Monday, 09 November 2009

Turkey and the IMF: What Delays the Deal?

Published in Articles

Joris Gjata (vol. 2, no. 20 of the Turkey Analys)

Since May 10, 2008 Turkey has been negotiating with the International Monetary Fund (IMF) over another three-year Stand-by Agreement, the corresponding loan and its conditionality. Despite debates on the need for such agreement, implicit in the statements of the IMF and Turkey’s authorities, the fact is that they both want it. However, there is no deal yet, its conclusion being delayed by the Turkish government. The reason for such a delay is not the political cost of an IMF agreement, as is generally supposed: it is the lack of a compelling political benefit from announcing the decision early. Yet, the reluctance of the Turkish government risks coming at a cost for the recovery of the Turkish economy.

BACKGROUND: Turkey has signed nineteen Stand-By Agreements (SBA) from 1961 to the present. It has however concluded only two of them successfully, both under the AKP government. The first three-year SBA started in February 2002; and even before it expired, the AKP government signed the second one in January 2005. By the time this last agreement ended on May 10, 2008, the global financial crisis had been recognized and expectations for a new Turkey-IMF SBA deal were high. The Turkish government had recently approved a Medium-Term Fiscal Policy Framework, revised its primary surplus target from 6.5 to 3.5 percent of GDP and adopted a social security reform. IMF officials in early May 2008 praised Turkey’s achievements and its stronger position with reduced interest rates, halved public debt as a share of GDP, dramatically lower single-digit inflation, and record levels of foreign direct investment. Nevertheless, they warned this performance would be negatively affected by rising commodity prices, tightening global credit conditions and also domestic political uncertainties like the AKP closure case.

The IMF Mission Chief, Lorenzo Giorgianni, recommended early monetary tightening and rigorous compliance with the revised primary surplus target of at least 3.5 percent of GDP as a near-term priority. He stressed the centrality of institutionalizing fiscal discipline through the adoption of an explicit fiscal rule and continuing political commitment to sound policies and reforms for Turkey to retain investors’ confidence and face the crisis. The IMF expressed willingness for future engagement to support Turkey in tackling ‘its remaining vulnerabilities’, facing the global financial crisis and devising its policy targets. Its message was clear: ready for another agreement and waiting for the Turkish government to decide.

The Turkish government, on the other hand, from July 2008 to mid-September 2009 kept claiming that negotiations were in progress and a decision on the format and size of an IMF program was to be expected very soon. On October 13, 2008 the Minister of Economy, Mehmet Şimşek, declared the intention to introduce a formal fiscal rule in the coming months (as advised by the IMF). Seventeen days later he invited an IMF mission to visit Turkey in early January in the context of Post-Program Monitoring (PPM), enhanced surveillance for members with exceptional debts of more than 100 percent of their quota to the IMF. After meeting with Prime Minister Recep Tayyip Erdoğan and Minister Şimşek on November 14, 2008, the Managing Director of the IMF, Dominique Strauss-Kahn, stated that the disagreements about the size of the potential IMF-sponsored package and program would soon be settled as an agreement remained crucial to stabilizing the situation in Turkey. A week later, prime minister Erdoğan also articulated his hope for an agreement very soon. But neither the fiscal rule nor the mission and the deal materialized.

The demands of the Turkish government were articulated more clearly only in April 2009. Minister Şimşek told the Wall Street Journal that negotiations were conducted regarding a 3-year loan arrangement. He affirmed Turkey’s agreement with the IMF on a ‘set of principles’ but demanded more flexibility on its part. Until September 2009, the message was that an IMF deal was surely to come. In Şimşek’s and Turkish Central Bank Governor Durmuş Yılmaz’s speeches the IMF agreement was recognized as being helpful in easing ‘concerns about external financing’ and providing ‘an external motivation’ for keeping fiscal discipline, respectively.

With the announcement of a very strong rebound in the second quarter after the deep contraction in economic activity in the first one, statements from Turkish authorities became more ambiguous. Despite businesses’ continuous insistence on the need for an IMF-sponsored agreement, the AKP government communicated growing reluctance to accept IMF help soon, especially in its speeches to domestic audiences. In early October 2009, Prime Minister Erdoğan told the international media about the solution to disagreements on the independence of Turkey’s tax administration and their ‘hoping to sign a deal soon’. Deputy Prime Minister Babacan, on the other hand, stated that concepts like ‘autonomous’ and ‘independent’ were inapplicable to the ‘not-matured-enough’ tax and revenue administration institutions in Turkey and that they were ‘not convinced’ by the IMF proposals. After the IMF-WB Annual Meeting, hosted by Turkey in early October for the second time, negotiations go on. It is said that ‘the next round of talks will be decisive’. Meanwhile, on October 24, Babacan admitted that they want an IMF deal because of ‘the positive impact’ it would have on Turkey’s growth rate.

IMPLICATIONS: Ambivalent declarations and the marathon of ‘negotiations’ have caused considerable market anxiety. Before the Annual Meetings in Istanbul, Turkish and foreign analysts at Morgan Stanley, Goldman Sachs and Bank of America Merrill Lynch called the IMF deal a ‘golden opportunity’ that ‘must be seized’ in order to close the financial deficit, keep one-digit inflation and interest rates, and improve the discipline and credibility of the Medium-Term Financial and Fiscal Programs. Turkish financial markets and business leaders want an IMF accord as soon as possible. Three-fourths of Turkey’s leading companies’ CEOs participating in a poll conducted by the Turkish Industrialists’ and Businessmen’s Association (TÜSIAD) in late July this year regarded the deal necessary and its delay an extra risk and cost for the economy. Even after the announcement of a Medium-Term Economic Framework by the government on September 16, 2009, and its endorsement by the IMF, doubts remain on the ability of the government to follow its targets successfully without the IMF loan. Until now, financial markets have supported each step ‘closer’ to the agreement asserted by the prime minister. This shows an implicit recognition of the fact that there is a delayed IMF deal rather than an undecided or unwanted one.

Thus the question should not be if there will be a deal, but when and how comprehensive it will be. Both parties want the agreement but they have different calculations of the right time. The IMF would prefer the loan agreement very soon. It has experienced an increase in its finances this year, especially in July 2009 when France and the EU committed US$15 billion and 100 billion respectively after similar moves by Japan, Norway and Canada in contribution to the IMF’s resources.

The Turkish government has other calculations. The rhetoric of succeeding alone (without the IMF loan) in managing the way out of the crisis is used domestically to boost the impression of a strong, independent government. There is no direct political cost to an SBA (the AKP could sign the one in 2005 without repercussions) and the economic benefit of a deal is recognized. Nevertheless, the political benefit is still not obvious to the AKP government. Positive growth expectations for 2010 and 2011 as well as the fact that no early elections are expected to be held in 2010 mean that there are no incentives for the Turkish government it to accept an IMF loan soon. Nevertheless, while waiting for the IMF to be more flexible on conditionality, the government risks getting a smaller loan and creating more uncertainty for foreign investors and the private sector. It will not be easy to recover from the global crisis with an expected 63 billion liras ($43 billion) budget deficit and about $8 billion debt to the IMF from earlier programs.
CONCLUSIONS: The IMF and Turkey both want the deal. It seems likely they simply do not agree on when to announce it, as the Turkish government wants to delay it for the moment. This stance shows how the AKP plays the IMF card both domestically and internationally. It is used domestically in order to boost the standing of the government. However, a full-blown recovery from the global crisis cannot be expected soon. Consequently, any short-term benefit of not accepting the loan soon, waiting for IMF ‘flexibility’ or the parliamentary elections of 2011 risks having unnecessary economic costs for the Turkish economy and post-2001 crisis achievements.

Joris Gjata is a Junior Visiting Researcher with the Central Asia-Caucasus Institute. She holds an M.Sc. in International Political Economy from the London School of Economics.

© Central Asia-Caucasus Institute & Silk Road Studies Program Joint Center, 2009. This article may be reprinted provided that the following sentence be included: "This article was first published in the Turkey Analyst (, a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program Joint Center".

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The Turkey Analyst is a publication of the Central Asia-Caucasus Institute & Silk Road Studies Joint Center, designed to bring authoritative analysis and news on the rapidly developing domestic and foreign policy issues in Turkey. It includes topical analysis, as well as a summary of the Turkish media debate.


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