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Western EuropeMarch 3 2004

Istanbul takes centre stage

Turkey’s finance minister Kemal Unakitan talks to Stephen Timewell about involvement in a new development bank and the country’s privatisation strategy.
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A new multilateral development bank is to be formed by a grouping of at least 10 states stretching from Turkey to Central Asia and Pakistan known as the Economic Co-operation Organisation (Eco). The new bank will be called the Eco Development Bank and will focus on building broader regional co-operation and peace in the region. The Turkish government hopes that the new bank, headquartered in Istanbul, will form a major part of its strategy to make its largest city a key financial centre in the region.

Speaking to The Banker in London in early February, Turkey’s finance minister Kemal Unakitan says that Turkey, Iran and Pakistan have discussed the project for many years but it was only at a meeting of the 10 finance ministers in Islamabad, Pakistan, in late January that initial plans were confirmed.

Stressing the key role of Pakistan’s finance minister Shaukat Aziz, Mr Unakitan notes the important part that the bank could play in financing cross-border projects from transportation to pipelines and electricity. The 10 countries involved are Turkey, Iran and Pakistan along with the five central Asian republics, Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan and Kyrgystan, plus Azerbaijan and Afghanistan. Initial seed capital of SDR60m (t70m) has been agreed.

The group of 10, which account for a population of more than 300 million people, may be expanded further. Mr Unakitan says the Islamabad meeting initially agreed on the formation and the headquarters location but a

meeting of the 10 finance ministers at the IMF/World Bank spring meetings in Washington in late April will examine a World Bank feasibility study, agree on the role of the participants and look at further details.

Kazakhstan is particularly active in the Eco Group and likely to be active in the new bank, says Mr Unakitan. No specific agenda for the institution has been set, however, and other countries, such as Georgia and Armenia, might become involved, he says.

Co-operation with the Arab Gulf states is also possible, he says – on a personal basis, he is keen to play a role in bringing countries together. He notes that there is a massive need for infrastructure projects between, for example, Pakistan and Afghanistan, Pakistan and Iran, and Iran and Turkey, in which the bank could play a vital role.

The Washington meeting in April will clarify many issues, such as the initial size of the bank, the shareholdings by the various states and management, he says. No decision has yet been made about who the president of the new bank will be, however. “We are looking for the right person, it could be a Turk, it could be someone else.”

Regional groupings

At the end of the 1990s another multilateral institution, the Black Sea Development Bank, was established with its headquarters in the Greek city of Salonika. While Turkey is a participant in both banks, Mr Unakitan sees no problem in that: if they follow complementary strategies they will be of mutual benefit, he believes.

“If the 10 countries of Eco and the 10 countries of the Black Sea get together, and the heads of the two banks work together, it will be much more efficient and easier to get decisions made,” he says.

Referring to Istanbul becoming a regional financial centre, Mr Unakitan mentions the major changes that have been made in reforming the banking sector and the changes that will take place over the next two years. Preparations have started on a new banking law, recent legislation has been initiated to deal with depositor issues concerning problem banks and the State Deposit Insurance Fund has been restructured.

Banking regulations are being strengthened, which will make the non-political banking regulator (BDK) stronger through the creation of new governing bodies. “In all sectors, corruption will not be tolerated,” he says.

In July the banking regulator (BDK) is due to change the deposit insurance guarantee, reducing it from the current 100% level. The government, along with many bankers, is against the 100% guarantee because, in their view, it has provided a distortion of the market. The BDK plans to announce the new level of the deposit guarantee in the next few months.

New currency planned

Among other financial developments is the establishment of a new currency, in effect, creating a new Turkish lira without the millions (current exchange rates of around Tl1.34m to the dollar will change to newTl1.34 to the dollar). Legislation was passed by parliament at the end of January and the government plans to introduce the new lira in January 2005.

Mr Unakitan notes: “With the inflation target of 12% for year end 2004 and all relevant ministries co-ordinated in the currency changeover, people will not have an inflation expectation in their minds when the new currency is introduced. We are confident, after having reduced inflation to 18.4% at the end of 2003, that we will be able to reach 12%, which is important for the new currency.”

Emphasising his government’s strategy Mr Unakitan says: “The key for us in all our goals is fiscal discipline. Even though we have an economic policy that is guided by the IMF, we as a government are very aware that, with or without this, fiscal discipline is the most important part of our strategy. While our relationship with the IMF will be winding down by the end of 2004, fiscal discipline will remain a key element for us.”

Assessing the progress of privatisation, the minister disagrees with the view that 2003 was not a good year. “Even though in terms of money inflows it was not that successful, as far as the work done, the efforts shown and the achievements that the privatisation administration made, I am very satisfied,” he says. “It is better to judge progress over a period of time.”

Several privatisation deals were concluded in January this year, including a number of fertiliser and textile factories and the long-awaited sale of state refiner Tupras, which awaits final approval from the Higher Privatisation Council.

Speedy decision-making

The minister says that, with a single party government, there is no comparison with previous coalition governments and final decisions can be made far more easily and quickly. “Unlike before, now we can bring five ministers together in half an hour to make a decision.”

Looking at 2004 and Turkey’s economic policy, he reinforces his government’s strong belief in privatisation and reducing the state’s interest in economic enterprises. The privatisation agenda for this year includes the second attempt to sell cigarette maker Tekel (the price offered last year was not acceptable), the electricity distribution companies, the National Lottery, the sale of 15-20% of Turkish Airlines, Turkish Telecom and some of the ports authorities.

Further privatisation

The government is also planning to privatise all three remaining state-owned banks, TC Ziraat Bankasi, Halkbank and Vakifbank. “I came from the private sector and I am strongly against state ownership; the state should do the governing and should not be the banker or the businessman,” says Mr Unakitan.

The decision to sell the banks has already been made but, rather than just selling them, he says he wants to wait for the right market conditions.

Halkbank has an adviser that is doing studies and is in discussions with potential investors. Vakifbank has also hired advisers and it is understood that the banks are cleaning their balance sheets.

Halkbank and Vakifbank are likely to be the first to be sold as preparations have already begun and the privatisation administration is working with the two banks. Ziraat is a bigger bank and requires more work, but Mr Unakitan insists that the privatisation decision has been made and everything it does is with a view to it being privatised.

Given the difficult political climate last year, what is the outlook for 2004? “Definitely we are expecting a better year,” says Mr Unakitan. “Barring external shocks, we are hoping for better results from privatisation, better inflation figures, better political environment, better growth, more activity in the financial markets – and attracting more foreign direct investment is key to our government.”

While he refrains from giving a forecast on expected foreign investment, Mr Unakitan is optimistic that the results will be good because of the strong foundations laid. He hopes that a sustainable 5% growth rate will be achieved this year.

The most difficult factor in achieving this success is the signal from the EU on the beginning of discussions for membership, he says. Turkey hopes to get a date for when discussions will commence on EU accession in December 2004.

On the question of Iraq, the minister says that Turkey will be one of the prime beneficiaries of the reconstruction of the country. “Already 3000 trucks a day are going to Iraq supplying food, textiles, construction – everything supplied from Turkey. Our good relations with the US will ensure that Turkey will be one of the major players in the reconstruction of Iraq. The food and water supplies for the US army are being supplied from Turkey.”

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