Dervis Hands in Long-awaited Resignation

Turkey

Economic News

22 Jul 2010
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Turkey’s Economy Minister Kemal Dervis resigned from the government on August 10th after weeks of speculation about his future in a coalition that had grown increasingly hostile to his presence in the cabinet.



Dervis announced his decision a day after meeting with Prime Minister Bulent Ecevit, who has in the past week turned up the pressure on the non-party economy minister to choose between his post and his much publicised political aspirations.



"We spoke yesterday and [Ecevit] implied that I should consider [my position in the government]," Dervis said in Ankara on August 10th. I still have a great deal of respect for the prime minister, and he has served Turkey well."



Dervis met with Ismail Cem and Husamettin Ozkan of New Turkey Party (YTP) in Istanbul after his resignation, but weeks of speculation that he would join the centre-left group went unfulfilled. He said only that his co-operation with them was continuing.



Dervis was linked early on to the YTP, but has since maintained contacts with other centre-leaning parties in an effort to create a broad social-liberal alliance that would end the country's tradition of shaky coalitions.



"I think Turkey needs a government of people who agree with the things that need to be done and to the method for accomplishing these things, rather than a coalition government," Dervis told reporters after his resignation.



Masum Turker of Ecevit's Democratic Left Party (DSP) replaced Dervis at the economy minister post, promising to continue the IMF prescribed economic regimen.



"An election economy will be avoided. Resources will continue to be utilised in line with the economic programme," Turker said over the weekend.



The International Monetary Fund (IMF) announced on August 7th that it had completed a third review of Turkey's economic performance, allowing the country to draw up to $1.1bn in loans immediately.



The IMF's biggest debtor, Turkey is benefiting under the current agreement from about $17bn in loans, and has to date drawn some $12bn. The IMF said Turkey was "to be commended" on its implementation of the economic recovery programme.



Horst Kohler, IMF managing director and chairman, said the government's steady pursuit of the programme had resulted in "a solid recovery in economic activity, a sharp drop in inflation, and a strong balance of payments performance."



Year-to-year inflation currently stands at about 42%, in line with the government's year-end target of 35%.



But the country is heading for early polls on November 3rd, and based on past performance when elections are afoot there is reason for concern.



A new IMF pact in 1998 was preceded by increases in public sector wages, generous agricultural support price hikes, and transfers to prop up state banks.



Heading to the general elections in April 1999, the government pursued an expansionary economic policy, with public sector wages as a percentage of GNP in 1999 rising from 7.2 to 8.4. Domestic debt rose to 39% of GNP in 1999, up from 14% in 1994.



The 1990s saw a lifting of restrictions on financial transactions and integration into the ups and downs of world financial markets, says Ahmet Oncu, a professor at Sabanci University's Graduate School of Management. Interest rates on government debt exceeded the inflation rate by some 30%, he says.



"In order to catch and beat the returns on international securities and domestic foreign exchange saving accounts, governments offered high real interest rates on government papers. The outcome was a rapid growth of public debt."



Turkey's debt servicing costs were around 103% of tax revenues in 2001, up from 48% in 1997.



Key to the country's agreement with the IMF is paying down its huge debt load, calculated as around $76bn at the end of June. Yields on Turkey's domestic debt soared 20 points after Ecevit fell ill, and now stand steady at about 72%.



The current IMF-backed programme is meant to wrest the country from its worst economic crisis since 1945, which was blamed on the country's beleaguered banking system. Prior to the February 2001 crisis, 70% of government debt was held by banks, and a major demand of the IMF is the reform of these lenders.



But it remains to be seen whether the upcoming election campaign will sideline commitments to economic reform.



"While Parliament's decision to hold elections on November 3rd points to a resolution of the uncertainty and has already resulted in some easing of financial market conditions, it will be essential that the authorities implement the programme to the fullest extent," said Kohler.



Parliament's decision was welcomed by markets and outside observers after months of political uncertainty since illness in early May kept Ecevit from his duties and called into question the coalition's grip on the political agenda and the huge IMF-backed stabilisation package.



According to Oncu, the programme will not be sold on the cheap in a competitive "political market" consumed by the upcoming polls.



"No political ideology can deny you have to have control over the budget decisions in order to attract investors," he says.



Regardless of which party comes to power, they must adhere to the common vision of Turkey's drive for economic stability and to the commitment to transparency and the independence of economic decision-making bodies, he says.



IMF Turkey desk chief Juha Kahkonen acknowledged on July 29th that early elections could "delay reforms where legislation is required."



Meanwhile, the State Statistics Institute announced on August 9th that industrial production was up 6.6% in June compared to last year, but is still down 3.9% on the year.



Paying down the domestic debt will dog the country's economic programme for some time, with the Treasury estimating some TL120 000tr in domestic borrowing for 2003. According to its agreement with the IMF, Turkey has promised to cut average t-bill yields to 46% over 2003.

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