Iraq War Bill Tallied as IMF Loans USD701m

Turkey

Economic News

22 Jul 2010
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With the war in neighbouring Iraq appearing to be winding down, attention in Ankara and Istanbul turned this week to the probable financial and economic costs of the conflict. There was also an almost audible sigh of relief from most analysts, whose pre-war 'optimistic scenarios' looked to be proving more accurate.



This certainly seemed to be the case for Deutsche Bank, which released a report April 17 saying that the total cost of the war on Turkey would be around USD3.5bn. This was substantially lower than many had feared before the conflict began - and indeed, markedly down on the USD25-30bn the Turkish government had been attempting to negotiate as a 'compensation' package from the US before the hostilities opened.



The major part of these losses would likely come from tourism, the DB report concluded. It forecast a loss to the sector over the year of around USD3bn. Over the last three years, yearly income from tourism has averaged around USD8bn, according to the DB figures.



However, earlier in the week, Deputy Prime Minister Abdullatif Sener had denied that the tourism sector was in any kind of trouble at all. Emerging from a cabinet meeting on April 15, he told waiting reporters that on the contrary, with the ending of major hostilities, people who had cancelled their summer bookings were now reconfirming them.



One of the main factors in reducing the size of loss is the expectation that business will soon resume under relatively normal conditions between Iraq and Turkey. Prior to the 1990-91 Gulf War, this had accounted for around 10% of Turkey's total foreign trade. DB assumed that the short term loss of around USD300m in exports across the border would be compensated in the longer term by an additional annual USD2-2.5bn export demand from Iraq for Turkish goods and services.



However, the extent of Turkey's possible gains in the post war reconstruction of Iraq continued to be more controversial. "I am finding it hard to answer," Public Works Minister Zeki Ergezen told TV news channel CNBC-E on April 17, "why the US, which in its own interests has burnt down and destroyed a country regardless of international public opinion, would give Turkish firms a share [in rebuilding Iraq] while it has its own interests in the restructuring."



However, Prime Minister Recip Tayyip Erodgan seemed to have far fewer difficulties.



“The power and potential pertaining to rebuilding of Iraq exist in Turkey,” he told the Ankara Chamber of Commerce on April 18, according to news channel NTV. “As to transportation, the port of Iskenderun has an ideal position. Turkey has an ideal location for transportation.”



Foreign Minister Abdullah Gul was equally fearless, arriving at the Arab summit in Riyadh the same day to announce that, “We are ready to contribute to the rebuilding of Iraq and the region, and to contribute in principle to settlement of stability.” According to the daily Radikal, this might also include the deployment of Turkish peacekeepers in the country - though Gul also stressed that any such move would have to be within a UN role.



On the US allowing Turkish companies into the potentially lucrative Iraqi reconstruction market, Ankara is not as well placed as it could be, however, after a major falling out with Washington over the war. A considerable amount of fence mending is now required, and to this end, the Turkish foreign ministry said April 16 it had appointed Ahmet Okcu, a senior diplomat, to co-ordinate government and private sector lobbying efforts to secure contracts for Turkish companies in Northern Iraq. The Turkish Industrialists and Businessmen's Association, TUSIAD, is also sending a delegation to Washington to add its weight to Turkey's case. Also dependent on US good will is a USD1bn grant for Turkey recently approved by Washington and now available at the discretion of US Secretary of State Colin Powell. This money could be used to leverage up to USD8.5bn in loans and loan guarantees. This would be more than sufficient to cover what the DB report said was an expected USD4bn financing shortfall for 2003. The USD1bn is tied to the government sticking to its IMF backed economic reform programme. Doubts about Ankara's willingness to stick to this have been a major contributory factor to recent economic uncertainty -- indeed, the DB report suggests it is almost impossible to separate the effects of fears over the Iraq war from fears over the commitment of the ruling Justice and Development Party (AKP).



However, meeting April 18, the IMF directors approved a USD701m loan to Turkey as part of the country’s successful completion of its long-delayed 4th review. The Fund had earlier decided to spread the USD1.6bn originally due to be released following this review over a longer period - most analysts saying this rescheduling was due to doubts over the AKP's performance.



While announcing the loan, IMF First Deputy Managing Director Anne Krueger said in a statement that, “Recent policy slippages have been costly. In particular, the government needs to rebuild its credibility in financial markets to ensure a smooth roll-over of domestic debt,” Reuters reported. Three more reviews are scheduled for this year, each leading to the possible disbursement of USD200m, while in 2004, four reviews will each have USD500m attached to a positive conclusion.



Much now depends on the AKPs ability to stick to what has been agreed and bite the bullet of major public spending cuts and thorough-going economic reform. This will be by no means easy, though perhaps the burden has been lifted slightly by the rapidity of the Baghdad regime's collapse.

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