PULSE of TURKEY No 19......................... FRIDAY, JUNE 26th, 1998
PURRING BUDGET PERFORMANCE IS LOST AMIDST NOISE
IMF agreement sought merely to gain credibility. First five months’ budget returns are better than budget estimates. Interest rates continue to fall. TL to be equal to Euro by knocking off five zeroes.
The talks between Turkey and the IMF that have been going on for ten months to work out a joint economic program are heading to a conclusion. It is not a usual standby agreement that involves the Fund’s support to an ailing economy with loans, but a new kind of agreement that requires a close watch over the Turkish economy by the IMF. This agreement, which will be signed by the Fund for the first time with any member country, is called Staff Monitoring Program and requires the IMF consultation team’s visits to Turkey on a quarterly basis.
The Turkish Government will, therefore, be under the surveillence of the Fund with visits to Turkey four times a year without receiving any financial support from it. The reason for Ankara’s acceptance of a kind of a straitjacket without any aid is that the economy is advancing within a very well prepared stability program that needs the confidence of the people and the external world.
To slash the inflation to half in 12 months from 100% at the beginning of the year, the psychological factor is the most important. The IMF’s declarations about the quarterly performance of the fundamentals of the economy will be the key in getting the necessary credibility for the achievement of the stability program. Central Bank Governor Gazi Erçel said that if they had persisted on continuing with the economic program without the IMF it would have cost them a year and a half and $10 billion.
To gain the public’s backing for this program, the Government has been exercising one of the most transparent economic policies of the world and with great success so far, but it fails to persuade them about it. The IMF will now serve as an international referee testifying to this success and consolidating the credibility of the economic performance.
Budget deficit in first five months narrower than estimate
The official figures released for the first five months show that the economy is purring exactly to the quarterly programs, but still the media is screaming about the widening budget deficit.
According to the Finance Ministry’s announcement, the budget expenditures in the first five months totalled TL5,595 trillion composed of TL1,636 trillion current expenditure (TL1,403 trillion for personnel salaries and TL233 trillion others), TL3,794 trillion transfer expenditure (TL2,673 trillion interest payments, TL528 trillion social security subsidy, TL593 trillion others) and TL164 trillion investments.
The budget revenue in the same period was TL4,123 trillion, composed of TL3,248 trillion tax revenue, TL420 trillion non-tax revenue, TL387 trillion funds and TL68 trillion annex budget.
So the budget deficit was TL1,472 trillion in this period and it means an average of TL122.6 trillion a month. Multiplying it by 12 gives an estimated deficit of TL3,533 trillion for the year. This is a considerable improvement on the budget bill’s TL3.9 quadrillion deficit estimate for 1998.
The Treasury is now preparing to announce the estimates for the monetary and credit policies, the interest and exchange rates and other fundamentals for the third quarter.
The performance in the first five months shows that all these fundamentals are unrolling better than the Government’s estimates. Privarisation revenue, which was not included in the budget estimates, is greatly helping to keep the economic performance within the program because it closes the gap whenever the deficit tends to widen. Perhaps this is the secret of this successful budgetary performance so far.
Interest rates determine the budget expenditure
Interest rates are a key factor in balancing public finances for the rest of the year because the TL2,673 trillion interest payments in the first five months account for almost half (47.8%) of the total budget expenditure of TL5,595 trillion.
The Treasury has been able to reduce the interest rates to about 80% for 3- and 6-month bonds. It does not want to issue bonds for longer terms either, with the expectation that the inflation and interest rates will come down further in the following months.
Central Bank Governor Gazi Erçel said on June 24th, “We have to run the interest rates parallel to the drop in inflation. By creating a budget surplus outside interest payments we will encourage economic development through private enterprise and also be able to lower interest rates further.”
He said that with a 7-article bill they had prepared, they would knock off five zeroes from the TL when the inflation rate dropped further, to 20% or so. Then one new TL would be equal to a Euro. In that case TL5 million would be 50 Euro or 50 new TL. “Foreign banks are envisaging to make 10-year investments with TL. We have seen that foreigners will buy if we issue a 10-year bond when we lower the inflation,” he said. uras@ada.net.tr.