As the expiry date of Turkey's $10bn International Monetary Fund (IMF) loan deal approaches, the question of the future role of the IMF in the Turkish economy has been on the agenda for officials in Ankara and Washington. While a new stand-by loan arrangement has been ruled out, the IMF will remain active in Turkey, monitoring fiscal policy and possibly extending emergency loans when needed.
Speaking at a press conference in Washington on April 14, Mehmet Simsek, the minister of economy, said the government had reached an agreement with the IMF regarding a final review of the current stand-by agreement, which expires on May 10. A letter of intent would shortly be drafted and sent to the IMF executive board for approval, he said. Upon completion of the review Turkey will be eligible to draw a final loan of $3.7bn.
The country's outstanding $6.43bn debt to the fund is the largest of the 64 countries to which the IMF provides loans. Given the size of the existing debt, and taking into consideration the average GDP growth of 6.8% over the last five years, the government has decided not take up another stand-by agreement. Instead it will proceed with either a precautionary stand-by deal with access to IMF loans when needed or a post-programme monitoring deal with no loan provision.
"After [the current agreement expires], post-programme monitoring will start automatically. Talks may take place for a cautionary stand-by deal if necessary and the dialogue will be deepened," Simsek said.
Even without a renewed stand-by loan, the IMF still holds an influential voice in the running of the country's economy. Delegations from the fund will continue to visit the country as part of the post-programme monitoring phase, providing detailed reports and proposing reforms aimed at boosting growth.
The IMF's $10bn loan to Turkey has played a strong role in its recovery from economic collapse in 2001, and the tight fiscal policies the fund advocates - cutting spending and aiming for high primary surplus targets - have become increasingly desirable given the current economic situation. Turkey's letter of intent to be sent to the executive board, for example, is widely expected to call for social security reforms long championed by the IMF.
Although Turkey has thus far remained relatively sheltered from the effects of the US subprime crisis, a string of troubling economic indicators reveal that the global slowdown, combined with political uncertainty over the future of the ruling party, are taking their toll. Inflation is currently around 10%, far above the government's 4% target. In addition, figures from the Turkish Statistics Institute show that unemployment in the country has grown 0.3% over the last three months to reach 11.3%.
The current account deficit, which totalled $38bn for 2007, is also a concern. Data from the central bank measured the current account deficit for February at $3.7bn, slightly down from January's figure of $3.9bn, but nevertheless an increase of 20% on last year's figure.
The fundamentals of the Turkish economy remain strong, however, and the treasury has the currency reserves to ride out the storm. While the government has indicated the economy has the strength to go forward alone and feels the removal of the IMF crutch would be a positive sign to investors, there are still many in the business community who have said the option of a precautionary stand-by deal, with the option to take another loan, would be the safest option for the immediate future. Many financial markets insiders have said access to IMF funds in times of necessity would be a useful insurance to have, especially since the Istanbul Stock Exchange has been hit in recent weeks by the global sell off.
The continued support of the IMF and its role as an external guarantor is also important for attracting foreign investors, especially since ratings agency Standard & Poor's (S&P) downgraded Turkey's credit rating from stable to negative on April 3 in response to concerns over the political stability of the country.
S&P analyst Farouk Soussa told the local media, "Despite its strong economic record, Turkey needs the IMF as an important foreign anchor to regain investors' confidence, which still remains fragile."