ODD PER BREKK Turkey Senior Resident Representative International Monetary Fund (IMF) (IMF) Uluslararası Para Fonu Türkiye Daimi Temsilcisi THE TURKISH GOVERNMENT'S ECONOMIC PROGRAM AND THE ROLE OF THE PRIVATE SECTOR I would like to take a somewhat longer-term perspective, and present three propositions about the government's economic program. These propositions underline the crucial role that the foreign and local investors in Turkey can play in supporting the program. The main goal of the program is to revive economic growth on a lasting basis, with the private sector being the engine. What the government can do is to create the conditions for this to happen, by sticking fully to the planned reforms. But, ultimately, the program relies on you to achieve this goal. With this in mind, these are the propositions I would like to make: First, the government's economic program is well designed to create the conditions needed for the private sector to take the lead in creating new business activities and generate employment; second, the government has been approaching the economic program with increasing determination; and third, based on the recent evidence, the program is delivering the intended results. Before considering these propositions, it is useful to briefly go back and review the past experience of Turkey. Doing that makes it clear that, in spite of the many changes since the early 1980s, the Turkish economy has not lived up to its potential. In fact, when you take a longer-term view, until recently conditions have actually worsened: Economic growth has been on a declining trend over time, from about 5 percent per year in the 1970s to 3 percent in the 1990s. Moreover, economic activity has become increasingly unstable, with periodic crises causing economic dislocation and suffering. At the same time, inflation has been on an upward trend, reaching something in the region of 80 percent per year in the 1990s and making Turkey one of the last battlefronts in a world which has, by and large, conquered inflation. The stock of government debt has risen to a very high level and; given its short maturity; represents an ongoing challenge for the government. With complex regulations and a not always fully transparent policy framework, it has been difficult, especially for foreigners, to establish businesses in Turkey. With the international business community paying attention to these macroeconomic developments and the complex business environment, foreign direct investment has remained disappointingly low. As we see it, there are a number of reasons, importantly in the economic policy framework, for this weak economic performance. And the economic program seeks to address each of these, including: An inefficient and non-transparent public sector, allowing fiscal laxity and the rapid build-up of government debt. The public sector borrowing requirement has trended up over time, leading to the rapid increase in government debt, from 15-20 percent of GNP in the mid-1970s to about 80 percent at present. Besides fuelling inflation, this development has hurt economic growth by raising real interest rates, by the government crowding out the private sector from credit markets, and by making the economy vulnerable to crises. A monetary policy diverted from achieving price stability. In the past, the Central Bank of Turkey tended to accommodate the government's financing needs, in effect printing money, with the result that high inflation over time became entrenched. A weak banking system, which has played a central role in the recent crises, and which has contributed too little to the channeling of domestic savings to productive private sector uses. Instead, you have seen the private banking sector expanding under weak supervision, with common practices of connected lending emerging, and the state bank sector being used for directed lending, leading to enormous costs in the form of so-called "duty losses" and, finally, An economy caught halfway between a dirigiste economic system, with a large public sector role, and one that is fully market based. The market-oriented reforms that started in the 1980s have not been completed. As a result, the investment environment has not been sufficiently attractive for domestic and foreign investors, in part because of continued state domination in key sectors and in part because of a lack of transparency in bureaucratic procedures and operations. The economic program is focused on addressing each of these problems, and important progress has been made over the last two years or so. The previous government made important strides towards fixing the problems of the past, although its efforts weakened when the parliamentary elections appeared on the horizon in late summer last year. Nevertheless, it made progress in all the areas that I have just mentioned: The budget balance was strengthened and underlying fiscal reforms were carried out. Moreover, major progress was made in cleaning up both state-owned and private banks. To the credit of the BRSA and its management, Turkey now has a much sounder banking system than two years ago: weak banks have been closed, and last year saw a comprehensive audit and recapitalization exercise of the private banking system. Moreover, the state banks have been put on a sound financial footing and have undergone a major operational restructuring. At the same time, the Central Bank helped by the formal independence and the prohibition of central bank financing of the government budget, called for in the amended Central Bank law has more directly focused on reducing the rate of inflation, and has racked up some remarkable successes, with the inflation rate falling below 30 percent last year. The main area where progress lagged was privatization, where major projects were delayed. Since coming to power, the new government has been approaching the program with increasing determination. While the new government, like its predecessor, inherited economic problems created by decades of economic mismanagement, it also had the benefit of the good start made by the previous government. After some initial hesitation, the new government has taken ownership of the program strategy, and has defined and started implementing a strong program for 2003. This program, which has been published in Turkey's so-called 'Letter of Intent' to IMF management dated April 5, provides the basis for the Fund's current financial support for Turkey. In line with the 'Letter', the government has already taken a number of steps to bring the reform process back on track following the slowdown during the election period. Among its achievements, the authorities can count: Continuation of budget policies aimed at a viable government debt position. The government has adopted a 2003 budget consistent with a public sector primary surplus of 6.5 percent of GNP, and will maintain the same target for 2004, to be achieved in large measure through spending restraint. Within the overall envelope, spending is being re-prioritized to increase social programs. Further steps towards rationalizing public sector operations. The plan to reduce over-staffing in state economic enterprises has been re-started. Also, budget execution is being strengthened and made less fragmented through the preparation of new legislation on budget management. Finally, legislation for the second stage of tax reform, focused on direct taxation, has been adopted, and additional legislation in this area is due shortly. Continuation of a monetary policy focused on disinflation. The Central Bank has already established its credibility in reducing inflation. Following the path of a number of successful emerging market economies, Turkey is now planning to move to so-called formal inflation targeting, making inflation itself the target for monetary policy. This move provided that it is coupled with continued progress on budget adjustment and structural reforms, and a clear commitment to Central Bank independence should further buttress the Central bank's credibility, help lower interest rates, and ease the transition to single-digit inflation. Continuation of banking reforms. With the achievements over the last two years, the banking system should not again be a fulcrum of crisis, and should over time be in a better position to mobilize resources and transfer these to the financing of productive private sector activities. Looking ahead, to keep the banking system sound and prevent a return of the problems of the past, it will be important that the BRSA be allowed to continue operating independently, without the interference of politicians, and follow best international practice in its decisions, and that the legal framework be amended as planned to strengthen the BRSA's hand; An acceleration of privatization and removal of "red tape." The new government has taken encouraging steps to finally get privatization going. Besides a number of smaller projects brought to completion over the last few months, the tender for PETKIM was held, while block sales were announced for TÜPRAS and TEKEL. The Privatization Administration is formulating privatization plans for Türk Telekom and Türk Şeker, and a number of electricity entities have been transferred under the Administration's scope. Moreover, legal changes to improve the business environment are underway, importantly the adoption by Parliament of a new FDI law. Finally, the government has restated its commitment to enhancing transparency in the public sector. This is encouraging progress towards the more stable and transparent economy that is a pre-requisite for a healthy business environment, but continued vigilance is needed. Changing the business environment requires time and determination. To convince both the business community and the financial markets, on which the government relies to sell its debt, steadfast implementation of the economic program over time is needed. This means that any deviations from the program, which in and of themselves may not make a big difference in the short run, could rapidly undermine investor sentiment and worsen financial market conditions. But it seems to us that the longer the government has stayed in power, the stronger its focus on the program has become. This is good news, because it means that we will see even more consistent adherence to the program going forward. Now, on to my final proposition: That the results of the program so far are positive. We believe that recent macroeconomic developments bear testament to the view that the program strategy is working: The economy has responded well, with economic growth last year, at almost 8 percent, far exceeding expectations, and signs of continued recovery this year. On this basis, the government has retained its growth projection of 5 percent for 2003; Significantly, the economic recovery has been accompanied by a rapid reduction in inflation, which was cut in halføto below 30 percent in 2002, and is expected to decline further to 20 percent this year; and the government debt situation has become less fragile, with the generation of a public sector primary surplus reducing the reliance on market borrowing and with interest rates resuming their downward trend in the aftermath of the Iraq war. Let me conclude by stressing again that the government has laid out an appropriate and ambitious economic reform agenda, which I believe deserves the support of the private business community as well as the international financial community, including the IMF. While the ball is in the government's court as regards economic reforms, the program will allow the private sector to take the lead in creating new production and employment. With economic and financial stability taking hold, and with new business opportunities opening up as a result of the structural reforms, we hope that you will be taking up the challenge. And, on the IMF's side, we have been a strong supporter of Turkey over the last several years. Perhaps most notably, we have committed some US$31,5 billion dollars gross in financial assistance to Turkey for the 2000-2004 period, and disbursed about US$28 billion of this. In addition to the financial support, which is what has been grabbing the headlines, we have also provided technical assistance in government budget management, tax policy and administration, monetary policy, bank restructuring, and macroeconomic statistics. Looking ahead, we expect to continue our support for Turkey: The economic program runs through the end of 2004, with the remaining financing amounting to some US$3 billion. We are close to concluding the discussions for the so-called fifth review of the program, which will lay the basis for IMF Board approval of the next loan tranche, of some US$500 million. With these joint efforts by the government, by us and the business community, we hope that the program will lay the basis for lasting growth in a stable economy, which is what Turkey needs to meet the aspirations of its people. TÜRK HÜKÜMETİNİN EKONOMİK PROGRAMI VE ÖZEL SEKTÖRÜN ROLÜ Programın ana hedefi, özel sektörün lokomotifliğinde ekonomik büyümeyi kalıcı bir şekilde canlandırmaktır. Hükümet bu durumun gerçekleşmesi için gerekli koşulları sağlayabilir. Bunun için de planlanan reformlara sıkı sıkıya bağlı kalmak gerekir. Hükümetin ekonomik programı özel sektörün yeni iş ve istihdam yaratma konusunda başı çekmesi için gereken koşulları yaratacak şekilde iyi tasarlanmış bir programdır. Hükümet, ekonomik program konusunda kararlıdır. Son gelişmeler ışığında, programın arzu edilen sonuçları verdiğini söyleyebiliriz. Türkiye'yle ilgili önerilerimize değinmeden önce, geçmiş dönemleri gözden geçirmekte yarar var. 1970'li yıllarda %5 civarında olan ekonomik büyüme oranı, 1990'lı yıllarda %3 seviyesine gerilemişti. Ekonomik faaliyetler giderek daha istikrarsız bir hal almış ve dönemsel krizler yaşanır olmuştu. 1990'lı yıllarda enflasyon da bir yükseliş trendi içindeydi ve yıllık %80'lere ulaşmıştı. Kamu borçları son derece yüksek seviyelerdeydi. Kanunların karmaşıklığı ve her zaman pek de şeffaf olmayan politikalar da özellikle yabancı yatırımcılar açısından Türkiye'de yatırım yapmayı cazip olmaktan çıkarmıştı. Tüm bunların neticesinde de doğrudan yabancı yatırımlar oldukça düşük seviyede kalmıştı. 1970'li yıllarda Gayrı Saf” Mill” Hasılanın %15-20'si civarında olan kamu borçları, yıllar içinde %80 mertebesine ulaştı. Bu durum hem enflasyonu beslemekte hem de reel faiz oranlarının yükselmesiyle ekonomik büyümeyi baltalamaktaydı. Netice olarak da Türk ekonomisi krizlere açık bir hal almıştı. Para politikaları fiyat istikrarını sağlayamıyordu. Zayıf ve denetimsiz bir bankacılık sistemi de özellikle kamu bankalarının "görev zararları"nın getirdiği muazzam maliyet yoluyla krizlere yeşil ışık yaktı. Ekonomik program, bu sorunların her birini ele almakta olup son iki yıl zarfında önemli bir iyileşme sağlanmıştır. Bütçe dengesi güçlendirilmiş, mal” reformlar hayata geçirilmiştir. Ayrıca, bankacılık sektörü yeniden düzenlenmiştir. Merkez Bankası kanununda yapılan değişiklikle Merkez Bankası devlet bütçesini finanse eder durumdan kurtarılarak daha özerk bir yapıya kavuşturulmuş ve enflasyonla mücadele konusuna yoğunlaşarak önemli başarılara imza atmıştır. Yeni hükümet, göreve geldiği günden bu yana ekonomik programı giderek artan bir kararlılıkla ele almaktadır. Türkiye'nin IMF'ye gönderdiği 5 Nisan tarihli Niyet Mektubunda da yer alan bu ekonomik program, IMF'nin Türkiye'ye sağladığı mevcut mal” desteğin temelini oluşturmaktadır. Hükümet, kabul edilen 2003 bütçesinde Gayrı Saf” Mill” Hasıla'nın %6,5'u kadar bir kamu sektörü fazlası öngörmüştür. Bu hedef 2004 bütçesi için de aynı olacaktır. Bu hedefe kamu harcamaları kısılarak varılması amaçlanmaktadır. Ayrıca kamuda istihdam fazlasının da azaltılması planlanmıştır. Vergi reformunun ikinci aşaması olan doğrudan vergilendirme kanunu da kabul edilmiştir. Diğer başarılı gelişen piyasa ekonomilerinin izlediği yolda emin adımlarla ilerleyen Türkiye'nin bundan sonraki hedefi, enflasyondur; yani enflasyon artık para politikasının hedefi haline gelecektir. Özelleştirmenin hızlandırılması ve bürokrasinin azaltılması da diğer öngörülen tedbirler arasında yer almaktadır. PETKİM ihalesinin gerçekleştirilmesi, TÜPRAŞ ve TEKEL'in blok satış yöntemiyle özelleştirileceğinin açıklanması bu konuda verilebilecek bazı örneklerdir. Özelleştirme İdaresi ayrıca, Türk Telekom ve Türkiye Şeker Fabrikaları vs. için özelleştirme planları üzerinde çalışmaktadır. TBMM'nin doğrudan yabancı yatırımlara dair yeni kanunu kabul etmiş olması da bir diğer önemli gelişmedir. Ekonomik programın şu ana kadar olumlu sonuçlar verdiğini söyleyebiliriz. Geçen yıl ekonomik büyüme beklenen düzeyinde ötesinde, %8 olarak gerçekleşti. Tüm bu gelişmeler ışığında, IMF olarak 2000-2004 dönemi için brüt 31,5 milyar dolarlık bir mal” yardım paketi taahhüt ettik. Ayrıca bütçe yönetimi, vergi politikası ve idaresi, para politikası, bankacılık sektörünün yeniden yapılandırılması ve makroekonomik istatistiklerle ilgili olarak Türk hükümetine teknik yardım da sağladık. Bu şekilde ortak çabalarımızla - Türk hükümeti, IMF ve özellikle de iş alemi olarak - bu programın, Türk halkının özlemlerini karşılayabilmek için Türkiye'nin ihtiyaç duyduğu istikrarlı bir ekonomide kalıcı büyümeye temel teşkil edeceğini ümit ediyoruz.