IMF may delay Turkey review; increases pressure on reforms
ISTANBUL – The International Monetary Fund (IMF) could delay until July the completion of a critical review of Turkey’s economic program because Ankara has failed to implement a series of reforms on time. The swift end to war in neighboring Iraq has bolstered the price of Turkish assets, but analysts say the market may be turning a blind eye to likely tensions between a visiting IMF mission and the ruling Justice and Development Party (AK). Ankara has not met a swathe of IMF pledges, many planned for April, meant to cement sustained recovery from a 2001 financial crisis. That crisis and an expensive bank rescue plan has ballooned Turkey’s domestic debt load to $115 billion. «If there is no rapid implementation from the government in the next week or so then we might see a second IMF mission in June… and the board meeting could be delayed until July,» said Yarkin Cebeci at JPMorgan. The visiting IMF team, led by Turkey desk chief Juha Kahkonen, is due to brief the press after ending talks with Turkish officials today, amid a fifth review of the country’s $16 billion pact. While praising the performance of Turkey’s fragile economy, Kahkonen is expected to detail a series of steps Turkey must take before the IMF executive board meets to consider the release of the latest loan, analysts say. The AK vows loyalty to the IMF pact. It says it expects the fund’s board to meet in early June to approve a $500 million loan tranche, a payout Turkish Economy Minister Ali Babacan has labeled «symbolic.» Among the still-unfulfilled pledges to the IMF are laws designed to boost foreign investment, raise low tax collection and reform a lumbering public sector, already dented by the government’s reluctance to slash the payroll. A previous IMF review was delayed for some six months after the AK, which swept to power in November general elections on an agenda with some populist edges, faltered on economic reform and a cost-cutting 2003 budget. «My impression is the IMF is being cautious to make sure they move legislation through Parliament. The only tool they have is to drag their feet on loan approval,» said Isaac Tabor, senior emerging markets economist at Merrill Lynch in London. The delay to the previous review added to concern over the economic impact of war in Iraq, helping to drag the lira to record lows against the US dollar. It also pushed yields on Turkey’s massive domestic debt load skyward. Turkey targets 5 percent gross national product (GNP) growth in 2003 and a reduction in consumer price inflation (CPI) to 20 percent by the end of the year from 29.5 percent in April. While analysts say loyalty to the pact would put those targets within sight, they point out that a firming lira will add to the widening trade gap, which will likely pressure the government to revise its current account deficit target for 2003. Wake-up call With the Iraq war over, the lira is now at 11-month highs against the US currency and domestic debt prices have firmed almost 30 percentage points, partly on hopes Ankara can meet key targets under the IMF program. That optimism could soon end. «The market doesn’t seem to be anticipating the potential problems. There will be tensions and a high risk of a delay in the review,» said Marco Annunziata at Deutsche Bank in London. «If the board meeting slips into July then the June criteria also become binding.» Investors are also concerned about reported tensions with Turkey’s staunchly secular generals, who suspect the AK of following an «Islamist» agenda. The party traces its roots to a banned Islamic movement. Market nerves frayed earlier this week after Turkey’s top general criticized the government for appointing religious radicals to important positions in the bureaucracy. Ankara has pledged the IMF six more measures in June, including laws to bolster the independence of a bank watchdog and ease privatization. The AK says it plans for some $2 billion in privatization revenues in 2003, an ambitious target. The IMF is also concerned about a recent tax amnesty and similar plans to reschedule debts owed to social security institutions, which analysts agree could make it more difficult for Turkey to raise much-needed revenues in the months ahead. «It (the tax amnesty) weakens the credibility of the government as a tax collector… I think the IMF is going to be all over them to increase the tax reinforcements,» Tabor said.
