The Last Standby

Turkey’s relations with the IMF go back a long way. We have signed a lot of standby agreements since we became an IMF member in 1947. According to the figures given by Radikal journalist Mahfi Eğilmez in his column on 19 May, up until last month the number of these agreements stood at 19. The agreement that was signed last month was the 20th. If everything goes as well as over the next three years than we hope that this standby agreement will be the last.

Standby agreements are one of the basic mechanisms used by the IMF to provide financial support to members who are in difficulties. The fact that we have signed 20 agreements in the last 58 years can be interpreted as a sign that we often face difficulties. Because this means nearly one standby agreement every three years.

Indeed, if we look at the period since 1970 then this is a fair assessment. Since the 1970s most of the standby agreements that we have signed have been in periods when we have faced severe difficulties. This was particularly the case with the agreements signed in 1978, 1979, 1980, 1994 and 2002.

But the agreements that were signed in the 1960s were different. In this period, standby agreements became the standard method used to finance the foreign deficits. During this period Turkey signed a standby agreement every year and guaranteed access to a certain amount of credit from the IMF and, when necessary, it used it.

In brief, the fact that we have to date signed 20 standby agreements with the IMF does not mean that there have been 20 times when we have faced severe difficulties.

The return to normality will be completed

The title of the article in last month’s Conjuncture section was “The Return To Normality In The Economy.. In this article we said that, starting from the 1990s, the Turkish economy had really gone off the rails and that the positive developments over the last three years meant that the trend now was for a return to normality. These three years were a period during which the 19th Standby Agreement was in operation. The reason for the trend towards a return to normality in this period was the success of the stabilization program introduced in the 19th Standby Agreement.

When we read the Letter of Intent which was presented to the IMF last month within the framework of the 20th Standby Agreement, which was signed last month, we were of the opinion that the basic aim of this agreement was to complete the process of returning the economy to normality.

Targeting a zero deficit in the public sector

In our article last month we showed that the main reason for the economy going off track during the 1990s was a disruption in the balances of public finance. In that article we said that the most important reason for the economy returning to normal was that in the last three years there had been a significant correction in public finance.

The two basic criteria for assessing the state of public finance are the public sector deficit as a proportion of national income and the public sector debt stock as a proportion of national income. If, over a period of three years, the planned targets for these figures are realized then this will be an indication that the economy has reached normal levels. 

In 2001 the total public sector deficit set a new record by rising to 16.5 percent of national income. This figure has fallen consistently over the last three years and in 2004 declined to 6.2 percent. The most ambitious target of the program that has newly been introduced is reducing this deficit to zero by the end of 2007. On the seventh page of the Letter of Intent it says: “The overall public sector deficit is expected to approach zero by 2007.”

The large deficits in the public sector are financed by borrowing; and in the 1990s this resulted in a rapid increase in the debt stock. In 2001 the net debts of the public sector rose to 90.5 percent of national income. Last year this rate fell to 63.5 percent. The first page of the Letter of Intent describes reducing the debt stock as one of the foundation stones of the economic strategy and foresees a reduction of 10 percentage points by the completion of the program. If this is achieved, then in three years’ time the public sector debt stock will fall to 53.5 percent of national income, which is a level compatible with the Maastricht criteria.

The death of inflation

The stabilization program which was introduced under the Standby Agreement signed at the end of 1999 and applied at the beginning of 2000 was called the “Program To Reduce Inflation”. That is to say, we began the relationship with the IMF which has continued for the last five years by setting as a goal the defeat of the high inflation which has bugged us since the 1970s.

After the crisis of 2001, the priorities changed and rolling over the debt stock became more important. But, even if it took two years, we succeeded in reducing inflation to the original target of single figures.

Yet even though inflation is in single figures, it is still high for a normal country. In developed countries inflation does not rise above 2-3 percent. In order for us to become a normal country we need to reduce inflation to this level.

The Letter of Intent which was signed on 26 April 2005 does not contain an specific target for inflation. But it says that inflation will be reduced to under 5 percent by the end of the program. We believe that this is sufficient for a return to normality.

The era of stable growth

One of the most important indicators of a return to normality in the economy is a steady growth in national income. From this perspective, the 1990s passed very badly. The economy zigzagged, moving first forwards and then back.

The new stabilization program targets the future growth of 5 percent per year. It will be difficult to always achieve this rate of growth but, if no mistakes are made in the management of the economy, it is possible to realize a growth rate close to this target. The economy has in any case grown rapidly (at 5 percent and above) over the last three years. If the new program’s expectations are realized, then the number of years of rapid growth will rise to six. To date, Turkey has only once succeeded in recording four successive years of rapid growth. If the growth forecasts in the program are realized then we will have demonstrably become a normal economy.

In Turkey periods of rapid growth also concluded with an explosion in the foreign deficits and a crisis. Last year the rate of the current account deficit to national income rose to 5.1% and again fuelled concerns in this regard. The new program foresees a reduction of the current account deficit to 4.5 percent of national income this year and 3 percent within two years.

In fact, this rate is not very low and Turkey generally cannot sustain such a high current account deficit for very long. But the movements that have been seen in direct foreign investment in recent months have offer some relief in this regard. Because direct foreign investment is regarded as being the soundest method of financing a current account deficit. Direct foreign investments are expected to be high over the next two years.

Can success be achieved?

Most of the stabilization programs that have been implemented in Turkey to date have been unsuccessful. Flaws in the design of some of the programs have resulted in us being faced with disasters and have necessitated the preparation of new programs. Sometimes as soon as they have secured the first positive results, governments have looked for ways for deviating from the program. As they have not hesitated to look for such get-outs, the result has been that the problems have been projected into the future than being resolved.

But the stabilization program that we have applied over the last three years is different. Even though the period during which the program has been applied has seen an early election and two changes of government, there has been no deviation in its application. Discipline has been maintained in public finance and, as a result, most of the targets have been achieved.

If the new program is applied in the same way there is no reason why it cannot be successful. The beginning of the EU accession process has increased global confidence in Turkey. As we noted above, a boom in foreign investment inflow is expected over the next two years. An increase in the inflow of foreign capital will ease the problem of our weakest point, the foreign deficit. If we can hold everything tightly together domestically, we may achieve most of the new program’s targets even before three years have elapsed.

REAL INTEREST RATES DIP UNDER 10 PERCENT

In the last three months the annual composite interest rate on domestic debt has been around 17-18 percent. When one compares these interest rates with the expectations for inflation in the Expectations Survey, which is conducted twice a month by the Central Bank, then one can see that real interest rates have finally fallen below 10 percent.

According to the abovementioned survey, the expectation for 12 month consumer inflation was 7.7 percent in February, and 7.2 percent in March and April. As a result, the expected real interest rate was 9.4 percent for February (1.178/1.077=1.094), 10.1 percent for March and 9.7 percent for April.

The fact that the Treasury has begun borrowing at real interest rates of less than 10 percent will help ease public finances a little this year. But this rate is still a little high and it needs to continue to decline. Most economists believe that it is necessary for real interest rates to be no higher than the rate of economic growth.