Additional US aid to Turkey tied to unconditional support on Iraq

ISTANBUL – Turkey must give Washington firm and swift backing for a possible strike against neighbor Iraq if it is to win a multi-billion dollar loan package aimed at softening the blow that war could deal its fragile economy. But if Turkey agrees to a US request for the use of bases and passage of troops, financial aid may flow only well after hostilities start, analysts say. That could be too little, too late to shield the NATO member’s economy, unless it also strictly adheres to making previously pledged IMF reforms. Washington has set no timetable for a possible attack, but has made clear its growing impatience with President Saddam Hussein, whom it accuses of harboring weapons of mass destruction. Ankara’s hesitation in agreeing to back its traditional ally may be causing some alarm as the clock ticks. At the same time, the ruling Justice and Development Party (AKP) has, in the eyes of some analysts, dawdled on a $16 billion International Monetary Fund loan pact. That could make it hard for the US treasury to justify to Congress the aid Turkey may desperately need to cover any war losses. Turkey has been struggling its way out of its worst economic recession since World War II, sparked by a financial crisis in 2001 which savaged its banking sector and caused national debt to balloon. The US Congress, said to be eyeing a possible loan package to regional allies Turkey, Jordan and Israel, may not release funds until the summer. Turkey’s initial payout is unlikely to top $2-4 billion, analysts say. «Sometime late in the summer they may start receiving US aid; when the war is over, and Turkey has been very involved, and the damage to its economy is palpable,» says Isaac Tabor, senior emerging markets analyst at Merrill Lynch in London. But arguing that Turkey incurred some $30 billion in damages during and after the 1991 Gulf War, the AKP has lobbied the United States to stump up aid ahead of any new war, saying more action against Iraq could cost its debt-ridden economy upward of $20 billion. Turkey’s National Security Council, which combines political leaders and top generals, will discuss US requests on Friday. Turkish leader Tayyip Erdogan has hinted that a decision may come next week, though this would have to be ratified by Parliament. Any further delay may give Washington precious little time to wrap a Turkish front into war plans, especially with a nine-day Muslim holiday looming in early February. Media reports say Washington plans to deploy up to 80,000 troops to Turkey’s mountainous border with Iraq. AKP, its roots in an Islamist past but with a modern-day platform embracing pro-Western policies, has led a last-gasp regional drive to avert a war it fears will pull Turkey back into recession and erode support among voters opposed to US action. «Hardship to the economy would be immediate; there’s no way of avoiding that. The economy may struggle through a period of time until the additional funding arrives,» Tabor said. Interest rates on domestic debt have jumped some 10 percentage points to around 58 percent and the lira has fallen almost 10 percent against the US dollar on fears of the war cost to Turkey. Oil prices have soared, challenging a tentative recovery – Turkey imports the bulk of its oil – and revenues from tourism are threatened. Turkey’s domestic debt stock swelled to 149,900 trillion lira (some $91.7 billion) by the end of 2002, some 53 percent of projected gross national product (GNP) for the year. Over the IMF barrel While US officials have indicated that Congress may offer some $15 billion, most would likely come in the form of guarantees on loans Ankara would later secure on international markets. But the US Congress, nervous over extending bilateral aid, is unlikely to approve any funding unless Turkey pulls through a latest review of its $16 billion IMF pact. AKP says it has no problems with the IMF and will meet or exceed 2003 targets such as a primary surplus of 6.5 percent. Some observers suspect the AKP is dithering on measures including painful spending cuts, hoping the proximity of war will encourage Washington to use its influence with the IMF to soften the pact’s conditions. Western diplomats say such thinking could easily backfire. «Congress will certainly not want to reward Turkey for failure to conform with the IMF program,» one diplomat said. That is why the EU candidate should move fast on IMF-backed economic reform to secure the latest $1.6 billion loan tranche, delayed since October, before the war hits, analysts say. «The war would unlikely be over quickly, in months rather than weeks. You could see a fairly sizable impact on growth, fiscal performance and on the current account,» says Philip Poole, senior emerging markets analyst at ING Barings. An IMF team could arrive in Ankara as early as next week to complete its latest review of the economic program, but senior IMF officials question whether the team can complete its work with expected reforms well behind schedule. The review should have been completed in October. Provided the review is successful, the fund’s board of directors would then convene to approve the loan tranche, perhaps in late February or early March, analysts say. If Turkey delays much longer, it may find itself with no financial support at all as the Iraq war kicks off. «It is unlikely that the US is going to wait this long before going into Iraq,» Bear Stearns said in a research note. But once war has started in Iraq and aid is secured, firm Turkish support for the US position could mean the IMF will be more lenient (for example, by insisting less on the urgency of fiscal reforms) over the disbursement of a further $1 billion in loans it has pledged Turkey this year. The World Bank, which often works in tandem with the IMF, may also release some $1 billion in credits it has also delayed. «Disruptions to payments would not be applied as harshly as normal. If war breaks out and Turkey is involved then the rules may change,» Tabor said.