EU Optimism versus IMF Concerns

Turkey

Economic News

22 Jul 2010
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With the country's leaders now finally included in the European Union family photograph, thanks to June's EU Thessalonika summit, a new mood of optimism has been evident in Ankara. A determined rash of new, EU-oriented legislative reform and a thawing in relations with the US have also added to the feeling that Turkey is entering the summer months in much better shape than some had predicted. Onlookers at the International Monetary Fund (IMF), on the other hand, would sound a note of caution. Progress in Turkey's efforts on the European front have been coupled with delays in key reforms required by the IMF.



The government's 6th EU harmonisation package had raised controversy back in early June with reports that Turkey's military was unhappy with some of the proposed reforms. A lengthy meeting of the National Security Council (MGK) early June produced further rumours of a civilian-military clash, and of potential delays in the EU reform process as the government would reportedly wait for further consultations with the generals before moving ahead with the harmonisation package.



Yet in the end, the government decided not to wait for the military and pushed the package through. This served to impress EU observers, looking for evidence that the Turkish army's considerable political influence be lessened. At the Thessalonika summit, EU leaders were warm in their praise for the government's efforts to harmonise with Europe.



The harmonisation package also works in line with Turkey's National Programme, a major body of political and economic reform worked out by the government and EU representatives. The programme foresees 87 new laws coming into force, along with amendments to 53 existing ones. Some 82 other legal provisions are envisaged and 380 new regulations. Foreign Minister and Deputy Prime Minister Abdullah Gul announced June 26 that the aim was to have the National Programme ready for debate July 1 with the whole deal signed and sealed with the EU by the end of the same month.



The contrast between Turkish relations with the EU and the IMF came into sharp relief after it became clear Turkey would have to delay its 5th review of its IMF-backed economic programme. This came on the heels of similar delays with the 4th review and many observers believe that the 5th and 6th reviews would have to be combined, most likely in August.



If Turkey completes the two reviews, then a further USD1bn tranche of IMF loans will become available. Yet completion of the reviews depends not only on positive economic indicators, but also on structural adjustments having been legislated and, more importantly, implemented. This was cited as a weakness in a Deutsche Bank report end of June given wide airing in Turkey's press.



"Policy performance over the last few months has not kept pace with the market-driven improvement in financial indicators," the DB report warned.



The government has managed some of the measures it signed up for under the 4th review - such as passing direct tax reform legislation - but other, stickier areas remain. These include the more politically dangerous commitments to slash public sector employment, social security reform and changes to the bankruptcy law. On the privatisation front, a government commitment to complete planning for the sell-off of land line monopoly Turk Telekom by the end of April is also still outstanding.



While market indicators have on the whole been positive, the concern that all may not really be well underscores longstanding distrust of the government in financial circles. Prime Minister Recip Tayyip Erdogan's Justice and Development Party (AKP) carries with it a great deal of political baggage, as far as many market movers are concerned, with a perception widely current that given the slightest chance, the AKP would unlock the coffers and unleash a flood of cheap loans, government jobs and investment projects.



The concern does gain resonance too when the government makes moves such as that in late June, when it put forward a proposal to dramatically increase staff at the state Religious Affairs Department from around 1600 to 15,000. This flew in the face of the government's commitment under the IMF-backed economic programme to cut state employee numbers by 9,900 before the end of June.



Likewise, a proposal that the state-owned Halk Bank should extend loans to private businesses at 30% - well below the market average - also caused jitters, especially when the state banking system has long been criticised for past excesses in extending bad loans and racking up massive "duty losses".



Yet the government itself sees much of this as unnecessarily pessimistic. On June 16, Gul had told reporters that the time was "fast approaching" when the country would no longer need the IMF at all. He said that the current programme would be finished by the end of 2004 and after that, Turkey would be going it alone.



"The thing that matters is that we must do the things that we have to do," he added. Few would disagree - not the least, the IMF.

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