Report: Turkey on right track, but economy will recover slowly
ISTANBUL (Reuters) – Turkey is on the right path toward restoring confidence in its ability to handle a huge debt load, but the damage done by a year of crisis may mean a slower return to growth than IMF plans foresee, the OECD said yesterday. The Organization for Economic Cooperation and Development said in a half-yearly report that a slow recovery from 2001’s recession posed a major risk for the country’s $16-billion IMF recovery package signed in February. Financial market panic in early 2001 sent interest rates soaring and halved the value of the local currency, exposing deep holes in state bank accounts that could only be filled by nearly doubling the domestic debt load. «Continuously falling real wages, higher unemployment, weak foreign investor confidence, a fragile banking system and cash-constrained corporate sector could delay the expected… recovery,» the OECD said. Turkey’s gross national product (GNP) contracted by 9.4 percent last year, and economists say the government’s target of 3-percent growth this year is ambitious given the continued weakness of domestic demand so far this year. The OECD forecast gross domestic product (GDP) growth of 1.8 percent in 2002 and 3.5 percent in 2003. Turkey and the IMF set their targets in terms of GNP. The OECD said it was vital for Turkey to push ahead with structural reforms, particularly in the financial sector, and to stick to tight spending limits laid out in the IMF plan if it is to meet its fiscal targets and ensure that inflation keeps falling. «As long as the government achieves its budget targets for this year and thereby lowers the public debt burden, this will eventually restore market confidence and lead to a decline in real interest rates,» it said. Interest rates have fallen sharply this year, with yields on benchmark one-year paper now around 52 percent. But since inflation expectations have also fallen quickly, real interest rates – the difference between the two – remains high. Targets A central bank survey of expectations published on Wednesday showed year-end consumer price inflation (CPI) forecasts fell to 37 percent from 39.2 percent in the same survey two weeks earlier, while the forecast for one year ahead was 35 percent. The OECD predicted end-2002 CPI inflation of 48.7 percent, but it was not clear when the report was compiled and price expectations have fallen sharply since February and March data were released. Turkey’s IMF target for the end of the year is 35 percent. The OECD said a stable exchange rate and a fall in interest rates would boost domestic demand, while strong export market growth would improve the current account. But it warned that Turkey still faces major risks. «A failure of world demand to pick up… (and) political instability in the region would greatly amplify risks from the external side,» it said. «If growth falls below expectations, lower fiscal revenues would require further revenue-raising measures or spending cuts, which could be difficult to implement given the already very tight fiscal stance.»
