IMF urges Turkey to reduce expenditures

23/05/2006

Turkey's financial markets suffered a blow Monday as the IMF urged the country to reduce public spending and follow a more cautious monetary policy.

(FT - 23/05/06; Reuters, AFP, Reporter.gr, NTV-MSNBC, Zaman, IMF - 22/05/06)

“Fiscal policy needs to be tighter for the rest of the year,” said IMF delegation head Lorenzo Giorgianni. [IMF]

Turkey must stick to its fiscal policy framework and pursue a more cautious monetary policy, the IMF said on Monday (22 May) following the conclusion of talks on the third and fourth reviews of its three-year loan agreement with Ankara.

The Fund approved the $10 billion stand-by arrangement in support of Turkey's economic and financial programme in May 2005, allowing the country to immediately draw about $837.5m. If Turkey implements the measures agreed during this month's talks, the international financial institution's executive board is likely to approve in July the release of a new tranche of $1.9 billion.

"Underscoring their commitment to fiscal discipline, the authorities will adopt measures to ensure that aggregate primary expenditures in 2006 do not exceed the approved budget and to keep the deficit in the social security system within the programme ceiling of 4.5 per cent of GNP," the IMF said in a press release Monday.

"These measures, together with the potential for fiscal revenues to overperform, should yield a primary surplus in 2006 that exceeds the government's target of 6.5 per cent of GNP. As a further safeguard for the budget, the government has declared that it will not introduce any further reductions or exemptions to the VAT," it said.

According to the Fund, Turkey should reduce public spending by up to $3 billion to offset an already widening current account deficit. "Fiscal policy needs to be tighter for the rest of the year," IMF's Turkey desk chief Lorenzo Giorgianni told reporters.

Noting that measures to curb expenditures already are being considered, Turkish Economy Minister Ali Babacan said the deficit would stand at 7 per cent of GDP, above earlier official projections.

The IMF's call for tighter fiscal policy came amid a wider process of a retreat from emerging markets and fresh investor concerns about Turkey's political and economic outlook, which have already affected the country's financial markets. Investors reportedly also fear a possible delay in Turkey's EU accession talks over the Cyprus issue and growing doubts among officials in Brussels about the country's commitment to reforms.

Turkish markets fell sharply on Monday, when Istanbul's main share index tumbled by 8.3 per cent, marking its sharpest fall since March 2003. The national index of the Istanbul stock exchange, the IMKB100, closed at 36,351 points, compared to 39,643.6 on Thursday, the AFP reported.