Turkey will still need IMF help when loan deal ends, but of a lesser kind

ANKARA – Turkey’s economy has grown strongly in the last five years but is not yet robust enough to weather turbulent financial markets without the help of the IMF when its current $10 billion loan deal expires on May 10. Turkey announced this week it had completed talks with the International Monetary fund on the final review of the country’s three-year standby deal. Ankara will soon decide what kind of follow-up deal it will pursue but the government has ruled out a new standby deal, betting that the economy is strong enough to go ahead on its own after seven years of reforms and five years of growth averaging nearly 6.8 percent. Turkey’s government plans to go for either a precautionary standby deal with access to IMF loans when needed or a post-program monitoring deal with no loan facility. The IMF played a key role in Turkey’s recovery from a deep crisis in 2001, which taught Ankara tough lessons on how to manage its $659 billion economy. But its orthodox economic policies have come under sharp criticism, both in Turkey – its largest commitment – and abroad, as too inflexible for the needs of countries in crisis. Saving measures, spending cuts and ambitious primary surplus targets have been key elements of the deals between the IMF and Turkey, fueling popular anger toward the global lender. Turkey’s economy has sharply improved since 2001, but it still faces major weaknesses such as a large current account deficit, one of the biggest among emerging market economies at $38 billion last year, and a resurgent inflation near a yearly 10 percent. It also faces significant political tensions. A new accord with the IMF should include the regular release of loans or access to soft loans in time of need, and not a more flexible program where the government would no longer be closely monitored, analysts said. «A new IMF program must either be a traditional standby or a precautionary standby,» said Zafer Ali Yavan, Ankara representative of Turkey’s top business group TUSIAD. «A new IMF program looks necessary both in terms of raising market confidence and also benefiting from lower IMF lending rates amid a global financial crisis,» Yavan said. Whatever decision the government makes, Turkey will be subject to continued IMF surveillance and annual reviews as it still needs to repay debts to the IMF. Turkey’s debt to the IMF is $6.43 billion now, the largest portion of the Fund’s outstanding $16.1 billion total loan to 64 countries. Inflation, deficit Turkey has sharply lowered its public debt ratios and posted 6.8 percent growth in the last five years including 2007, but failed to meet its inflation goal for two successive years. «We need to compare Turkey to Brazil. When Brazil ended its IMF program, inflation there was essentially in line with the central bank target. Turkey has not been able to succeed in that, so I think some program in terms of reforms needs to be in place,» said Debbie Orgill, analyst in ABN Amro. Turkish annual consumer price inflation stood at 9.15 percent in March, more than twice the year-end 4 percent target. Unemployment is also stubbornly high at 11.3 percent and the strength of the lira has hurt the Turkish industry’s competitiveness. On the political front, Turkey has recently been rocked by a top prosecutor seeking to shut down the ruling Justice and Development Party (AKP) for alleged Islamist activities, a major negative development for the country which has a history of banning parties. Alternatives to the IMF-backed floating exchange rate regime and inflation targeting system should be discussed because the existing policies failed to reduce inflation, said Ali Ihsan Gelberi, head of research at Garanti Bank. Analysts also fear that Turkey’s economy, sharply hit by a sell-off in global markets, will be deprived of the key IMF anchor and this might hurt capital inflow into the country. «The financial markets would prefer a precautionary standby. It will be positive for Turkey to have access to IMF funds when necessary,» said Sengul Dagdeviren, economist at Oyakbank. Turkey’s total government debt stock stood at 249 billion lira ($189.64 billion) at the end of last year. In 2007 the total public debt stock ratio to GDP fell to 29.1 percent from 66.4 percent during the crisis in 2001, highlighting the improved finances.

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