Can Turkey raise its game? The $10bn IMF accord with Turkey has heralded renewed economic optimism in the country. But can the government in Ankara meet the levels of debt repayment and financial controls the organisation requires?

WITH A NEW, $10BN DEAL CLOSED between Turkey and the International Monetary Fund (IMF) at the end of last year, the Turkish economy received a quick vote of confidence from international investors. As the country's economic vital statistics display some healthy signs, most in the financial community are forecasting a sound year ahead.

Yet, at the same time, there are still some question marks. With debt a continuing problem, the government's ability to make its long-delayed privatisation campaign work is also an ongoing concern. Many individual Turks also felt a little poorer as the year began, as the New Turkish Lira (YTL) was introduced, wiping out millions of 'millionaires' in the process.

On 14 December, IMF Turkey Desk chief, Reza Moghadam, told reporters that a three-year deal had been agreed with the Turkish government which would supersede the previous $19bn IMF package, due to expire in February 2005, that had been agreed with Ankara after the 2001 financial crisis.

The standby loan deal makes $10bn available for Turkey, with economy minister Ali Babacan stating that this sum would be released in 12 instalments. The first letter of intent--in which the government would set out its economic plans--was scheduled for discussion in the early months of this year.

The agreement was the latest in a string of IMF deals with Turkey that go back almost to the birth of the Fund itself, yet Moghadam seemed confident this might well be the last. "The new package should allow Turkey to exit from further IMF financial support," he told reporters after the deal had been agreed.

DISCUSSION AND BARGAINING

The last programme of loans aimed at trying to rescue Turkey from a major financial crisis which had seen the Turkish lira go into freefall and a string of banks collapse. The deals work on the basis that money is made available by the Fund for Turkey to borrow on the proviso of an economic reform programme worked out between the IMF and the government. Before each instalment of the loan can be released, the two must agree on what it will be spent on, with this largely being the result of negotiations over a letter of intent provided by Ankara. Suffice to say that what the IMF wants its money spent on is measures to move the country towards a liberal economy--privatisation and structural reform. Classically, however, what the government wants is money to address the social, unemployment and poverty issues created by the economic crisis.

The result is therefore usually a round of bargaining, which, until the election of the current government in 2002, had often been fraught. Yet the ruling Justice and Development Party (AKP) has long stressed its commitment to market liberalisation, making these negotiations recently a lot more straightforward.

The size of the new deal was less than some had expected, yet was nonetheless greeted positively by Turkish and foreign markets. Most saw the smaller size as positive evidence of the government's determination to bring down its debts. Babacan had told reporters that the money would be borrowed at a total rate of $4.2bn this year, $3.3bn in 2006 and $2.5bn in 2007. The decelerating rate, combined with efforts to repay the amounts outstanding from both this programme and the last, should leave Ankara in debt to the IMF to the tune of $9.3bn by the end of 2007, Babacan said. By then, it would have repaid some $20bn since 2001.

MEETING REPAYMENTS

The question is begged then as to how likely Turkey is to be able to meet such debt repayments. The answer seems to be a fairly positive one at present, given the generally good indicators throughout the rest of the economy.

Growth for 2005 may even hit 10%, while inflation--long in double and even triple figures--is also on the way down. The Consumer Price Index (CPI) for 2004 saw annual price increases of 9.32%, while wholesale price rises stood at 13.84%. The imbalance indicates a potential surge in inflation in the first quarter of 2005, however, particularly when the political importance of achieving an end-of 2004 inflation figure of 10% or less is taken into account. Prices were kept artificially low in a number of areas so that the target could be hit, and such controls are likely to come off early in the year--with the government hoping such a bump can be ironed out by the end of 2005.

Also adding to inflationary worries for the early part of the year was the change in currency to the YTL. Previously, $1 had been worth around 1.5m lira, leaving many visitors to Turkey bemused and many electronic calculators unequal to the task of carrying so many zeros. Yet, as of 1 January 2005, the YTL knocks six zeros off, with a million old lira worth one new one. As with many such currency changeovers, however, the tendency to 'round up' has meant a range of price rises.

Elsewhere, there is also continuing concern about the current account deficit. Exports have been booming, but not as much as imports, leading to a serious balance of payments problem. This had led to market expectations of a devaluation of some kind early in 2005, particularly as the lira has been appreciating against foreign currencies for some considerable time now.

POSITIVE INDICATORS

Nonetheless, the positives are still strong. The granting of a date for accession talks to begin with the European Union also saw a market surge mid-December (seepage 26). The negotiation process, while unlikely to lead to major boosts in foreign investment in the short term, does set a positive framework for the economy in the years ahead.

At the same time, the government has reiterated its commitment to financial discipline under the new IMF programme. Babacan claimed the government would stick to a target of creating a budget surplus of 6.5% of GDP this year, and had agreed a programme of structural changes in banking, social security and tax regulations with the IMF.

However, one keystone in all this is the privatisation programme. The state telecoms company, Turk Telekom, state tobacco products manufacturer, TEKEL, the national lottery and a number of other important corporations are due for sell off this year--as, indeed, many of them have been in past years. Herein lies the difficulty, of course, as the government has historically been highly unsuccessful in this regard. Sell-offs have failed to attract sufficient interest, or have been later cancelled due to a variety of irregularities, leading to a stalled programme.

Yet few in the market blame the government much for this. Trust seems still to be present that these corporations will be sold off, it being more a question of when than if: Nonetheless, the AKP administration will have to pull out all the stops on this in the year ahead, particularly if it is to meet its debt repayments and the letter of its IMF agreements.

On the other hand, there is also the social cost of the structural reforms, which is not often mentioned in the negotiations. For more than half a decade, the country's schools, cultural and social services have been starved of cash as part of the government's belt-tightening. What effect this is having on the country's future development is an important question. Meanwhile, unemployment is yet to come down significantly, with many pointing to an increase in crime as a consequence. Budget surpluses, it seems, do not come cheap.