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Monday, May 05, 2008

New Turkey Deal With IMF In the Offing

The Turkish government outlined a multi-billion dollar public spending programme late last week, with the explicit intention of losening fiscal policy ahead of a new, and probably much less stringent, agreement with the International Monetary Fund. All current evidence suggests the Turkish government will seek a looser arrangement with the IMF when the agreement ends next Saturday. Turkey is expected to sign a “precautionary stand-by arrangement” that will allow for some fund oversight of fiscal policy but will not include guaranteed funding. Indications from the IMF suggest that they are not unsympathetic to the Turkish viewpoint.

The finance ministry said it was revising some key budget targets between 2008 and 2012 to release about 17bn new Turkish lira (YTL) ($13.4bn, €8.7bn, £6.8bn) for investment in infrastructure. The announcement is a sign that the government, pressured on the one side by strict IMF oversight and on the other by a serious political crisis, intends to pursue an ambitious public spending programme, much of it concentrated in Turkey’s unsettled south-eastern region.

The government’s ability to spend on infrastructure has been curtailed since 2002 by a $10bn (€6.5bn, £5bn) loan agreement with the IMF that set strict targets for public finances. The most visible of these was a primary surplus – the budget surplus before interest payments – that was once as high as 6.5 per cent of gross domestic product.

Kemal Unakitan, the finance minister, said the government was revising the primary surplus target down to 3.5 per cent for 2008 and to 2.4 per cent in 2012, after an upward revision of the size of the economy this year.

This year's budget aimed for a so-called primary surplus, excluding interest payments, equal to 5.5 percent of estimated economic output. Since then, the government's statistics office has revised its GDP forecast, increasing it by about a third and effectively reducing the budget target to about 4.2 percent. The primary surplus goal will be 3 percent next year, 2.7 percent in 2010, 2.5 percent the following year, and 2.4 percent in 2012.

The government aims to spend as much as 17 billion liras ($13.5 billion) over the next five years on the Southeast Anatolia Project, a $32-billion chain of hydro-electric dams and irrigation systems in the mainly Kurdish southeast, according to Economy Minister Mehmet Simsek. The project could ``double or triple'' farm output in area, he said.

The shift to increased public spending is unlikely in principle to worry the financial markets, given the underlying soundeness of Turkey’s YTL 750bn economy. What might concern investors, however, is that it coincides with an economic slowdown and heightened political tensions. There are indications that the central bank may well raise interest rates later this month to curb inflation, currently running at 9.7 per cent. Of course another reading which could be put on any decision to raise rates is that higher interest rates serve to underwrite the lira at a time of global uncertainty. If the bank fails to raise rates then this can be seen as a weakening in the will to fight inflation and the bank could lose credibility. But Turkey's economy has slowed considerably, inflationary pressure is more a by-product of global prices than of excess domestic demand, and arguably some parts of the economy need a boost. Hence the decision to loosen fiscal policy even as monetary policy is tightened.

The five-year investment programme includes funds to boost agricultural production in an attempt to keep food prices from rising excessively. However as we are seeing in one country after another, rising domestic food prices at a time when global prices are pushed up and up is one of the inevitable downsides of economic openness.

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