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    Does Turkey have the power to continue without IMF support?

    Hurriyet English with wires
    13.05.2008 - 10:57 | Son Güncelleme:

    The muted response by investors on Monday to the expiration of Turkey's $10 billion agreement with the International Monetary Fund may be just the reaction the Turkish government needed to show it can live without the IMF, Reuters reported.

    The IMF approved a final review under Turkey's $10 billion loan programme and Turkey has not commented publicly on what kind of deal it will seek after its 19th stand-by accord with the IMF expired on May 10.

    The Turkish government has not yet advised the fund what it wants by way of a follow-up deal, the IMF's Turkey-desk chief Lorenzo Giorgianni said in a CNBC-e interview broadcast on Monday.

    "Let me first say that we have not yet received from the government their view on the preference for the format of the future relationship between Turkey and IMF," he said.

    Turkey is expected to choose either a precautionary stand-by deal with access to funding or a less stringent post-programme monitoring deal with no access to IMF loans. Economy Minister Mehmet Simsek has said a new stand-by agreement with the IMF was not necessary as Turkey no longer needs IMF cash.

    After an economic crisis in 2001, Turkey set out to break from a history of high inflation and low economic growth, as it set its sights on EU membership. But the restoration of its fortunes may have been helped as much by five years of global economic growth, as by improved macro-economic strategy.

    As the IMF's three-year programme wrapped up on, weakening economic growth in developed countries, and rising world fuel and food prices, threaten to dampen demand for Turkish products abroad and push inflation higher again. Tighter global credit conditions are also problematic for Turkey which relies heavily on external financing to fund its investment and growth.


    The Turkish IMF programme was a success if judged according to economic objectives set out at the start of the programme, according to Giorgianni.

    "In terms of the macro-economic targets, the programme has been a success, growth rates averaged between 6.0 to 7.0 percent while reserves are now almost twice the size envisaged. If you look at macroeconomic indicators, there is certainly significant over performance," he said.

    "Of course, if you look at where we stand now, the economy is coming off a good run and there are signs of fatigue. All this is because Turkey has run into strong head-winds from global tightening of credit conditions, increasing food and energy prices, and also has been affected by domestic political events," he added.

    Giorgianni also said that a continuation of macroeconomic discipline with or without the IMF was key for Turkey.Turkey needed to stick to its revised economic programme goals and maintain macroeconomic discipline, he said. The reforms would be important at a time of rising inflation and slowing growth he added.

    Giorgianni said sticking to fiscal discipline in the past created room for cutting primary surplus goals, but Turkey needs to adhere to the new goals.

    The Turkish government has cut its key target of total public sector primary surplus, which excludes interest payments on government debt, to 3.5 percent this year from 4.2 percent, in order to stimulate a slowing economy.

    Turkish economic growth, which stood at 4.5 percent last year after averaging 7.4 percent a year from 2002 to 2006, was forecast at 4 percent this year, Giorgianni said.

    The IMF estimates that for every 1.0 percent decline in economic growth in industrial nations as a group, cumulative growth over a one-two year period declines by about 0.8 percent in Turkey.

    But those effects could be mitigated by the strength of economic growth in other developing nations which is expected to offset weaker growth in Europe and the United States this year.

    Turkey has become less reliant on advanced economies, as its market penetration in other emerging countries has increased to 26 percent from 20 percent, IMF data shows.

    Inflation is also beginning to rise again in Turkey. Under the IMF programme inflation fell to a 30 year low around 7.0 percent, but it crept up to 9.5 percent last year as global fuel and food prices soared.

    "At the end of the day inflation is running well above the target set by the government of 4.0 percent, so it poses a challenges and a credibility issue for policymakers, and needs to be attended to," the IMF's Giorgianni said.

    The central bank, he added, could adopt a strategy in which it allows inflation to exceed the target for a while to accommodate the first round effects of higher food and fuel costs, but then tighten monetary policy to keep expectations anchored


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