IMF seeks "fiscal rule" arrangement with Turkey

"There is still the risk that credit losses in mature financial systems may turn out to be much larger than currently envisaged. In such a case, it would be natural for emerging markets to see reduced availability of external financing," Lorenzo Giorgianni, IMF's Turkey desk chief, told Fortune Turkey magazine's April issue.                                    Â

The reduction of external financing capabilities could "force a disorderly adjustment" in countries with a high current account deficit and large external financing needs like Turkey, he added.         Â

Turkey's large current account deficit, which is expected to hit 42 billion dollars in 2008, seen as the biggest risk factor of the economy. Turkish markets are among the hardest hit when global risk appetite reduces significantly.

Market experts see IMF stand-by agreement and the EU membership process as the two key anchors of Turkish economy against the risks of current of account deficit and fading risk appetite.

"These risks underscore the importance of sticking to disciplined policies and accelerating structural reforms to sustain investor confidence and bolster potential growth", Giorgianni added.    Â

FISCAL RULE
IMF's $10 billion loan agreement with Turkey expires in May. IMF agreements helped Turkey to rebound strongly from a financial crisis in 2001. Investors have been clamoring for information on Turkey's plans once the current the program expires. Turkey's State Minister Mehmet Simsek has said there will no new stand-by agreement with IMF.

Giorgianni told Fortune Turkey IMF is ready to continue providing support and advice to the government after the expiration of the current program, adding this could be either with a new financial arrangement which is subject to periodic reviews or with a less intensive surveillance relationship.

"From a conjunctural perspective, Turkey's high real interest rates, above-target inflation, and large current account deficit all point to the need to keep fiscal policy tight, so as to reduce the burden on monetary policy and allow real interest rates to come down over time," he added.

However, if progress is made on the disinflation front, it should be feasible to reduce the primary surplus target over time to make room for growth-inducing labor tax cuts or new infrastructure spending, he said.

"Given competing demand on fiscal resources, however, it will be important to anchor expectations about the future course of fiscal policy. In this regard, Turkey would benefit significantly from publicly announcing a target path for the next, say, 3 years for expenditures and the primary surplus.

"Such commitments could be eventually formalized by an explicit fiscal rule that aims to restrain spending growth. If complied with, a fiscal rule can boost policy credibility and help reduce risk premia," he added.

Fiscal rule is defined as a permanent constraint on fiscal policy, typically defined in terms of an indicator of overall fiscal performance.

He defined the 5.5 percent of old GDP (4.1 percent of new GDP) primary surplus target for 2008 as the "key gauge of the authorities' commitment to fiscal discipline and a yardstick of policy credibility."

Giorgianni also said IMF revised their growth expectations for 2008 down to 4 percent from 4.75 percent in 2007 due to less favorable global economic and financial conditions. IMF also expects the headline inflation, which is currently above 9 percent, to ease toward 6 percent unless new shocks occur.