Turkey ‘set to sign IMF accord

By Delphine Strauss in Ankara

Published: December 4 2008 19:55 | Last updated: December 4 2008 19:55

Turkey could sign an agreement with the International Monetary Fund by the end of the year, but will not answer business lobbies’ calls for a cut in value added tax, Recep Tayyip Erdogan, the prime minister, said on Thursday.

His government faces increasingly savage criticism from business and investors for denying Turkey faces a serious economic downturn, delaying an IMF deal to secure its external financing needs, and failing to deliver a significant economic stimulus package.

Two weeks ago, Mr Erdogan said Turkey was close to reaching a new deal with the Fund, after its last three year, $10bn programme expired in May. Leaked comments from party officials suggested it could allow access to funding of more than $20bn.

But although talks with the IMF are continuing, Turkey has still not made a formal request for help, and with the country now winding down for a week-long public holiday, time is running out to reach an agreement before the new year.

The delay is largely due to the government’s unwillingness to revise its growth target and cut spending ahead of local elections in March.

Moody’s warned this week that failure to sign a deal would push the economy into recession – a view contested by Zafer Caglayan, industry minister. Tusiad, the main business lobby, also criticised Mr Erdogan for saying the worst of the crisis was over – in a TV address backed by glossy footage of his latest overseas trips.

But unemployment is already rising, exports have dropped sharply despite a slide in the lira’s value, and retailers are banding together to hold discount weeks as consumer spending falters.

Analysts say the prime minister is likely to sign a deal eventually – and to opt for a stand-by programme offering upfront access to funds, rather than a precautionary arrangement.

Some speculate that the government would prefer to wait until early next year – so that the first three-month assessment of adherence to the programme’s conditions would fall after the elections.

But the government is also struggling to reconcile the IMF’s demands for fiscal rectitude with business calls for tax cuts, cheap credit and industrial bail-outs.

Mr Erdogan appears to be resisting the more profligate demands, saying on Thursday that a VAT cut would be incompatible with an IMF deal and suggesting the promised stimulus package would in fact consist of modest measures already announced.

“Turkey can do very little,” said Ahmet Akarli, economist at Goldman Sachs. “It’s not printing its own dollars, you have very limited means.” He added that a recession appeared inevitable as credit tightened and domestic demand slumped.

The consultancy Istanbul Analytics said the ruling Justice & Development party, whose electoral strength has coincided with a sustained spell of prosperity, would not want to “choose between financial stability and growth”, but added that unless the credit backdroup improved miraculously, “You can’t have both.”



Copyright The Financial Times Limited 2008