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Turkey: International Monetary Fund Sends Warning About Economy

Washington, 7 August 1997 (RFE/RL) - The Executive Directors of the International Monetary Fund (IMF) have told Turkey it must embark on a "bold and comprehensive" program of stabilization and structural reform to cut inflation and get its economy back on track.

In its annual review of Turkey's economy, called an Article Four consultation, the IMF directors said Ankara faces an "urgent" need to break inflation, which is still running at around 85 percent per year, cut wasteful government spending and subsidies, eliminate subsidized state bank lending, and relaunch the privatization process which bogged down without the needed legal and regulatory framework.

The directors noted the adverse effects of high inflation on output growth and income distribution and expressed concern about Turkey's weak fiscal position and the "precariousness of the economy."

Turkish authorities must move boldly to pull down inflation in order to establish the credibility needed to break the cycle that is strangling the economy, the directors said.

Fiscal consolidation -- restraining spending and greatly reducing the budget deficit -- is "the linchpin" of any stabilization effort, said the IMF directors, but it will require "far-reaching reforms in many areas." Among their specific recommendations, the directors said Turkey should reduce the wage bill, end subsidies to state firms, and immediately deal with the social security system.

IMF staff which gathered data on the Turkish economy as part of the review, said that in the medium term, the country's fiscal sutainability is threatened by the costs of "an overly generous and poorly managed social security system whose deficit reached 2 percent of GNP (gross national product, a measure of the size of the economy) in 1996." The directors recommended raising the minimum retirement age and tightening the link between contributions and benefits.

On the revenue side, the directors said Turkey must broaden the tax base, reduce exmeptions and strengthen tax administration quickly.

The fund staff said that privatization is an "important means of reducing distortions" in the economy as well as improving resource allocation and a major potential source of cutting budget outlays.

The government's plan to sell off state assets equal to four percent of GNP in 1997 was "frustrated" by the failure to sumount legal and practical obstacles and the absence of an adequate legal and regulatory framework.

The directors urged the government to urgently put the necessary framework in place while eliminating various "legal and other obstacles to privatization and to foreign investment."

The directors also "expressed concern" about the weakness of the banking sector in Turkey, especially the situation of the state banks which they said "require immediate attention."

They said the central bank should be made more independent, it's advances to the treasury be stopped, and that so-called "directed lending at subsidized rates" be stopped immediately.

The 24 directors who make up the IMF board represent all the member nations of the fund -- some appointed to represent large countries, others elected to represent constituencies of nations.

The fund staff noted that Turkey's growth this year is projected at 5.5 percent, driven primarily by domestic demand. However, with high inflation continuing and short-term external debt growing rapidly, the fundamental stability of the economy is threatened.

One major problem for Turkey, says the IMF staff, is the unrecorded "shuttle trade" mainly with the countries of the former Soviet Union. Estimates of the magnitude of this trade vary widely, but the Turkish central bank estimates that if that trade was counted, Turkey's current account deficit would drop from 2.4 percent of GNP to less than one percent of GNP.

Underlying that estimate of the shuttle trade, says the IMF staff, is that exports of goods and services from Turkey grew by 12 percent a year during 1995-96.