Turkey Feels the Pressure

Turkey

Economic News

22 Jul 2010
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While Turkey became the focus at NATO of perhaps the worst rift in US-European relations in decades, back in Ankara and Washington the International Monetary Fund (IMF), the US Treasury and the Turkish government were doing a good deal of number crunching during the week. Up for analysis were the cost of a war and the price of economic reform.



“Even though there isn’t a war yet,” Prime Minister Abdullah Gul said February 13th, “Turkey has begun to be affected badly. On the maps the US has distributed, even Istanbul is shown as within the range of Iraqi missile attack. This is not true, but it has already hit tourism.”



This was just one of a number of points Turkish leaders had made to visiting US Treasury under-secretary John Taylor the previous week.



Different sources in Turkey claim that the previous Gulf War cost the economy anywhere between $5bn and $50bn in lost trade with Iraq, one of the country’s chief pre-war trading partners. The US disputes this, but does concede that Turkey has made losses, and stands to lose again in the event of a US-UK invasion of its southeastern neighbour.



This time, bargaining over compensation has therefore been a major part of the dialogue between the US and Turkish ‘strategic partners’. This time though, Turkey is doing its bargaining from a much weaker economic position, but a much stronger political and military one.



The economic crisis of February 2001 left the country with an IMF-backed economic programme that relies on continued good will from the Fund and other international institutions, as well as the US. Meanwhile, the unpopularity of the US-UK invasion plan has left the Turks in a more pivotal strategic position, the location of a ‘second front’ against the Iraqi regime thanks to a 218-mile border with Iraq.



Opening this second front requires transiting US troops and equipment through Turkey, a process that led to an agreement by the Turkish parliament on February 7th to allow US engineers to expand and adapt military bases and ports to receive the US army.



According to the Turkish daily newspaper Hurriyet, this means work on two seaports and at least five military posts and air bases. The improvements will include longer runways and new housing and should cost between $200m and $300m.



Hurriyet also reported on February 7th the arrival of US Treasury under-secretary John Taylor for talks on overall compensation for Turkey, a sum news agency AP thought would range between $4bn and $15bn, depending on the length of the war and its economic impact.



Taylor met Economy Minister Ali Babacan and press reports afterwards suggested that a rough draft of a financial assistance agreement had been worked out and would be completed later in the US.



Sure enough, on February 12th, Babacan flew to Washington along with Foreign Minister Yasar Yakis for further discussions with the US State Department and Treasury. This was after Taylor had pronounced himself satisfied with Turkey’s progress in its economic programme through a statement issued by Treasury spokesperson Tony Fratto.



“We’re pleased with the progress and the level of co-operation with Turkey on a number of issues,” Fratto told reporters February 10th. “Turkey is, of course, a very good friend and ally of the US.”



Although direct aid to Turkey will still have to gain US congressional approval, speculation that an injection of substantial amounts of credit might be on the way gave the Istanbul Stock Exchange a welcome boost.



In the Turkish financial newspaper Dunya, analyst Ismet Palanrli said February 7th that “Despite the uncertainty an Iraq war is creating, John Taylor’s visit... and the expectation of US financial support have helped the market.”



Yet clearly there are also more troubled minds in both Ankara and Istanbul. Doubts over the government’s fidelity to the strictures of the economic programme broke the silence of former economics minister Kemal Dervis, who delivered his first economic policy comments since the November 2002 general election in a paper to his Republican People’s Party (CHP) on February 10th.



Warning that “Economic developments face serious dangers in many areas,” he urged the government to try and restore confidence in the banking sector and act decisively on the public deficit. He then criticised the government for what he described as “populist policies”.



Whether Dervis was exaggerating concerns for political purposes or not, it seems that Turkey’s industrialists are fairly certain in their uncertainty. A survey by the Central Bank revealed February 12th that eight out of ten industrialists do not believe demand will grow in the immediate future. As a result, they are making extremely short-term production programmes, with 42.2% of the respondents saying these were of one month or less. Only three percent said they had production programmes of more than one year.



Meanwhile, the markets are also awaiting the outcome of the IMF’s deliberations on the 4th review of the economic programme. The liberal newspaper Radikal reported that IMF officials currently in Ankara were marking down many of the figures in Abdullah Gul’s 2003 budget, claiming that in order to meet the 2003 year end primary surplus target of 6.5%, the government was being over-optimistic on revenue collection from taxes and privatisation.



With the 10-day Eid holiday due to end this weekend, it seems Gul will have plenty on his plate when the parliament returns from the break.

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