Prime Minister Recep Tayyip Erdogan’s government, facing rising domestic debts and an expanding current account deficit, is considering extending a standby agreement with the International Monetary Fund (IMF) for another two or three years to maintain economic stability in Turkey, despite growing domestic opposition to the international lending institution.
In moves that were designed to fulfil EU political requirements and win backing from Brussels for membership talks, in June the Erdogan administration released Kurdish legislator Leyla Zana and three of her colleagues, who were imprisoned 10 years ago for espousing Kurdish nationalism in the Grand National Assembly. The government also began broadcasts in Kurdish, Bosnian and Lazish (a language akin to Georgian that is spoken on the eastern Black Sea Coast by a large group known as the Laz) on Turkish state radio and television. And it pledged to reopen the Orthodox Church seminary on Princes’ Islands near Istanbul (shut since 1971) to improve its image as a democracy.
New accord
A three-year $20bn standby accord with the IMF ends on December 31. In the first two weeks of June, Turkish Treasury and Finance Ministry officials met with the IMF’s executive director Willy Kiekens, European department director Michael Deppler and other officials visiting Turkey to draw up a new accord. Economics minister Ali Babacan said a final agreement would probably be concluded in July.
Turkish business leaders say Turkey needs IMF support to control its ballooning domestic debts, which stood at $145.5bn at the end of April, compared with $101.4bn in April 2003, according to the Treasury. About 60% of the debt is to private sector banks; the remaining is debt from one government institution to another. Domestic debts are largely short term and have to be rolled over within a year.
At the end of 2003, Turkey’s total foreign debt stood at $147.3bn, of which $63.4bn was government debt. Although most of this is medium and long-term debt, over the next three years Turkey will have to repay the IMF $20bn it borrowed between 1999 and 2003. In 2004, it will have to service TL180 quadrillion ($121.9bn) in total debts, of which it plans to cover with TL157 quadrillion in new borrowing, Treasury officials say.
“The IMF programme makes important contributions toward both budgetary discipline and structural reforms. We believe it will be beneficial for Turkey to continue an IMF programme for one or two years,” Omer Sabanci, president of the Turkish Industrialists and Businessmen’s Association, told reporters on June 7, after holding a meeting with the visiting IMF delegation.
“The difference of having a new standby agreement with the IMF or not will be $20bn,” Hüsnü Özyegin, chairman of Finansbank, a fast-growing medium-sized bank, said in an interview with the newspaper Hurriyet.
An agreement would also improve the current account deficit, which stood at $5bn in the first three months of 2004. Economists warned that this could rise to $20bn by the end of 2004 if unchecked.
Fear of IMF policies
But opposition to an IMF accord is simmering. Leftwing economists and trade unions, who fear that the fund’s restrictive policies could lead to job losses and lower incomes, have objected to the accord.
Opponents of the IMF have described the international lending institution as a “state within a state”. They say that the IMF is intervening in all aspects of Turkish political and economic life, and that the country’s domestic and foreign debts have spun out of control since the nation began receiving emergency loans in December 1999. Turkey’s total domestic debts have increased 3.2-fold and its foreign debts have increased 41.1% since then. Domestic debt stood at only $45.4bn at the end of 1999.
“Politicians no longer make decisions in Turkey. Everything is under the IMF’s control,” Müstafa Sonmez , a prominent leftwing economic writer, said in an interview. And Korkut Boratav, a professor of economics at Ankara University, told the weekly newspaper Gercek Hayat: “Turkey must throw off its IMF straitjacket. Everything is lost when IMF prescriptions and a straitjacket economy management are viewed as the only choices in Turkey. It means that free debate, thought and even parliamentary democracy have come to an end.”
Growth continues
The developments come as Turkey’s economy continues to show signs of vitality. Government planners predicted high growth in the first two quarters of 2004, driven by a surge in exports and a rise in consumer spending, after the economy grew 5.9% in real terms in 2003, the second consecutive year of buoyant growth. Year-to-year inflation based on consumer prices at the end of May 2004 stood at 8.88%, the lowest level in 32 years. Inflation was 88.6% in 2001. Annual inflation in Turkey in the past 27 years has averaged anywhere between 30% and 150%, devastating the economy.
“These developments are important gains for single-digit inflation that we’ve always dreamed about,” economics minister Ali Babacan says. “The stage we’ve reached won’t upset our fight against inflation. Our ultimate goal in inflation, as in other economic indicators, is to reach the Maastricht criteria.”
The criteria, a set of standards that Turkey needs to meet for membership of the European Monetary Union (EMU), are:
- Turkey’s inflation rate should not exceed the rate of the best performing EMU member state by more than 1.5 percentage points.
- Its budget deficit should be no more than 3% of its gross domestic product (GDP).
- Its public sector debt should be no more than 60% of its GDP.
- The average yield of government bonds should not exceed the average yield of the best performing member states by more than two percentage points.
“Low inflation is a factor increasing productivity in the real economy. Developments in 2003 confirm this view,” Mr Babacan maintains. “With the drop in inflation, the [nation’s] economic units have been directed to lowering their costs and improving productivity.” He says that lower inflation is encouraging increased domestic and foreign investment in Turkey.
Optimism pervades the Istanbul stock exchange (IMKB), encouraging more family-owned companies to go public. Fenerbahce Sports Club, Turk Traktor and Dogus Oto, a distributor of Volkswagen Group automobiles, went public in the first half of 2004. Half a dozen other companies have announced plans to follow in the next two months, including Coca Cola Cecek AS, a maker and bottler of Coca Cola in Turkey, the mid-sized Denizbank and Korteks, one of the world’s largest producers of synthetic fibres.
Turkey’s export drive also continues. In the first four months of 2004, exports rose 35.5% from the same period last year to $13.8bn, says the Turkish Exporters’ Assembly, an association of 55 exporters’ organisations. Export sales are strong throughout the economy, but particularly robust in motor vehicles.
Crackdown on debts
Meanwhile in the financial sector, on May 26, the Central Bank’s savings deposits insurance fund, the TMSF, seized control of 38 companies and personal properties owned by businessman Erol Aksoy, for failure to pay it $1.6bn in debts over the collapse in March 2001 of his Iktisat Bankas¦, a small wholesale bank. The companies included Cine 5, the country’s leading cable television network, several radio stations and cable manufacturer Ergür Kablo.
This came only 10 weeks after the TMSF took control of 219 companies of the controversial Uzan Group, after its owners failed to come up with a plan to pay its debts of $5.8bn over the collapse of Imar Bank.
The takeovers have made the TMSF one of Turkey’s biggest holding companies, at a time when the government is struggling with its massive privatisation programme. On June 3, an administrative court cancelled the tender for the sale of state-owned oil refineries concern Tupras, effectively postponing the sale of the nation’s biggest corporation for months and slowing down the privatisation drive.
The TMSF has warned other holding companies whose banks have been taken over to pay their debts or face the same consequences as Mr Aksoy and Uzan Group. Eight other holding companies that have lost their banks have yet to draw up debt repayment plans to the TMSF (see box).
The TMSF is attempting to recoup $42.7bn in taxpayers’ money that it has poured in to rehabilitate the banking system of 23 shaky private banks that it has taken over since 1997. The banks’ collapse was the main cause of the country’s economic tailspin in 2001.
TMSF warns debtor holding companies
The TMSF, the central bank’s savings deposits insurance fund, has warned the following holding companies to pay their debts or it will take control of their holdings as it did with Uzan Group:
- EGS Holding, owned by a group of 160 apparel manufacturers from the Aegean region of Turkey. The group’s bank, EGS Bank, collapsed in 2001.
- Nergis Group of Companies,one of Turkey’s biggest textile and apparel manufacturers, based in Bursa, northwest Turkey. The TMSF took control of the group’s Interbank in 1999.
- Toprak Holding, which has interests in pharmaceuticals, building materials and textiles. Its Toprakbank collapsed in October 2001.
- The Garipoglu Group, which has interests in textiles. Its Sumerbank collapsed in 1999.
- The Balkaner Group. Its Yurtbank went under in 1999.
- Zeytinoglu Group, which has interests in cement, automotive companies, information technology and trade. Its Esbank collapsed in 1999. The group owes the TMSF $601m.
- Yahya Murat Demirel, a businessman and nephew of former president Suleyman Demirel. His bank, Egebank, collapsed in 2001.
- Korkmaz Yigit Group, a leading Turkish contractor and real estate developer. The TMSF seized control of the group’s Bank Ekspres in 1998.
