Simsek pledges to step up reform

Turkey’s new finance minister is focused on privatization and fiscal discipline, but will not commit to a new IMF programme just yet

  • By Philip Alexander
  • 06 Nov 2007
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The AKP will speed up privatization and liberalize the economy in its second term, Turkey’s new finance minister Mehmet Simsek has told Emerging Markets. He also promised to restore public finances, which were weakened when the government ramped up spending ahead of elections in July 2007.

Fiscal discipline “has been the cornerstone of our successful programme,” said Simsek, “and will be sustained.” The former Merrill Lynch economist is aiming for a primary fiscal surplus of 5.5% of GNP in 2008, up from an estimated 4.3% surplus in 2007, although lower than the 6.5% target in 2006 and 2007.

At the same time, Simsek said reform measures would be focused on “enhancing Turkey’s external competitiveness and increasing employment.” These included social security and labour market reform, together with an overhaul of the energy sector.

“Social security reform is essential for Turkey’s long-term fiscal sustainability. A reduction in the social security system deficits should provide fiscal room for growth-enhancing measures,” said Simsek.

“We aim to reduce the tax burden on employment and make the market more flexible to boost employment and reduce informal economic activity,” he added.

On energy sector reform, Simsek said the primary objective was to ensure security of supply, but the government also wanted “to deregulate the energy sector and divest both distribution and generation assets,” to create a more competitive market.

Sureyya Serdengecti, former Turkish central bank governor and now a director at the Economic Policy Research Foundation (Tepav) in Ankara, told Emerging Markets that he is convinced by the government’s commitment to strengthening the budget and social security balances.

“Putting fiscal policy and balances back on track is of vital importance for the successful continuation of the stabilization program, as a tight fiscal policy would help the management of the external balances by keeping domestic demand under control,” he said.

“Social security reform has been on the agenda for a long time now. I believe the government has no choice but to introduce a sound reform package that will reduce the social security deficit over time,” Serdengecti added.

The IMF has voiced support for the 5.5% primary surplus target in 2008, and investors are keen to know whether the government will sign a new agreement with the Fund when the current deal runs out in May 2008. But Simsek told Emerging Markets he was not yet ready to commit either way. The government has been “successfully implementing” the current stand-by arrangement, he said, and is “focused on completing the seventh review” under that agreement.

“We think it is premature to discuss the future format of our relations with the Fund, we have plenty of time to think about it,” Simsek added.

But Zafer Ali Yavan, Ankara representative of the Turkish industrial and business association Tusiad and a former official in the state planning department, said a new IMF deal was important for market confidence.

“We urge the government to sign up to a new stand-by or staff monitoring programme, even on a non-credit basis. This is not just for stability, it is needed to add sophistication to measures like fiscal reforms,” Yavan told Emerging Markets.

For in-depth analysis of Turkey's prospects in 2008, please see "Second life for AKP in Turkey".

  • By Philip Alexander
  • 06 Nov 2007

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