Mr. Rodrigo de Rato Ankara, April 26, 2005
Managing Director
International Monetary Fund
Washington DC 20431
U.S.A.
Dear Mr. de Rato,
1. This letter comes after the completion of the second year of our government. In the
short time since taking office, our government has decisively transformed the performance of
the Turkish economy. Output has grown significantly while inflation has fallen to single
digits, the best performance in more than a generation. By bringing order to economic
policymaking and to the management of the public finances, the confidence of our citizens
and of investors has been restored, allowing interest rates to drop to their lowest levels in
decades.
2. Although the achievements of the last two years have been considerable, over the
next three years we aim to build on these and provide the basis for strong and sustained
growth, low inflation, and employment generation. To this end, we have developed our own
comprehensive program of economic reform. These policies are aimed at fulfilling our next
and most ambitious challenge—securing convergence with the economies of the European
Union:
• First, the strict control of public finances and debt reduction will continue to be the
cornerstone of our economic strategy. Within a debt reduction framework that seeks
to reduce the net public debt ratio by about 10 percent of GNP by the end of the
program period, we will continue to aim at achieving a primary surplus of 61/2 percent
of GNP. This should help bring the overall budget position close to balance by the
end of the program period. Continued tight fiscal policy will keep the current account
deficit under control, and generate the resources needed for investment and growth.
Importantly, it will also help ensure that interest rates continue to fall.
• Second, with macroeconomic stability successfully established, we can now focus on
improving the quality of government spending and taxation to make our fiscal
adjustment sustainable and easier to implement. To achieve this, we will embark on a
wide-ranging structural reform agenda to redirect resources toward more growthenhancing
public investment. We will also introduce reforms that will broaden the tax
base and reduce the size of the unregistered economy, to generate sustained
improvements in revenue performance.
• Third, the government and the central bank are determined to safeguard the success in
reducing inflation and indeed to bring it down to the low single digits during the
program period. To achieve this, we remain committed to fiscal discipline and
preserving the independence of the Central Bank, in line with European Union
standards, and to introducing formal inflation targeting by January 2006.
• Fourth, to maintain financial sector stability we will introduce a new Banking Law
that further improves the supervisory and regulatory framework, restructure the state
banks, and accelerate asset recovery.
• Fifth, we will introduce a comprehensive agenda of reform to enhance the investment
climate, improve Turkey's medium-term growth prospects, and lower unemployment.
• Finally, we will continue to strengthen our international reserve position, as part of
our strategy for increasing resilience to external shocks and exiting from the financial
support of the Fund.
3. The attached Memorandum of Economic and Financial Policies (MEFP) presents the
details of the reforms we will adopt in pursuit of these goals. To support this reform program,
we request a new three-year stand-by arrangement with the Fund (May 2005–May 2008).
Based on our balance of payments and financing framework, and our strengthened policies
described below, we are requesting access in an amount equivalent to SDR 6,662.04 million,
to be spread across 12 equally sized purchases (Annex A).
4. To smooth our debt service profile, we also request that the repurchase expectations
falling due in 2006 be extended to an obligations basis. Moreover, should macroeconomic
conditions prove significantly more favorable than envisaged in the macroeconomic
framework underlying the request for this arrangement, we would forgo further purchases
and treat any remaining access under the program as precautionary.
5. The program will be monitored through regular reviews, prior actions, quantitative
performance criteria and indicative targets, and structural performance criteria and structural
benchmarks. The phasing of purchases under the arrangement and the review schedule are
set out in Annex A. Annex B summarizes the quantitative performance criteria and indicative
targets, while Annex C lists the structural conditions and prior actions for approval of the
arrangement.
6. We will enhance the transparent reporting of performance under the program
described in the attached memorandum. We are committed to publishing key relevant data,
all updates to the memorandum and associated Letters of Intent, as well as all staff reports for
the request and reviews for this program. Accurate and timely data will be provided as
required for the monitoring of the program described in the attached memorandum.
7. We believe that the policies set forth in the attached Memorandum of Economic and
Financial Policies are adequate to achieve the objectives of our program, but we will take any
further measures that may become appropriate for this purpose. We will consult with the
Fund on the adoption of these measures and in advance of revisions to policies contained in
the MEFP, in accordance with the Fund's policies on such consultation.
Very truly yours,
Ali Babacan Süreyya Serdengeçti
Minister of State for Economic Affairs Governor of the Central Bank of Turkey