ANKARA - The objective of Turkish government was determined on Friday as unleashing Turkey's development potential by providing a stable macroeconomic environment and implementing fundamental structural reforms in the letter of intent which was approved by International Monetary Fund (IMF) Executive Directors Board regarding fourth review of Turkey and dating April 5, 2003.
It was stated that the government would continue with its disinflation policy and stressed that the 59th government which won the vote of confidence in the parliament on March 23 would continue rapidly to implement the economic reform program in the 46-article letter of intent which was signed by State Minister Ali Babacan and Central Bank Governor Sureyya Serdengecti.
The letter of intent said, ''the government's main goals are disinflation, debt reduction, and lasting rapid growth. We are committed to sustaining the reduction in inflation and we will continue with our disinflation policy to further enhance the prospects for rapid growth in the economy. Our public sector primary surplus target of 6.5 percent of GNP for 2003 is of paramount importance both to fuel confidence in our program and to reduce the high net public debt to GNP ratio.''
''For 2004, and over the medium term, we remain committed to our 6.5 percent primary surplus target. Should prospects for debt reduction change significantly we would be prepared to adjust the target, in close consultation with the Fund, provided that this is consistent with our goal of reducing the public debt ratio to levels specified in the Maastricht Treaty,'' the letter of intent noted.
The letter said, ''several structural commitments were missed due to early elections, legal proceedings, or else due to the time constraints faced by the government. These include the structural performance criterion on eliminating two thirds of the remaining redundant state economic enterprise (SEE) positions by end-October, and structural benchmarks relating to resolving Pamukbank and ownership in Yapi Kredi Bank, announcing the sale of part of the SDIF's loan portfolio, various elements of the tax administration reform, adopting a privatization plan for Turk Telekom, passing legislation to establish a code of ethics for civil servants and public administrators, submitting to Parliament legislation to improve state enterprise governance, enacting comprehensive reforms of the Execution and Bankruptcy Act, including net lending as an appropriation in the draft 2003 budget (which was met only in part), and putting in place an integrated quarterly monitoring system of general government and SEE employment. Nevertheless, we remain committed to the structural reform agenda and seek rapid progress in this area in the period ahead.''
The letter of intent said, ''we are taking steps to bring our program of eliminating redundant positions in state enterprises back on track. As of end-January 2003, we were some 10,000 short of the end-October 2002 target of 30,600. We have now developed a strengthened plan to first catch up with this interim target and then reach our revised goal of eliminating all the identified 45,800 redundant positions by end-December 2003.''
''On March 26, 2003, the Government adopted a regulation lifting existing restrictions on retirement of public sector workers enabling SEE managers to address the redundancy problem in their enterprises. We believe this will result in a cumulative reduction in the number of redundant positions, starting from end-January 2003, by 9,900 by end-June 2003, 19,400 by end-September 2003, and 25,074 by end-December 2003. The number of eligible retirees exceeds the number of redundant positions in some companies and falls short in others (the mismatch amounts to 5,025 workers). To achieve our target in each state enterprise, we will transfer redundant workers ineligible for retirement into state enterprises which have open positions due to excess retirements (subject to the transferees having matching qualifications),'' it stated.
The letter of intent said, ''the adoption of the government regulation and the public announcement will be prior actions for the fourth review, while the quantitative targets listed above will be structural performance criteria. To ensure that our steps will achieve lasting reductions in public employment, open redundant positions will be permanently eliminated. To help enforce this, we will fully implement a quarterly monitoring system for general government employment by mid-May 2003, meeting a structural benchmark with delay. Since we are extinguishing a public sector liability, the net costs of retrenchment will again in 2003 be excluded from the calculation of the public sector primary balance for program purposes up to TL 500 trillion.''
''We will steadfastly implement the new Public Procurement Law, which became effective on January 1, 2003. The new procurement framework is an important signal of the government's commitment to fiscal reform and fighting corruption. It is broadly in line with international standards. It has been prepared after wide consultation with the World Bank and the EU. We will monitor the implementation of the new system under the law. If improvements are deemed necessary, we will consult with World Bank and IMF staff on possible amendments,'' the letter of intent noted.
The letter stated, ''We continue to make progress in improving debt management. To reduce risks and improve the financing picture for 2003, we will continue our policy of building a deposit buffer at the CBT through borrowing in excess of redemptions when market conditions allow. In addition, we seek to develop a cash management mechanism to borrow and lend short term as provided for in the new Debt Management Law.''
''The recently started military conflict in neighboring Iraq will not derail achievement of our key macroeconomic and structural reform objectives. In the event of a swift conclusion to hostilities we believe our macroeconomic framework and objectives for 2003 will remain viable. At the same time, we recognize that there are uncertainties, reflected in our financial markets, as to the magnitude and duration of the economic impact of the conflict. Accordingly, we are taking fiscal actions to promote a smooth rollover of government debt, by blocking central government budgetary appropriations for discretionary spending (except defense) until further notice. We are prepared to continue this blockage, with annual savings of at least 1 percent of GNP, as long as is required by our budget financing program. Moreover, if prior to the Fifth Review developments point to significant changes to the macroeconomic framework or in financing prospects, we stand ready, in close consultation with the Fund, to revise the program's macroeconomic projections, adopt on a timely basis additional fiscal and other measures necessary to safeguard our program objectives and agree to revised program modalities'', noted the letter.
The letter said, ''any use of additional bilateral financing will be fully in line with our program commitments. The U.S. government has proposed economic support for Turkey in the grant-equivalent amount of 1 billion U.S. dollars that could be converted into loans of up to 8.5 billion U.S. dollars. Should this or other bilateral assistance materialize, we will use it primarily to strengthen our debt reduction strategy through lengthening maturities and lowering interest rates. Additional spending to address temporary costs arising from the Iraq conflict will be financed by grants or by taking offsetting fiscal measures, thereby preserving our primary surplus objective.''
''The better-than-expected outcomes for 2002 are clear evidence that our targets for 2003 of 5 percent growth and 20 percent inflation are appropriate and feasible with the strict implementation of our program strategy described in this letter. The strong recovery in 2002 bodes well for growth in 2003, which we continue to project at 5 percent, in light of strong performance in the early months of the year for industrial production and notwithstanding downside risks resulting from the war in Iraq'', stated the letter.
The letter of intent noted, ''moreover, civil servant salaries and public worker wages will not be subject to backward-looking indexation. More generally, the Economic and Social Council will be instrumental in conveying the government's commitment to breaking the cycle of backward-looking indexation to all parties involved in wage setting in the economy.''
''We will overhaul the administrative and institutional framework for managing social security. By end-April 2003 we will enact legislation for SSK, Is-Kur, and Bag-Kur which establishes the administrative mechanisms to support earlier pension reforms, and provides firm legal grounds to implement our 2003 social security measures (a new structural benchmark). By end-2003, we will enact new framework legislation with the aim to include all three pension institutions under one organization (the legislation would also enact any necessary parametric reforms to ensure the medium-term solvency of each individual fund). Health insurance and non-pension transfers (for example, for social services) would each be transferred to separate institutions'', said the letter.
The letter noted, ''we will reform public administration. In particular, we will complete a functional review of government by July 2003. The primary objectives of this review are to restructure the public management in a citizen and sector oriented manner, accelerate the decision-making process by simplifying public organizational structure, and reduce public expenditures. To follow up on this, by end-2003, the Council of Ministers will adopt a civil service reform strategy.''
''We will further rationalize direct taxation by submitting to Parliament by end-May legislation to minimize geographical, sectoral, and other investment incentives (including, in line with earlier commitments, the progressive reduction of benefits in Free Trade Zones). We expect that this legislation will be approved by Parliament by end-June 2003 (a new structural benchmark). Also, by end-June 2003 we will develop and implement through government decree proposals to harmonize taxation of financial income at the withholding stage, with due regard to financial sector stability. To improve the transparency of future tax policy, and help preserve the benefits of the direct tax reform, beginning with the 2004 budget we will publish details (including estimated costs) of remaining tax exemptions and incentives. We attach particular importance to improving taxpayer compliance. Our Tax Peace plan, which restructured tax arrears, is the last such benefit taxpayers will receive. There will be no tax amnesties or restructurings, and in support of this aim, we intend to fundamentally reform the tax administration'', noted the letter.
The letter of intent stated, ''we will eliminate all special appropriations in the context of passage of the Public Financial Management and Financial Control Law by end June. We will also prepare and pass legislation by end-June to eliminate the accounts and give authority to the Ministry of Finance to collect the revenues. The new Public Finance and Debt Management Law strictly controls revisions to foreign-financed investments, including by incorporating for the first time foreign project credits disbursed in-kind into initial investment appropriations.''
''A committee will be formed with representatives of Treasury Undersecretary, Ministry of Finance, Central Bank, State Planning Institution and Banking Regulation and Supervision Agency (BRSA). The Committee will develop an action plan to reduce the intermediation costs of the banking sector, including costs imposed by taxation, reserve requirements, and other duties imposed by various institutions. This action plan will be implemented as monetary and fiscal conditions permit.''
The letter of intent said, ''on Ziraat Bank, we are in the process of defining an appropriate corporate structure in advance of its privatization, which will take into account the sui generis role of the bank in providing public services and finance to the agricultural sector. Both activities shall continue to be carried out in line with standard commercial banking principles.''
The letter of intent stated, ''for the privatization of Halkbank, a strategic study will be carried out by independent outside consultants. This study will be commissioned by end-April 2003 and completed by end-September 2003.
''On Vakif Bank, after the first unsuccessful sale process, the bank has undertaken both operational and staff restructuring and has divested some of its nonfinancial assets. A strategy for the sale is being developed by the bank in consultation with the World Bank, with the aim of completing the sale by end-October 2003,'' the letter said.
''In 2002, the privatization targets were not fully met, in part because of the elections. In 2003, privatization is a top agenda item in the Government's program. The government has conveyed its strong intentions by announcing the 2003 privatization program on January 13. Moreover, the Privatization Administration (PA) is examining the related legislation to include the Istanbul Stock Exchange, the Istanbul Gold Bourse, the National Lottery Agency, and Halkbank in its portfolio'', stated the letter.
The letter noted, ''the new program aims at attracting a wider range of investor interest and is expected to yield 4 billion U.S. dollars in 2003. The government will concentrate on privatization of large public companies, but will also sell some medium and small-sized public assets. To highlight the main efforts:
The PA, working with international consultants, has formulated a privatization plan for TEKEL, including strategies for dealing with the key issues of overemployment, debt settlement, and excess inventory. Owing to the elections, this plan could not be adopted in 2002. However, on March 31, 2003 the Privatization High Council approved the plan, meeting a prior action for this review.''
''Since the present market conditions do not support a global offering, the PA is proceeding with the preparations for the privatization of TUPRAS through a block sale to a strategic investor in the second quarter of 2003. Other methods (such as a convertible bond issue) that would result in a majority privately owned company could also be considered depending on market conditions. With regard to Turk Telekom, the Council of Ministers was unable to adopt a privatization plan by end-November 2002 (a structural benchmark) since the necessary amendments to the Telecom Law could not be passed owing to the elections. The plan is now expected to be approved by the Council of Ministers by end-April 2003. This strategy will aim to divest at least 51 percent of the company through: a single block sale, or a combination of block sale and public offering, or a public offering. The plan may also include provisions for convertible bond offerings'', said the letter.
The letter noted, ''concerning TSFAS(SEKER, the sugar company), the road map for its privatization is expected to be approved by the Privatization High Council by end-June 2003.
In the electricity sector, we will move decisively with the preparation for sale and privatization of key assets. As a first step, distribution will be reorganized into 33 entities. The number of distribution entities may be further consolidated. Similarly, power plants will be grouped into multiple-plant entities by end-April 2003. These distribution and generation entities (excluding those subject to legal process regarding TOORs) will be transferred under the scope of privatization by mid-May 2003. Following preparatory work-by the PA to ready the companies for sale and by the Energy Market Regulatory Authority to ensure a well-functioning energy market-the distribution entities will be transferred to the PA portfolio by end-September 2003. The tenders for the distribution entities will start in December 2003. To complement this process, the government will determine the best way to resolve the outstanding transfer of operating rights (TOOR) contracts expeditiously, based on a review and estimate of the contingent liabilities attached to such contracts to be completed by end-April 2003.''
''Among a comprehensive set of actions is the Law on "Freedom of Information for Citizens", which has already been drafted and sent to agencies for comments and is expected to be passed by end-September 2003. Legislation establishing a code of conduct for civil servants and public administrations is expected to be passed by end-July 2003, meeting a structural benchmark with delay'', stated the letter.
According to the letter of intent, the Fifth Review will be done on June 15, 2003.
(EÖ-GC-AY) 19.04.2003