data to enable monitoring and will be complemented by separate legislation that clarifies intergovernmental fiscal relations. A committee is preparing a comprehensive report on the current level of local government debt, including enterprises under local government control,'' it said.
The letter of intent said, ''arrears of local governments, including penalties and interest, will be dealt with on a case by case basis by a newly created Commission empowered by law to restructure claims, subject to Council of Ministers' approval.''
''Monetary policy remains focused on achieving this year's 12 percent inflation target, and reducing inflation over the medium term.''
''The floating exchange rate regime remains central to our ability to adjust promptly to changing global circumstances. The recent exchange rate depreciation represents a correction largely in response to tightening global capital markets and a weakening of the current account balance. Its impact on the price level should be contained, and monetary policy will aim to limit second-round effects on inflation,'' it said.
Noting that coordination between the Treasury and the Central Bank in their respective policy areas of debt management and monetary policy had been strengthened, the letter of intent said, ''coordination at the operational level, on a daily basis, is working well. To further enhance the effectiveness of policy coordination we will prepare a joint Central Bank-Treasury action plan, by end-September 2004, to address remaining legal, regulatory or procedural obstacles.''
-FINANCIAL SECTOR REFORM-
''We have completed a comprehensive review of the Banking Act and prepared a new draft Law on Credit Institutions to bring the legal framework more closely in line with European Union (EU) standards. By end-September, 2004, we will conduct seminars for the banking community and other stakeholders to help contribute to the understanding of the new law's principal objectives and features. We will submit the draft law to Parliament by end-September 2004. We expect Parliament to pass the Law on Credit Institutions with the features above by end-November 2004,'' it said
-OPERATIONAL AND FINANCIAL INDEPENDENCE OF BRSA AND SDIF-
The letter of intent noted, ''we are committed to maintain the operational and financial independence of the BRSA and the SDIF in the new banking act and other relevant legislation. Regulation and supervision of non-bank financial institutions will be transferred from the Treasury to the BRSA by January 1, 2005.''
Referring to developments about the Imar Bank, the letter of intent said, ''the Imar bank inquiry is underway. The commission was appointed in late April and is expected to present its findings to the government in a final report, to be made public by end-August 2004.''
''Our plan for the resolution of Treasury receivables from the SDIF arising from financing the restructuring of the banking system by end-2004 is on track,'' it said.
-STATE BANKS-
The letter of intent said, ''the key elements of our new strategy for state banks will be announced shortly. Legislation for the integration of Pamukbank into Halkbank is expected to be approved by Parliament shortly. All legal, managerial and financial issues regarding the integration, will be completed by end-August 2004. The integration is expected to be completed by end-October 2004. Treasury will recapitalize Pamukbank and eliminate the negative net worth before integrating Pamukbank and Halkbank. Over time, Treasury will also replace Halkbank's holding of non-marketable securities with securities issued on market terms. The strategy for Ziraat bank has been developed and will be announced by end-July. Our objective remains to privatize these banks as soon as the restructuring is complete and when market conditions permit.''
''The due diligence for Vakifbank has been delayed. The terms of reference have been finalized, the bank is in the process of hiring a consultant, and the due diligence will be completed by end-September 2004,'' it said.
-PRIVATE SECTOR DEVELOPMENT-
The letter of intent said, ''as a follow up to the Investment Advisory Council (IAC) meeting in March, we have prepared draft legislation to streamline permission and approval procedures for investors. Moreover, we revised the draft law on establishing an Investment Promotion Agency and reflected the views of the various stakeholders. Our work also extends to the effective protection of intellectual property rights enforced by new legislation. We will submit a progress report to the Prime Minister and IAC members by October 2004.''
-PRIVATIZATION-
''Our privatization program is delivering good results and we have made progress on some legal and procedural issues. In the first quarter, cash receipts from privatization reached 311 million U.S. dollars, exceeding the indicative benchmark. We have amended public procurement legislation to simplify the hiring of advisors, and are preparing legislative amendments to facilitate sales of minority holdings,'' it said.
-TUPRAS-
The letter of intent said, ''due to a legal ruling halting the sale of TUPRAS we may fall short of our annual privatization receipts target of 3 billion U.S. dollars, though we are determined to maintain forward momentum. To this end, a law enabling the sale of more than 45 percent share of Turk Telekom to foreigners is approved and we expect to launch the tender process before the end of the year. We are also planning public offerings for 10-15 percent shares of PETKIM (petrochemicals) and Turkish Airlines. Privatization of the National Lottery is pending parliamentary approval of the legal framework, and then we will proceed to a request for proposals.''
(UK) 31.07.2004