Turkish Relief Over Iraq

Turkey

Economic News

22 Jul 2010
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Discussion has been raging for months about the timing of a US attack on Iraq - an event that would deeply shake Turkey's progress out of its deepest recession since 1945 - but on March 19th US vice-president Dick Cheney implied that a military strike would not take place in the near future. This gives Turkey a breathing space as Ankara wrestles with fulfilling the remaining requirements to secure an IMF loan of $1.1bn due in April. The IMF delegation that left Turkey last week after a two-week visit to review the country's economic programme seemed generally satisfied, but did encourage the government to continue pursuing reforms. Turkish and IMF officials have both said that the target of 3% GNP growth in 2002 can still be achieved - despite scepticism in business and financial circles - and have identified inflation as the country's "Achilles heel" according to Economy Minister Kemal Dervis on March 19th.



Turkish Prime Minister Bulent Ecevit said after his meeting with Dick Cheney, who was in Ankara at the end of his Middle East tour to whip up support for a US attack against Iraq, that he had been assured that "a military operation was not on the agenda in the foreseeable future". This brought immediate relief to Turkey's financial sector, with the Istanbul Stock Exchange's 100 index rising by over 1% that day, and by 6.45% the following day on March 21st. It appeared that all concerns about the effects of a US campaign against Iraq and the troubles it would cause Turkey were temporarily over.



The fear is that aside from damaging the country's tourism industry, one of its main sources of succour throughout the economic crisis until the autumn, foreign investors will be more wary of entering the Turkish market as long as regional instability continues. Naturally an attack against Iraq is not entirely off the agenda, but Ankara is hoping that with a breathing space, and with less uncertainty - a campaign is not expected to begin until this coming autumn according to Turkish reports - Turkey will have time to recover from its year-long economic crisis.



Ecevit has said before Cheney's visit that he believed that Iraq did not pose a threat to its neighbours and that hence there was no reason to launch comprehensive military strikes against Saddam Hussein. But the consensus is that Turkey would rather be involved in a coalition or any action against Iraq rather than kept on the sidelines, which would not allow it a say over the status of the Kurdish population of northern Iraq, for example. Ankara claims to have lost up to $30bn in lost trade with Iraq as a result of the 1991 Gulf war and the ensuing sanctions, but with only limited trade to lose this time, official backing for an operation will probably materialise when the time is right, no doubt in return for some further financial help from the US.



However, until that happens Turkey will have to keep its economic recovery programme on track within the context of its $16bn stand-by agreement with the IMF. A delegation from the fund left Turkey last week concluding that Ankara had thus far made good progress and was well on its way to securing the $1.1bn tranche of the loan due in April. In an interview on March 18th the IMF desk chief for turkey Juha Kahkonen said that the Turkish government and the central bank had met all the required budgetary and monetary performance criteria, and that good progress had been made in structural reforms. He did mention, however, that before the IMF board could approve the $1.1bn the government would have to fulfil two promises, that were to have been implemented by the end of January. Ankara has promised to reduce overstaffing in state enterprises by two-thirds by October, but has yet to identify where these redundancies will be made, and it will have to implement a law to manage public debt. This law needs to be accompanied by two decrees that would regulate the operations covering control of the sovereign debt, its accounting, budgeting and transparency.



The Turkish Housing Minister Abdulkadir Akcan said on March 19th that the plans to cut jobs from state enterprises would be ready by the end of the month, and would see savings of some TL300-400 trillion. The middle level of management at many of these enterprises would be cut streamlining an overstaffed bureaucracy. The finance minister Sumer Oral also had good news when he stated on March 21st that the government's spending was on course and that the primary surplus for the first two months of 2002 was some TL800 trillion above target. He also reported a consolidated budget deficit of TL10 634 trillion for those first two months- over one third the target total for the entire year, but insisted that the spending had been planned for and everything was under control.



The other issue under debate is whether Turkey can achieve economic growth this year- the target is for 3% GNP growth in 2002. Economic indicators show that there is not yet any growth, with industrial production not growing, but other signs are more positive, such as the stringer lira, declining inflation and confidence among the business community. Turkish and IMF officials point to this as a basis for their continued confidence that growth will be positive, but most observers remain sceptical that Turkey can achieve the 3% target, with some analysts predicting no growth at all this year.



Kemal Dervis remains confident that the target can be met, but in a speech in Washington on March 19th in which he said that he believed the worst of the economic crisis to be over, he reiterated his concern over inflation. He said that it was at least as important to cut inflation as it was to stimulate economic growth, as with continuing high inflation Turkey would always remain subject to financial crises. Once macroeconomic stability was achieved, he believed that Turkey could "realise average growth of seven percent".

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