A agreement between Turkey and IMF expired at the weekend, removing an anchor for Ankara’s economic and structural reform programme just as the economy appears to be heading into difficulties.

- 12 / 05 / 2008 09:58

A $10bn loan agreement between Turkey and the Inter­national Monetary Fund expired at the weekend, removing an anchor for Ankara’s economic and structural reform programme just as the economy appears to be heading into difficulties.

The expiry of the agreement, originally designed to help Turkey out of a crippling financial crisis seven years ago, brings to an end one of the most intense and, in many respects, most successful of the fund’s current operations. Turkey got its first loan from the IMF in 1961.

Investors viewed the agreement, along with the prospect of European Union membership, as the two anchors of the government’s reform agenda.

The fact that it is not being immediately replaced, with an economic slowdown under way in a deteriorating global environment, worries analysts concerned that both the reform agenda and EU membership prospects are faltering.

Wolfango Piccoli, an analyst at Eurasia Group, a political risk consultancy, said in a note to clients last week: “Given the growing domestic and external challenges that Turkey is facing, it is disappointing to note that the government has still not decided on the new format of its relations with the IMF.”

The government has indicated – though it has not officially announced – that it will agree a “precautionary stand-by arrangement” to succeed the expired agreement.

This arrangement allows a fair degree of IMF oversight of fiscal policy but it provides financing only in emergencies, unlike the expired agreement, where the $10bn (£5.1bn, €6.5bn) was guaranteed.

Any new arrangement could take several months to put in place.

Mehmet Simsek, Turkey’s economy minister and in charge of liaison with the IMF, said in a recent interview the government wanted to continue a close relationship with the fund.

But it also wanted greater flexibility to raise public spending to address a huge infrastructure-spending backlog.

Ten days ago the government said it was revising some key IMF-inspired targets downwards over the next five years to free funds for spending.

Simsek said at the weekend that there was “a total consensus” with the fund regarding this new spending.

Analysts have questioned its timing, however, given the deteriorating macroeconomic environment.

Still, the $10bn agreement achieved some notable successes, allowing the IMF to present Turkey as a significant success story over the past five years.

Lorenzo Giorgianni, head of the IMF’s Turkey monitoring team, said the country had over-achieved in some key respects, given that some targets – such as GDP growth, public finances, debt ratios and reserves – were all above the initial targets.

Giorgianni said in a telephone interview from Washington: “There was a lot of hard work, a lot of it behind the scenes, by government and central bank officials, to make this work.”

He said whatever programme replaced the $10bn agreement should be “home grown”. He urged a speedy decision.

“To the extent that it [no decision] increases the uncertainty among investors, a decision would be better sooner than later,” Giorgianni said.

Financial Times