February’s CPI of 1.8% came significantly under analysts estimates of around 3%, with Wholesale Price Inflation (WPI) coming in at 2.6%, also less than expected. The annual CPI rate was brought down one tenth of a percentage point from January to 73.1%, while the annual WPI rate was still high at 91.8%. The stock market reacted with an initial rise- with hopes that the 35% CPI year-end inflation target may be realistic. Such optimism soon wore off, however, as investors remain worried over rising regional tensions surrounding a possible US military strike on Iraq.
Economy Minister Kemal Dervis welcomed the inflation news, saying that the data was evidence that the drive to cut inflation and encourage growth could work at the same time, and that the 35% target was "realistic and achievable". Other analysts are less optimistic, saying that the figures indicate that the economy is still contracting. Other commentators are simply concerned that the fall is only temporary and that as soon as the economy begins to grow, inflation will rise again.
Turkey's central bank has also been cautious. It last lowered its overnight borrowing rates on February 20th by 2 percentage points to 57% and now that the bank's case has been vindicated by the February data some observers had hoped that another interest rate cut would follow. This has been largely ruled out, however, with the Governor of the Central Bank Sureyya Serdengecti telling Reuters on March 4th that the bank would base its interest rate policy on its prediction of future inflation, rather than based on past data. The bank has recently said that it is "cautiously optimistic" about Turkey's inflation.
A fall in January industrial production of 3.1% on the previous year- average industrial output in 2001 fell 8.9%- has supported the argument that Turkey is continuing in its recession. But these figures are also better than analysts' predictions of a fall of around 5.3% after a December decline of 9.4%. Meanwhile export data issued on March 4th shows a 6.9% decrease to $2.3bn in February exports compared with the previous year. Exports had risen by around 14% for 2001, but these February figures indicate that concerns over the recent strengthening of the Turkish Lira and its impact on exports are well-founded.
The IMF has been forthcoming with words of encouragement, however. The day after the start of the first review of the new programme, the Fund’s European department director Michael Deppler said on March 6th that he doubted Turkey would face another economic crisis and that the economy would soon gather steam. He expressed his confidence in what he called the "strong" economic foundations- saying that a year ago no one had been aware of just how weak the system was- and that the fall in interest rates at domestic debt auctions were an indication of growing confidence in Turkey.
The IMF team arrived in Turkey on March 5th on a review expected to take up to two weeks. The IMF board is to hold a meeting in April to discuss the release of $1.1bn to Turkey, conditional upon Ankara's progress in a series on reforms, such as monetary policy, overhaul of the banking sector and budget performance.
In a show of will, the Turkish parliamentary commission on March 7th approved a belated draft law, which was one of the conditions for the $15.7bn loan package from a year ago. The law aims to end political interference in public borrowing and limits treasury loan guarantees. The IMF has labelled the law as a requirement before the next tranche- under discussion in April - would be released. The draft law will now go the general assembly prior to ratification by President Necdet Sezer. The delays in this and other IMF -promoted laws have caused some analysts to question whether Turkey has the political will and ability to fully reform its economy and return it to growth.
But Turkey has also received warnings recently that it cannot continue to depend on IMF and World Bank support for its survival. The World Bank Turkey Representative Ajay Chhibber noted on March 6th that Turkey had to receive five to six times its current annual level of foreign investment to achieve a lasting recovery. It now receives around $1bn annually, a third of the amount that goes to its neighbour Bulgaria, which has a smaller population and economy. Removing corruption and cutting bureaucratic hurdles are issues high on the government's list of priorities- also a condition of the IMF loans. The government has committed itself to a drive in the second half of 2002 to attract foreign investment.
The issue of foreign investment and implementation of the IMF-backed programme was also the reasoning behind decisions by two rating agencies, Moody's and Standard and Poor's, to not upgrade Turkey's debt ratings on March 7th. Speculation that both agencies would improve their country ratings led to a rally on the Istanbul Stock Exchange- which soon faded after the announcement. Both agencies are waiting on Anakara to build a better track record on the economic programme’s implementation.