Late August 1, the International Monetary Fund (IMF) approved the delayed fifth review of Turkey's USD16bn loan pact with the world’s lender of last resort just two days after parliament passed its 7th EU harmonisation package - a series of laws designed to bring Turkish legislation more into line with European requirements.
The IMF review had been delayed because of Turkish foot-dragging on important economic reforms, but this time around the board took note of recent legislation in striking a new tone of encouraged confidence about the country’s financial stability. The Fund’s managing director, Horst Koehler, specifically cited measures to safeguard the primary surplus target, the enactment of legislation to underpin social security reform, and progress made on the structural reform agenda.
Koehler did sound a word of caution, noting that “real interest rates remain high reflecting underlying fragilities."
Turkey’s minister of economics, Ali Babacan, announced on Sunday that an IMF loan of USD476m would be deposited into treasury accounts within a week. According to Babacan, the loan would lead to a 3-5% decrease in debt rolling ratio, freeing up an additional source for the real sector and reducing pressure on interest rates.
The IMF also extended the repayment schedule for USD11bn originally due in 2004 and 2005, sending the markets higher. By spreading out debt repayments, the IMF decision has cut payments due next year from USD9.7bn to USD5.2bn, hoping to extend nascent signs of market stability by easing investor concern about Turkey’s external financing gap, which many had feared would bottleneck state financial flows toward the end of the year and into 2004.
As investors absorbed the IMF news announced on August 2, a better than expected consumer prices report released the following day helped send the lira up from a two-month low of TL1 439 000 to the US dollar. Consumer prices rose 0.4% in June, up 27.4% on the year. Some analysts expect an interest cut of 300-400 basis points in the central bank’s overnight lending rate, which currently stands at 35%. Barring an unforeseen drop in the TL against the dollar, Turkey should reach its IMF-backed target of 20% year-on-year inflation target by the end of the end of December.
The IMF decision came on the heels of last week’s news that the parliament had passed the EU’s harmonisation package. The package, if implemented, should curtail the power of Turkey’s military leaders, the proclaimed guardians of the country's secular constitution. Pervious incursions into the political realm by Turkey’s generals have undermined the country’s efforts to present itself to Brussels as a thorough democracy on a par with EU member states.
Under the new amendments, the council will serve as an advisory body, meeting once every two months, rather than monthly as it currently does. The general secretary of the council will be appointed by the president and could be a civilian. The legislation also foresees that the court of accounts will supervise military spending.
While parliamentary approval is encouraging, legislation is not enough. Ankara has passed a series of sensitive reforms this year, but the EU insists that they are implemented satisfactorily. Much still depends on regulatory bodies, such as the broadcasting watchdog, as well as the judges and prosecutors responsible for interpreting the law.
The EU will keep an eye on how the military interprets its diminished role in Turkish governance. The often politically-engaged army has edged or forced out four governments in as many decades and maintains important influence through state institutions beyond the National Security Council. The Turkish public also continues to support the military, which it sees as one of the few state institutions it can trust.
In a statement announcing the IMF decision, Koehler tied the week’s biggest stories together and pointed to the importance of progress in Turkey’s EU bid for its financial stability. "Progress on European Union-related legislation is also welcome;” he said. “This has undoubtedly contributed to improved market sentiment.”. Babacan agreed, referring to Turkey’s adoption of EU standards as “a sine qua non condition for healthy economic growth”.
The IMF decision and passage of the EU harmonisation package have enabled the AKP to secure important financial breathing room. These developments have also improved the party’s pro-Western credentials while enabling it to take on its biggest remaining challenge, the military. Such bravado could only come from a party increasingly confident of its support in the streets, not to mention the markets.