PULSE of TURKEY No:89 ............................ FEBRUARY 12^th,  1999

BANK BILL TO AFFECT ECONOMIC PERFORMANCE

With his half a century experience in politics, DSP Chairman Bülent Ecevit, upon becoming Prime Minister about 40 days ago, did not expect that his government could pass through Parliament any Bills other than the 1999 Budget and the vitally important Bank Bill. Even that modest expectation, however, has proved too optimistic and Parliament has adjourned its work until the post-election period without passing even these two bills. Thus the Opposition has won the recent battle in Turkish politics by obstructing the legislation of the Bank Bill before the elections.

Yet the legislation of the Bank Bill is the minimum requirement of the IMF and the World Bank to give their support to the Turkish economy. It could have been possible to get a loan of up to $1 billion from the World Bank for these structural adjustments even before the elections, but it is definitely out of the question now.

The IMF team under Martin Hardy has left Turkey without any commitment before the elections, but even its declaration of the success of Turkey’s financial program and praise of lowered inflation was helpful to the Ecevit Government. It helped to lower the domestic borrowing rates by 18 points, from 138% to 121% last week.

The Bank Bill’s Background

The current Bank Act 3182 was passed in 1985 and was amended 13 times in nine years until 1994 when the economic crisis forced the Government headed by Tansu Çiller to pass decree law 538 for the banks. The opposition claimed that the Bill authorizing the government to pass this decree law was unconstitutional and the Constitutional Court repealed the Bill as such. Thus the provisions of decree law 538 amending Bank Act 3182 remained in suspense. They are still in force in practice, but without much legal grounds. It is possible to repeal any of these rules of decree law 538 if anybody authorized to apply to the Constitutional Court makes such a move.

It is apparent that such a highly important sector of the economy cannot be governed by such precarious rules. That is why this vacuum has to be filled by a new Bill without delay. The Seventh 5-Year Development Plan as well as the 1998 economic program both passed by Parliament in 1995 and last year respectively call for legislating a new Bank Bill. The 1998 economic program reads:

“Keeping in sight the relevant European legislation and international standards, the Bank Act shall be redrawn in a way to have a totally autonomous decision-making body devoid of the political influence of the public authority which controls the system.With the end in view of taking the financial sector out of the jurisdiction of political influence, the Finance Sector’s High Board will be established by the new Bank Bill. ”

In 1998 the Yılmaz Government, in consultation with various economic sectors and the Union of Banks, presented the Bank Bill to Parliament. The Budget Planning Committee and a sub-committee devoted meticulous attention to it and elaborated on the Government’s draft. The Bill passed through the Committee and came down with the House Floor for legislation, but got nowhere in the end. It sets up a banking system in line with world standards and establishes a Banking Regulatory and Inspection Board to run this system. It is autonomous both administratively and financially and aloof from political influence.The Board has a team of 150 experts to inspect the banks. Its 7-member steering committee is selected from among respected banking experts. Top civil servants such as the Under-Secretaries of Finance, Treasury, the SPO (State Planning Organization) designate 14 candidates to this body and the Council of Ministers assigns seven among them for six years. The Bill has new rules for founding and disbanding a bank in accordance with international standards under the supervision of this Board. In 1994 the Çiller Government gave a 100% guarantee to bank deposits to avoid a panic in the banking system when three small banks collapsed. This guarantee still holds good and the IMF and the World Bank as well as some Turkish quarters press for changing this rule. It is claimed that several small banks may go bankrupt if this is done, but it will be done in a cautious way under the new Bill in order to gain a healthy structure for the Turkish banking system.

Now that it is evident that the Bank Bill cannot pass through Parliament, all this work will go to dust and the Bill will become “caduc” (null and void).

Turkey receives external and domestic loans despite all setbacks

Despite this failure and the lack of IMF backing, however, Turkey has been able to get loans from international finance markets with reasonable interest rates this year. Already the Government has issued DM750 million 4-year treasury bonds through Deutsche Bank and Commerzbank in January and surprisingly sold them all at 9.25% interest without any difficulty. On February 3^rd, the Treasury authorized Deutsche Bank and Bank Paribas to issue Euro1 Billion 5-year treasury bonds and the soundings of the international finance market are very promising.

Last year Turkey sold in international markets $2.8 billion bonds and intends to receive $8 billion external loans this year. This will be done through $3 billion bonds sales, and the rest through other external borrowings or through domestic debt substitution.

Independent experts find these targets objective, even reserved, given Turkey’s present credibility and world financial conditions. They note that since the Russian crisis in the second half of last year Turkey received 17% of the loans accorded to emerging market countries in this period. It will rise to 28% when Euro1 billion ($1.1 billion) comes through.

Now that the Government has to do without IMF and World Bank support due to the failure to pass the Bank Bill, it has to take other measures to obtain the necessary domestic and external financing without causing interest rates or dollar parities from rising too high.

The first two loans of the year from external markets were for four and five years with just over 9% interest rates. That is to say they were received with reasonable conditions. These terms may be preserved until a stable government is formed after the elections. As for domestic loans, the Government has issued bonds with 35% interest rates for 134 days. It corresponds to 126% compound interest rate for the year. The bonds were sold out within a few hours without even reaching the people. The banks just hoarded them as a good bargain. The Government can, therefore, easily market short-term bonds at around 120% compound interest rates to manage in the first half of the year. Making them short term would save the future government from undertaking too heavy interest burdens for the future, as the post-election government has to lower the interest rates much more in the second half of the year.

Stricter financial program discussed and agreed upon with the IMF

The talks with the IMF in Ankara concerned the financial program for the post-election period, rather than financial support for the Ecevit Government because the Prime Minister was well aware of the fact that it was not possible for him to make such long-term arrangements even if the Bank Bill was legislated.

The Treasury Chief, Yener Dinçmen, told a press conference he jointly held with Martin Hardy of the IMF on Monday (8^th) that they had reviewed the 1998 performance of the financial program and decided that it had been successful. The program lived up to its objectives. “As of the end of 1998,” said Dinçmen, “we have attained almost all the targets of the financial program. Our target for total tax revenue was TL11,400 trillion. The actualization was TL11,424 trillion. The target for non-interest expenditure was TL9.2 quadrillion and actualization TL9.2 quadrillion. Our target for non-interest surplus was TL2,145 trillion. The actualization was TL2,204 trillion. We had foreseen TL2 quadrillion revenue from privatization. Due to the global financial crisis and the decline in capital entries we could obtain only TL1 quadrillion from that source and that was the only shortfall.”

Dinçmen said that at their consultations with the IMF they reviewed various economic fundamentals for the first half of 1999 and decided upon a stricter financial discipline, budget performance, monetary program and lower inflation rates. Wholesale prices will be pulled down to 45% by June. Agreement has been reached with the IMF for striking the balance in the macro-economic indicators in the first half of the year. He said that this program had to be supported by structural reforms and this would be done after the elections. They had sought no financial support from the IMF, but the Fund believes that it is necessary. “We have not discussed any figures about financial backing. We will first set in motion the program, then other factors will be introduced when we reach a certain point in its implementation,” he affirmed.

Martin Hardy praised Turkey’s economic performance in 1998 and said that this was due to faithful implementation of the financial and monetary program. “But if the structural reforms had been done in time, Turkey would have obtained really interesting and more impressive results. The delay in bringing to life the reforms keeps Turkey back from fully using its growth potential,” he emphasized.

Structural reforms on the negotiating table with the IMF and World Bank

The structural reforms Turkey is discussing with world economic organizations concern the Bank Bill and reform, the social security system, marketing and pricing agricultural produce, privatization and international arbitration for foreign investments, especially in the energy sector.

Martin Hardy expressly said in Ankara, “In your country women can retire at 38 and men at 43. This is hard for us to understand.” This is a problem that has come up at the negotiating table at every discussion between Turkey and the West since the Early Retirment Bill was passed in 1992. During the 1991 election campaign, the then DYP Chairman Süleyman Demirel objected to ANAP’s social security reform moving the retirement age up to 55 for women and 60 for men and, upon winning the election, passed the Early Retirement Bill in 1992, thus causing one of the structural problems of the Turkish economy today.

At the Economic and Social Council meeting chaired by PM Ecevit on February 8^th, the Deputy Under-Secretary of the SPO (State Planning Organization), Faik Öztrak, read a report on the budget subsidies extended to social security organizations in the last ten years. The total of the ten years between 1990 and 1999 is $26,403 million and this $26.5 billion is equal to Turkey’s domestic debt stock today. The breakdown of social security subsidies in ten years, including the $5.5 billion estimated for this year is (in million dollars): 1990-470, 1991-384, 1992-582, 1993-1,242, 1994-1,322, 1995-2,367, 1996-4,133, 1997-5,019, 1998-5,384 and 1999-5,500 (estimated), the total being $26,403 million.

As is seen from this breakdown, the subsidies doubled up as from the legislation of the misguided Bill in 1992 and surpassed $5 billion a year in the last three years. This matter will be one of the first reforms to be tackled by the post-election government and the Bill is ready for it.

Answering a question at his press conference at end of the latest consultations with the IMF, Thomas Hardy said about Turkey’s agricultural support policy, “It is fact that Turkey’s agricultural support prices are far above world prices and that this gap is widening. This situation causes the accumulation of unusable stocks and wastage in some products like tobacco. This price support policy causes deficits in some institutions such as the Agricultural Bank as well as in the Budget. The support to farmers should be lowered within a medium-term policy. The World Bank is making preparations about this matter in Turkey."

The agricultural support subsidies reached TL4,093.1 trillion (about $13.5 billion) in 1998 and it is close to half of Turkey’s exports revenue. At a panel discussion held in Ankara on Tuesday (9^th) by the Treasury and the World Bank, Deputy PM Hikmet Uluğbay said that the current policies for agriculture and animal husbandry needed a reform. World Bank representative Ajay Chibber suggested that rather than the present outdated support policy Turkey should introduce a direct payments policy to farmers. He promised to extend the necessary support from the World Bank for this program. The Deputy Under-Secretary of the SPO, Yavuz Arınsoy, said that of the TL4.1 quadrillion subsidies to the agricultural sector last year 80% did not reach the farmers, but was pocketed by feudal lords. The Governor of the Agricultural Bank, Selçuk Demiralp, complained of the financial burden put on his bank by these subsidies. Treasury Chief Yener Dinçmen underlined that it was also costing the Treasury heavily. A ton of sugar was $241 in the world whereas it cost Turkey $786. Instrumental in undertaking this burden were governments’ populist policies to curry favour with the electorate, he noted.

The Ecevit Government and its partner ANAP are making preparations for the solution of these problems after the elections and trying to manage until then. By all indications they will be able to lower the inflation and bank rates at moderate dimensions in the period up to the elections. uras@ada.net.tr,   February 12^th, 1999

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