The International Monetary Fund has recalled former Turkey experts as it seeks pledges that the country will act to reverse deterioration in its budget.
The IMF has seen a worsening in spending discipline in Turkey since the last loan accord expired in May 2008 and wants to install mechanisms to prevent that from happening again.
Hoping to introduce a healthier deal, the IMF called upon former Turkey desk chiefs Lorenzo Giorgianni, Carlo Cottarelli and Juha Kahkonen, who will assist Rachel Van Elkan, to negotiate a new loan agreement. This was the first time the IMF chose to go beyond its usual practice and get its former Turkey experts involved. The move has been perceived as a sign of the IMF’s desire to keep a tight rein on the deal with Turkey.
The fund also requested a comprehensive letter of intent to be prepared, sources told Referans.
In the private talks IMF First Deputy Managing Director John Lipsky held, it was understood that he was accusatory of the latest imbalances. There has been a major retreat in fiscal discipline since May 2008, according to Lipsky. He urged the government to put it in writing as part of the letter of intent that it will take all necessary precautions to prevent any further retreat in fiscal discipline.
Lipsky wants to implement institutions and mechanisms to sustain permanent spending discipline. That is exactly why the fund, has turned to former Turkey desk chiefs.
As requested by the fund, Cotarelli, Kahkonen and Giorgianni got down to business in helping Van Elken find focal points that the letter of intent should touch upon. There have been other cases where former desk chiefs were consulted; however, this is the first time the former chiefs have gathered in such a systematic manner.
Within the past year it has become obvious that steps taken to strengthen Turkey’s economy have failed. That is why the IMF is seeking to establish strict rules. This shows that while the Fund has previously been flexible, it now has no intention to show any more flexibility. The IMF’s request for the letter of intent to focus on structural reforms will make it harder for the government to approve a deal.
Another issue is the gap between the IMF’s and Turkish government’s expectations for a balanced budget. Even if both parties agree on a 2009 budget, there is much to discuss for the 2010 and 2011 budgets.