IMF approves $12 billion for Turkey: Jon Gorvett reports from Istanbul on the loan package which made Turkey the IMF's largest debtor nation

Middle East, The, April, 2002 by Jon Gorvett

Almost exactly a year after a financial crisis sent the Turkish economy into meltdown on 4 February 2001, the board of the International Monetary Fund (IMF) approved an extra US$12 billion loan package, making the country the Fund's biggest debtor, with the total now owing standing at a fulsome US$31 billion.

The loan could not have come at a handier time. The following day, the Treasury announced it would spend $6.1 billion of this new cash -- $9.3 billion was to be made immediately available -- to pay back an earlier IMF loan, released under the Fund's supplementary reserve facility. The rest of the new cash also has to be paid back over a four year period, at an interest rate 200 base points above the current stand-by credit interest rate of 2.67 per cent. This is because Turkey has used more than 300 per cent of its loan quota already, and so must pay punitively high rates.

It was also timely, because the terrorist attacks on the US in September have, according to both the government in Ankara and the IMF, harmed Turkey's tourism income and reduced its access to international financial markets. The IMF believes this has led to "weaker privatisation and foreign direct investment prospects" which, by November 2001, had, in turn, led to an external financing gap of around $10 billion for 2002, with gaps of $1 billion in each of the following two years.

Nonetheless, the new loan was greeted as a triumph by the country's embattled politicians, and a further indicator that Turkey is on the road to recovery.

"I believe," prophesied Prime Minister Bulent Ecevit, "that toward the end of this year, the economic situation will be much better, and our citizens who are in material difficulties now will see major improvements."

Elsewhere, the minister responsible for the economy, Kemal Dervis, was slightly more cautious, but still seeing the light at the end of the tunnel as not being too far off.

"We are entering a new era," he told a gathering of investors in New York. "The most difficult moments are behind us ... We will not need this kind of large-scale financing after 2002, but our relations with the IMF and the World Bank are ongoing."

Dervis, a former World Bank official, claimed inflation would end 2002 at around 35 per cent -- about half of its recorded end of 2001 figure -- while growth is targeted at three per cent. Last year, the economy shrank by around nine per cent.

Such statistics would represent a major turn-around that cannot come too soon for most Turks. Some 1.5 million have lost their jobs since the crisis struck; unemployment is running at over 10 per cent for the first time since anyone can remember. Other economic indicators, even when they are good, often reflect deeper problems. January's balance of trade, for example, showed a record surplus of $129 million, as imports plummeted faster than exports -- down by 50.62 per cent, compared to a drop in exports of 2.87 per cent.

This turned around a nearly $2 billion deficit for January 2001, and was consequently interpreted as a promising development. But over the same period, the Turkish Lira (TL) was devalued by around 50 per cent and consumer spending was down across the board. The falling Lira meant imports went up in price, while Turkish exports became cheaper still on the world market -- the fact they fell even further is, therefore, a touch worrying. The trade surplus is useful, but could be more a consequence of the crisis than a sign of it being over.

For that to happen, most economists argue, a much wider variety of things must happen -- most of them painful. Paying off debt must be a major factor, otherwise interest payments will eventually suffocate the economy single-handedly. The government's IMF-backed economic programme is an attempt to do this by applying the Fund's `catch all' formula for success -- market liberalisation. Under this ethos, the government has forced through two crucial pieces of legislation since the start of 2002 -- the banking law and the tobacco law.

The first of these aims is to re-hydrate the country's banks, a process that is vital, given that it was a liquidity shortage among them that triggered the February 2001 meltdown. Under the terms of the law, banks will be obliged to possess larger amounts of cash or apply for government assistance in reaching the new approved levels. This re-hydration process could cost up to $4 billion, according to government estimates.

Meanwhile, the tobacco law looks set to be something of a test-case for reforming Turkey's large, State-subsidised agricultural sector. The law removed State support for tobacco growers and opened the market to international competition. An aid programme for farmers who will lose out because of the new legislation has been factored in, although its size and efficacy have been questioned. Indeed, questioned so much so that the opposition True Path Party (DYP) has applied to the Law Courts to get both the tobacco and the banking laws revoked.

This highlights a potential problem with the implementation process -- a weak political system. However, while the government three-party coalition looks vulnerable, composed of nominal leftists, rightists and centrists who are constantly manoeuvring against each other, in fact, none of the parties involved would stand a chance of success if an election were called. Therefore, the coalition seems likely to hang on under almost any circumstances -- or face complete oblivion.