IMF: Turkey must continue tight fiscal policy

"Disciplined and prudent fiscal and monetary policies on the macroeconomic front must be preserved. Fiscal restraint raises national savings and helps reduce the current account deficit, public debt and borrowing costs. It also helps monetary policy in controlling inflation, which has been rising recently," International Monetary Fund's (IMF) Turkey representative Hossein Samiei, was quoted as saying in an interview pubished by Referans daily.

"The medium-term fiscal policy framework recently announced by the government needs to be institutionalized by adopting an explicit fiscal rule," he added.

Samiei underlined that the government's recent decision to reduce the primary surplus target for this year from just over 4 percent of Gross Domestic Product to 3.5 percent puts an additional burden on monetary policy in stemming inflationary pressures.

As we have seen, the central bank has already raised interest rates. This will help the government strike an appropriate balance between the two competing objectives of supporting growth and disinflation, he was quoted as saying.

The Turkish Central Bank raised its short term interest rates by 50 basis points in May, the first increase in 22 months, due to inflationary pressures. The Central Bank decision raised the overnight borrowing rate to 15.75 percent from 15.25 percent; and the lending rate to 19.75 percent from 19.25 percent.

This is justified in light of the weaker growth outlook. Moreover, with the resulting fiscal space, the government intends to fund initiatives aimed at supporting growth and increasing employment, such as additional infrastructure spending, especially in the impoverished southeastern region, and a cut in labor taxes that should shore up employment generation and reduce informality, Samiei added.

TURKEY'S ECONOMY

In his assessment of the greatest risks facing the Turkish economy, Samiei pointed to rising commodity prices, tightening global credit conditions and domestic political uncertainties.

"It is no surprise that Turkey is experiencing slower growth, higher inflation and a widening current account deficit. These developments are all the more troubling given the tightening of global credit conditions, which may complicate the external financing situation for countries like Turkey that have large current account deficits and rely on significant foreign inflows," Samiei warned.

The current account deficit came in at $4.157 billion in March, representing a 37 percent rise compared to the same period last year, making the 12-month rolling deficit $40.4 billion, exceeding the $40 billion level for the first time.

Samiei estimated that the government could achieve its objective of reducing public debt from nearly 40 percent of GDP today to 30 percent of GDP by 2012, while still allowing a gradual and moderate easing of the primary surplus targets.

"This easing would, in turn, be used to fund a limited number of growth-enhancing fiscal initiatives, such as infrastructure investments and labor tax cuts. These are all worthy goals, and they reflect sensible priorities," he quoted as saying.

IMF RELATIONS

It is up to the government to decide whether Turkey will request a new arrangement with the IMF, Samiei said in the interview.

He added that it was up to the government to decide whether Turkey request a new arrangement with the IMF adding that for their part, they would be happy to continue remaining engaged and to assist the government in its reform efforts.

A new arrangement could be like the recently-expired stand-by agreement (SBA), or just a precautionary SBA, according to Samiei. If the authorities do not request a new arrangement, Turkey will enter into an intensive surveillance relationship, called Post-Program Monitoring (PPM)," he was quoted as saying.

The Turkish government has yet to decide the future shape of relations with the IMF after its $10-billion IMF stand-by agreement expired on May 10.

"Notwithstanding the type of agreement to be concluded with the IMF, the continuation of Turkey's economic success will depend on the ability to deliver disciplined macroeconomic policies and structural reforms," he was quoted as saying.