Turkey, the IMF and Infrasturcture In the Kurdish East

The $10bn loan agreement between Turkey and the International Monetary Fund which expired earlier this month removed what many have seen as an anchor for Ankara’s economic and structural reform programme just at the moment when Turkey's economy is passing through a tricky moment, and by all apearances heading into a slowdown. The expiry of the agreement, originally designed to help Turkey out of a crippling financial crisis seven years ago, brings to an end one of the most intense and, in many respects, most successful of the fund’s current operations. Turkey got its first loan from the IMF in 1961.


Investors viewed the agreement, along with the prospect of European Union membership, as the two main anchors of the government’s reform agenda. The fact that the agreement is not being immediately replaced in the context of what is evidently a deteriorating global environment, worries many analysts who have become concerned that both the reform agenda and EU membership prospects may be faltering.


The $10bn agreement was obviously valuable for both parties since it achieved some notable successes, and has allowed the IMF to present Turkey as one of its more positive policy stories over the past five years. Lorenzo Giorgianni, head of the IMF’s Turkey monitoring team, said recently that the country had over-achieved in some key respects, given that some targets – such as GDP growth, public finances, debt ratios and reserves – were all above the initial targets.

However since the ending of the agreement fears have been voiced that the Turkish government may be loosening fiscal policy, and as evidence of this they point to this week's announcement by the government of the details of a $12bn additional investment package. However, before reaching any hasty decisions here we would do well to think about this package in more detail, about the value it may have at the present time in macro demand management terms, and in particular about its infrastructural focus and the fact that it is directed towards the Kurdish dominated provinces in the south-east, and thus as well as the immediate economic objectives the initiative could be seen as taking one tentative step in the direction of countering separatist sentiment and improving living standards in what is one of Europe’s most impoverished regions.

Recep Tayyip Erdogan, the Turkish prime minister, has said that as well as the infrastructural components the package will also include funding for cultural, educational and landmine-clearance initiatives. The entire investment is expected to create up to 3.8m jobs and free up for farming some 1.8m hectares of land.

Erdogan said TL1bn ($802m, €509m, £405m) of new funding would be added to the roughly TL15bn earmarked for spending in the region in April, when the government reduced some fiscal targets agreed with the International Monetary Fund in order to boost public spending between now and 2012. Mehmet Simsek, Turkey’s economy minister and also the person responsible for liaison with the IMF has indicated that the government wants to continue a close relationship with the fund, but it is seeking greater flexibility to raise public spending to address the huge backlog in infrastructure spending. Equally, at a time when private domestic demand is being held so tightly in check by the high interest rates being (sensibly) maintained by the central bank increasing public demand on worthwhile projects might seem like a reasonable policy option to maintain some growth momentum.

Mr Erdogan, speaking in Diyarbakir, Turkey’s main Kurdish city, described the package as “a well defined, scheduled, and funded action plan to remove regional differences in economic and social development, unemployment, and migration”. He said it would “constitute a social restoration to strengthen our social fabric, unity, and integrity”.

Most of the money is to be spent on irrigation and hydroelectric schemes under the banner of the South Anatolia Project. This vast state project, initiated in the 1970s, aims to harness the region’s rivers, including the Tigris and Euphrates, and to boost farm production and electricity generation. Given that one of the problems facing Turkey at the present time has been the high price of food products and energy, so anything which is realistic in policy terms and can help improve the situation in the longer term can only be welcomed I feel.