Ankara seeks more spending leeway from IMF

Ankara seeks more spending leeway from IMF

By Vincent Boland in Istanbul

Published: April 9 2008 17:13 | Last updated: April 10 2008 08:00

In January 1961, a few months after enduring its first military coup, Turkey received its first Inter­national Monetary Fund loan. Three more coups, at least three economic crises and 18 loans later, the beginning of the end of their long-standing relationship is in sight.

When negotiations begin in Washington this week on a successor to the current, 19th stand-by agreement, the government is expected to seek a less “orthodox deal”. Analysts speculate that Ankara wants a “precautionary stand-by arrangement”. This would allow for some IMF monitoring of fiscal policy and access to emergency funding but it would not include a guaranteed financing facility similar to the $10bn loan that was central to the expiring agreement.

Mehmet Simsek, economy minister and chief liaison with the IMF, says the government wants more discretion over spending to pursue Turkey’s huge infrastructure investment needs.

“We want to make sure that current expenditure is contained, but also to be able to spend on investment. If the IMF is willing to look beyond its orthodoxy, this will be the key defining issue as to where we go,” he says.

The current phase of Turkey’s relationship with the IMF began after the financial crisis of 2001, caused by a weak banking sector and years of economic mismanagement. It can afford now to loosen the ties a little, Mr Simsek argues, because the stand-by agreements implemented since then have proved successful.

Inflation has been tamed, the banking sector is much healthier, foreign direct investment has flooded in, and Turkey has had one of the fastest-growing economies since 2002. “They succeeded because the government took full ownership of them. The delivery hasn’t been perfect, but broadly speaking it has been there,” says Mr Simsek.

Given the almost 50 years of IMF monitoring, the puzzle is why the past two have succeeded where previous agreements failed to address the country’s economic weaknesses. These weaknesses included an excessive reliance on state investment and government borrowing, banking problems and persistently high inflation. By 2002 one dollar could buy more than 1m liras, and Turks had lost confidence in their own currency.

Economists say political instability is to blame, especially in the 1990s, which businesspeople lament as Turkey’s lost decade. “The problem was that the governments that signed the IMF agreements were not the governments that implemented them,” says Ercan Uygur, an economist at Ankara University. “Many of these agreements were the result of crises and were unpopular with the public because they included wage cuts or other income measures, so new governments were always in a position to ignore them.”

By 2002, there was a wide acceptance that this had to change. When the pro-business Justice and Development party (AKP) was first elected in 2002, an IMF agreement was in place following the crisis. Ministers stuck to it and renewed it in 2005 to general acclaim.

Yet Turkey has also been lucky in the past few years. The international environment has been good for emerging markets and it has been a big beneficiary. Now sentiment is deteriorating with the global credit squeeze. The Turkish economy is slowing, inflation is proving difficult to keep in single figures and political instability is rising as a prosecutor seeks to shut down the AKP for “anti-secular activities”.

Investors are fretting about what role the IMF will continue to play as an anchor of structural reform. Wolfango Piccoli, an analyst at Eurasia Group, a political risk consultancy, says a precautionary stand-by arrangement should satisfy the financial markets. “Even if the IMF’s leverage over Turkey is slightly weaker, it will still be enough to see it continue to play the role of anchor,” he says.

However, Tolga Ediz, an economist at Lehman Brothers, is sceptical about the depth of Turkey’s recent reform record. He says any reluctance to seek a full stand-by arrangement, with its close monitoring of policy and guaranteed financing, would be a mistake.