HIGHLIGHTS - Turkey reveals its letter of intent to IMF

Here are the highlights of Turkey's letter of intent: Â

-- We met all the applicable external debt and net international reserve targets for end-August and end-December.

-- Inflation at both end-June and end-September 2007 was within the outer bands, although it exceeded the inner bands, while end-December inflation exceeded the outer band. The central bank has discussed the reasons for the June and September results with Fund staff and reaffirmed its commitment to policies.

-- The fiscal targets for end-April, end-August, and end-December were missed, as an acceleration of central government spending proved difficult to reverse, pension and health spending (especially at private hospitals) increased more than expected, and consumption-based tax revenue suffered from weak demand for some goods (notably autos and cigarettes). In addition, tax arrears from a large energy state economic enterprise (SEE) and some decline in compliance adversely affected the revenue outturn.

-- We recently took a number of strong policy measures. In particular, we adopted a prudent fiscal stance for 2008 that targets a public sector primary surplus of 3.5 percent GDP; passed a revised social security reform that will contribute decisively to fiscal sustainability; took several steps to strengthen tax administration; significantly raised average end-user electricity prices (the first increase in over five years) as part of our plan to bolster the energy sector; and strengthened bank provisioning requirements in line with international norms.

-- GDP growth in 2007 came in at 4.5 percent, one-half percentage point below our original target. Economic activity has slowed on account of a drought-related shortfall of agricultural production and a weakening of net exports. Looking ahead, we expect activity to remain resilient to the global economic and financial headwinds. At the same time, we are mindful that the worsening global environment has increased uncertainty and reduced prospects for global growth. In this light, we have slightly revised downward our growth target for this year, to around 4.5 percent.

-- On the external side, despite a strengthening of the exchange rate, export volumes grew by 10.9 percent in 2007, supported by robust growth in our main trading partners. Import growth accelerated during the course of 2007, reaching 11.1 percent for the year as a whole. Still, the current account deficit declined to 5.7 percent of GDP, from 6.0 percent of GDP in 2006. For 2008, in turn, the current account deficit is expected to increase slightly back to around 6.5 percent of GDP, mainly on account of surging oil prices. Meanwhile, external financing remained favorable in 2007, with foreign direct investment covering more than half of the current account deficit (driven mainly by strong private merger and acquisition activity). Foreign direct investment is expected to exceed one-fourth of the current account deficit in 2008, supported by ongoing mergers and acquisitions and the resumption of privatization activity. In light of the recent credit crunch and re-pricing of risk in global markets, we are monitoring current and capital account developments closely and are prepared to adjust policies as needed.

-- We remain committed to the floating exchange rate system, which helps to avoid undue build-up of risks in the financial system and provides flexibility to adjust to external developments. At the same time, accumulating international reserves for prudential reasons remains a key objective of the program. In light of increased volatility in global markets, we have recently reduced the daily minimum purchase amount to 15 million USD (from the 30 million USD announced in the central bank's yearly program for 2008), with the option for banks to sell up to 30 million USD in additional foreign exchange to the central bank. As in the past, we retain the option to change the daily auction/optional selling amounts in either direction depending on market conditions, and to temporarily suspend the auctions in extreme circumstances. We also retain the option of using discretionary intervention to prevent excessive exchange rate volatility.

-- We have taken measures to boost revenue, including adjusting specific excises on petroleum products and tobacco, and strengthened tax administration. And, although we are confident that our revenue targets will be met, we stand ready to implement additional measures if revenues fall short of our baseline projections or if other assumptions underpinning the budget, including on state enterprise pricing, do not materialize.

-- As the current Stand-By Arrangement comes to an end, we consider that most of the key objectives set at the outset of the program have been achieved. First and foremost, continued discipline in fiscal and monetary policies (in the context of the recently adopted inflation targeting framework) has consolidated macroeconomic stability, affording three more years of strong and steady growth with comparatively low inflation, sharply rising FDI, and strengthened public balance sheets. These advances have allowed our economy to withstand even serious external shocks, including repeated bouts of financial market turbulence. Simultaneously, we have made important progress in a number of structural areas, notably on social security, tax administration, and banking supervision, as well as state bank restructuring and privatization."

-- Reflecting the success of the program, Turkey has expanded significantly its trade and investment links with the rest of the world, converged further to the economies of the European Union, strengthened its international reserve position, and reduced it reliance on Fund financial support. We intend to build on this economic success by persevering in the period ahead with disciplined macroeconomic policies and structural reforms to secure even greater economic prosperity.