International Monetary Fund VOLUME 33 NUMBER 17 SEPTEMBER 20, 2004 In this issue www.imf.org/imfsurvey 261 Turkey registers Turkey: From crisis to recovery strong recovery or a few months in late 2000 and early 2001, DEPPLER: Turkey’s growth has averaged 6–7 percent F Turkey hovered on the brink of economic collapse. over the past two years, well above the 5 percent forecast 261 under its Stand-By Arrangement with the IMF. Interview with High inflation, a large public debt, a growing current Takatoshi Kato account deficit, and delays in restructuring the economy Inflation has come down from around 70 percent to triggered a loss of confidence among investors and single digits (see chart below); (Please turn to next page ) 267 Making IMF caused a run on the country’s banks. To deal with the surveillance crisis, the government undertook a sharp fiscal correc- Kicking the habit of high inflation more effective (percent) tion, floated the exchange rate, and initiated wide- 120 269 ranging structural reforms as part of an ambitious World Economic package supported by the IMF. Three years later, Turkey 100 Outlook: addressing is on its way to becoming a new tiger economy. But it demographic shifts 80 has faltered before. Will it manage to stay the course this 271 Global Financial time? Michael Deppler and Reza Moghadam—respec- 60 Stability Report tively Director and Assistant Director in the IMF’s European Department—spoke with Camilla Andersen 40 274 of the IMF Survey about the country’s prospects. De Rato continues 20 listening tour IMF SURVEY: Turkey has undergone an amazing recov- 0 276 1964 68 72 76 80 84 88 92 96 00 04 Preview of ery since the 2001 crisis. What made this possible? Data: IMF, International Financial Statistics and World Economic Outlook. Annual Meetings and… Interview with Takatoshi Kato 266 Top IMF official underscores need for New on the web flexible exchange rate management in Asia 272 Selected IMF rates n February, Takatoshi Kato of Japan joined the IMF as Deputy Managing 273 I Director, replacing Shigemitsu Sugisaki (also of Japan). Previously, he held IMF arrangements a series of senior positions at Japan’s Ministry of Finance—including Vice- 275 Minister of Finance for International Affairs (1995–97)—advised the president Recent publications of Tokyo-Mitsubishi Bank, and taught in both Japan (Waseda University) and the United States (Princeton University). He spoke with Laura Wallace of the IMF Survey about the 1997–98 Asian financial crisis, current trends in Asia, and his IMF security brief. IMF SURVEY: How do you view the tremendous build up of foreign exchange reserves in Asia in recent years? How do you react to charges that all this “one-way intervention” amounts to currency manipulation and to concerns about a lack of exchange rate flexibility in Asia? KATO: One of the lessons of the 1997–98 Asian financial crisis is that it makes sense for an emerging market economy to build up its foreign exchange reserve position to enable it to better handle short-term liquidity Kato: “Manipulation is an problems. So I can understand the desire of these countries to accumulate emotional term that has been foreign exchange reserves. However, they now have the equivalent of about used too widely and too loosely.” nine months’ worth of imports—which is eight times (Please turn to page 264) 261 ©International Monetary Fund. Not for Redistribution For Turkey, fiscal policy remains key (Continued from front page) reserves are many billions of government ran the highest primary surplus on record dollars above what we had programmed; and real inter- in that country—just over 6 percent of GNP. est rates—which are key to confidence—are down from But if you look more closely at the budget, difficult about 30–35 percent to 15 percent. All this has hap- challenges lie ahead. For example, three-fourths of pened because strong policies, together with IMF total spending is nondiscretionary, leaving the govern- financing to give the process time, have restored confi- ment with little flexibility to control expenditures. dence in the economy. People are now investing and And because tax rates are already very high, there is lit- spending more. Turkey is, in fact, a classic case of suc- tle room to increase revenues. International experience cessful stabilization. shows that sustaining fiscal adjustment depends, to a large extent, on controlling expenditure. IMF SURVEY: What There are other challenges as well. During the crisis, sparked this current spending was increased at the expense of capi- Turkey's central bank has restored transformation? tal spending. This must now be reversed to make room credibility in fighting inflation DEPPLER: The crisis, basi- for more public investment in infrastructure and social (percent) 25 cally. Economic problems programs. All of this points to the need for structural are almost invariably polit- fiscal reforms to sustain the fiscal performance. 20 ical problems. Societies get themselves into a situation IMF SURVEY: Paying down Turkey’s debt will be diffi- 15 where they accommodate cult to reconcile with the social demands placed on 10 too many rent-seeking the state by high unemployment, regional inequality, activities. When this and population growth. How can the government 5 becomes unsustainable, it balance these contradictory demands? 0 results in crisis, which then DEPPLER: With the crisis giving way to recovery, there is brings about change. I have clearly a shift to paying greater attention to social issues. -5 seen this in many coun- Unemployment, in particular, has become a greater -02 -04 -03 Jun-03 Jun-02 Jun-04 Feb-04 Oct-02 Oct-03 Feb-03 Apr Feb-02 Apr Apr Oct-01 Dec-03 Dec-02 Dec-01 Aug-01 Aug-02 Aug-03 tries. A case in point is concern. Needless to say, this is a concern we share. Note: Expected annual inflation minus the central bank's announced Bulgaria, where a crisis The real issue is how to address it. As you suggest, inflation target. changed the dynamics of many people see increased public spending as the solu- what is possible. Turkey is tion. My answer to them is that Turkey’s very tough fis- another such case. cal policies have lowered interest rates dramatically, and this has led to very strong economic performance. Real IMF SURVEY: Can you give us a sense of where the interest rates are still about 15 percent, which, by any Turkish economy has come from and where it is standard, is extremely high. Policies that reduce real going? interest rates to single digits—which are more the DEPPLER: Turkey is shifting to a new view of both norm in emerging market economies—will pay off its place in the world and how it wants to manage much more in terms of reducing unemployment and its economy and its politics more generally. As part increasing tax receipts to fund social programs than of this, there is much more coherence to the policy would token spending policies in favor of particular package, the policy perspective, and the direction of programs. Do not underestimate the growth that can the economy. That is probably the most significant be achieved from sound fiscal and monetary manage- change to have come out of the crisis, and it gives ment in a situation like Turkey’s. us reason to hope that Turkey’s performance in the future is going to be significantly better than it has IMF SURVEY: Has Turkey finally kicked the habit of been in the past. high inflation? MOGHADAM: There has definitely been a structural IMF SURVEY: Fiscal policy has always been Turkey’s change. For the first time in Turkey’s history, the Achilles’ heel. What should the government do to put credibility gap—the gap between market expectations fiscal policy on a sound long-term footing? and the inflation target—has turned negative (see MOGHADAM: The performance of fiscal policy in chart, this page). This means the central bank has Turkey has been impressive compared with that in managed to restore credibility in terms of dealing September 20, 2004 emerging markets around the world. Last year the with inflation. Now, the challenge will be to move 262 ©International Monetary Fund. Not for Redistribution toward European rates of inflation. Fiscal policy has regime closer to EU standards. However, asset recov- been key in bringing down inflation, and it will con- ery has been disappointing and needs to be acceler- tinue to be important. Another important change has ated to recoup some of the costs incurred. been the government’s decision to grant indepen- dence to the central bank. IMF SURVEY: Turkey is awaiting a decision from the EU in December on whether it will be allowed to IMF SURVEY: Turkey is still very vulnerable because start accession talks. How important will this be for of its debt. What can it do to reduce its exposure? Turkey’s economic future? MOGHADAM: The government is well aware of the DEPPLER: We agree with the authorities that, regard- need to reduce the debt. In the new member states less of what happens, the present economic strategy of the European Union [EU], gross public debt is needs to continue. That said, there is no question that typically about 40 percent of GDP. At about 80 per- joining the EU would be a major boost to Turkey’s cent of GDP, Turkey’s gross debt is double that figure. prospects. The EU has been a beacon for sound The IMF has done a lot of work in recent years on policies throughout Eastern Europe over the past risks associated with high debt, and the Turkish 10 to 15 years, and it will serve the same role in authorities recognize these risks.