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Ankara, December 18, 2000 Mr. Horst Köhler Dear Mr. Köhler: 1. In our letter of December 9, 1999, requesting a three-year stand-by
arrangement with the Fund, and in two subsequent letters-dated March 10
and June 22, 2000-requesting completion of the first two reviews, we described
the main elements of our ambitious disinflation and fiscal adjustment
program, charting the course of economic policies over 2000-02. This letter
provides an update on economic developments since the completion of the
second review, discusses our policy goals for 2001-02 in light of these
developments, and outlines the key policy measures needed to achieve those
goals. With this letter we also request the completion of the third and
fourth program reviews, as well as access to Fund resources amounting
to SDR 5.784 billion under the Supplemental Reserve Facility. Recent macroeconomic developments 2. Steady progress has been made in achieving the key goals of our program.
We expect that by December 2000, the 12-month CPI inflation rate will
be about 38 percent. This is above the program target of 25 percent, an
overshooting that is partly due to the large and unexpected rise in international
energy prices. However, it is about half the inflation rate at end-1999,
and the lowest inflation rate since the mid-1980s. 3. Fiscal performance continued to be strong, meeting, by a wide margin,
the program's end-June and end-September 2000 fiscal performance criteria
and indicative floors, respectively, for the primary surplus and for the
overall balance of the consolidated government sector (CGS, which includes
the consolidated central budget, selected extrabudgetary funds (EBFs),
eight nonfinancial state economic enterprises (SEEs), and three social
security institutions) (Annex A). For the whole
year, we expect the primary surplus of the CGS to exceed the program target
by some 1 percent of GNP. This, together with the fall in interest rates
and the sizable amount of expected privatization proceeds, will lead to
about a 3 percentage point decline in the public debt-to-GNP ratio (excluding
the securities issued for the recapitalization of the banks taken over
by the Saving Deposit Insurance Fund (SDIF)). 4. Total receipts from privatization will, however, fall short of the
original program target, owing to delays in the conclusion of the sale
of the GSM license and of part of Turk Telecom. We now project privatization
receipts to reach US$3½ billion in 2000, against the original target of
US$7½ billion. As actions to remedy this delay have already been taken,
or are about to be taken (see below), we request the modification of the
end-December 2000 performance criterion on the primary surplus of the
CGS inclusive of privatization receipts (Annex
B). 5. Following the deep recession in 1998-99, economic activity-fueled
by consumer spending, investment, and exports-recovered strongly this
year. This recovery reflects to some extent a post-earthquake rebound,
but also renewed confidence in economic prospects and a major fall in
interest rates during the first half of the year, which have stimulated
domestic spending. In light of these developments, real GNP growth in
2000 may exceed the program's target range of 5-5½ percent. 6. The strong recovery of domestic demand, as well as the rise in international
oil prices, has led to a sharp increase in imports. Although export volume
growth has also accelerated and tourism revenues are projected to reach
an historical peak, the external current account deficit is likely to
widen this year to about 5 percent of GNP, against about 1 percent of
GNP in 1999. At least 2 percentage points of this increase are related
to unanticipated external shocks (the rise in international oil prices,
the appreciation of the U.S. dollar, which has negatively affected our
competitiveness in European markets, and the rise in international interest
rates). Thanks to increased confidence in our macroeconomic policies,
this deficit has been readily financed for most of the year. Up to mid-November,
international bond issues amounted to US$7½ billion (against a plan of
US$6 billion for 2000) and gross international reserves, valued at program
cross-exchange rates, had increased by US$3½ billion. The performance
criteria on NIR and external debt for end-June and end-September 2000
were observed (Annex A). Up to mid-November,
monetary and exchange rate policies were rigorously implemented. The net
domestic assets (NDA) of the Central Bank of Turkey (CBT) were kept within
the specified narrow band (as implied by the no-sterilization rule introduced
at end-1999), and the NDA performance criteria for end-June and end-September
2000 were observed (Annex A). 7. During the last ten days of November and in early December, Turkish financial markets experienced a period of high volatility. Financial difficulties of one medium-sized bank, which was subsequently taken over by the SDIF, and the sell-off by that bank of large stocks of government paper in the secondary market led primary dealers to suspend the posting of the rates on government paper. This triggered massive capital outflows, in spite of the rise of interest rates to 100-200 percent. At the same time, the CBT increased the supply of NDA well outside the program's corridor, out of concerns for the effect that excessively high interest rates would have on the banking system. Those events, in the context of weaker international market sentiment for emerging economies, led to a loss of US$6 billion of foreign exchange reserves. On November 30, the CBT announced that it would stop providing liquidity to the market, halting in this way the loss of reserves. Interest rates, however, skyrocketed to over 1,000 percent. The pressure on financial markets eased only with the announcement of a policy strengthening and the request of access to the Supplemental Reserve Facility. Policy objectives and overall macroeconomic management strategy for 2001-02 8. In spite of the recent financial market turmoil, the results achieved
in 2000 are generally positive and have strengthened our resolve to achieve
the program's key macroeconomic goals-bringing inflation down to single
digits by end-2002, restoring the viability of public finances and, in
this way, setting growth on a sustainable path. In particular, there is
a need to ensure that the improvement in domestic economic conditions
is consistent with a viable external position, after the widening of the
external current account deficit projected in 2000. More specifically,
our policies for 2001 will be oriented to avoiding the risks that could
arise from excessive domestic demand pressures, minimizing the likelihood
of further slippages in inflation performance (thus preserving external
competitiveness), and bringing down the external current account deficit
to a more sustainable level. To this end, our overall macroeconomic framework
for 2001, including fiscal policy, has been significantly strengthened
with respect to the original program targets. Critical steps are also
being taken in the banking area, with the goal of reducing the banking
system's vulnerability to shocks and speeding up its restructuring. Finally,
new structural reform initiatives will be started, including in the critical
area of privatization, a source of potentially large foreign exchange
inflows. 9. The program for 2001-02 focuses on achieving the following goals:
10. While we regard the above macroeconomic targets as mutually consistent,
the primary goal of our policies in 2001 will be to ensure that the inflation
target is achieved and that the expected improvement in the external position
is realized. Achieving and sustaining over time a stable macroeconomic
framework is the necessary condition for maximizing the growth prospects
of the Turkish economy over the medium term. Fiscal policy 11. The primary position of the public sector (which includes the consolidated
central budget, EBFs, local governments, SEEs, social security institutions,
the CBT, and the unemployment insurance fund) will be strengthened not
only with respect to the projected 2000 outcome, but also with respect
to the original program targets. This strengthening will be instrumental
in reducing overall macroeconomic risks and in lowering more rapidly the
public debt-to-GNP ratio, which at end-2000 will still be above its average
of the 1990s. 12. Our objective is to improve the primary surplus of the public sector
by some 2 percentage points of GNP, from the projected 3 percent of GNP
in 2000 to 5 percent in 2001 (against an original target of 3¾ percentage
points of GNP). The public sector borrowing requirement is projected to
decline from 18½ percent of GNP in 2000 to 10 percent of GNP in 2001.
The operational deficit of the public sector (the deficit adjusted for
the erosion in the real value of public sector debt due to inflation)
is expected to fall from some 5½ percent of GNP in 2000, to 3 percent
of GNP in 2001 (excluding interest payments of about 0.3 percent of GNP
on the securities issued to recapitalize the SDIF banks taken over during
1998-99). Public sector debt is projected to fall by 4½ percentage points
of GNP, excluding the issue of securities for recapitalizing banks. In
2002, we intend to keep the primary surplus of the public sector at about
the 2001 level. This is expected to be sufficient to keep the operational
deficit at about the same level of 2001. 13. The targeted improvement in the public sector accounts will involve
a coordinated effort not only at the level of the central government,
but also at the level of the non-central components of the public sector.
Regarding the central government, we expect the primary surplus excluding
privatization receipts, interest receipts, and transfers of profits from
the central bank to be at least TL 8,735 trillion in 2001 (5.7 percent
of GNP, against 4.9 percent of GNP in 2000). After adjusting for the inclusion
of the Public Participation Fund in the budget, this represents an improvement
of 1 percentage point of GNP with respect to 2000. 14. In addition to the measures introduced in September 2000, which are
expected to save some 1/4 percent of GNP on an annualized basis, further
steps are being taken in the run up to the approval of the 2001 budget,
partly to offset the expiration of temporary measures that were introduced
in the 2000 budget. More specifically, the following measures are being
implemented:
16. Regarding the noncentral components of the public sector:
17. Enactment of the measures indicated in paragraph 14, and approval by the parliamentary planning and budget commission of the 2001 budget in line with the above-mentioned fiscal targets (and including provisions allowing the introduction of fees on electricity consumption), will be prior actions for the presentation to the IMF Executive Board of our request for the completion of the third and fourth reviews under the stand-by arrangement, and for access under the Supplemental Reserve Facility (henceforth "prior actions").
19. We believe the above fiscal measures are sufficient to achieve the
program's goals. However, we would introduce additional fiscal measures,
should it be necessary for the attainment of the key macroeconomic targets,
in particular inflation and the external current account. Public debt management 20. In 2000 public debt management has succeeded in lowering borrowing
costs, while maintaining the average maturity of domestic public debt
broadly unchanged (it was about 15 months in October 2000). The market
for floating rate notes (FRNs), an instrument launched in the second half
of 1999, has developed rapidly (FRN issues have represented about 21 percent
of domestic debt issued through auctions in 2000). The share of gross
external debt over total debt of the public sector is projected to remain
broadly constant between 1999 and 2000 (at about 40 percent). We request
the revision of the end-December 2000 short-term debt limit to US$1.1
billion from $0.5 billion to provide some room for securing additional
financing, if needed. 21. In 2001 we will continue with our policy of balancing the need for
a lengthening of maturities of domestic debt with the need to avoid locking
in at the current interest rates in a period of continued disinflation.
While in 2000 the main emphasis was to avoid a shortening of the maturities,
in 2001 we will aim at a moderate increase in the average maturity of
domestic debt, partly through the further growth of the market for FRNs.
We will also aim at maintaining the share of external debt of the public
sector in total debt broadly constant. This policy has been reflected
in the ceilings on contracting and guaranteeing of external debt of the
CGS included in Annexes G and H. The end-December
2000 short-term debt limit is carried over until the third quarter of
2001 before reverting in the final quarter to the level initially agreed
for the first year of the program (i.e., US$0.5 billion). Incomes policy 22. In the public sector, in addition to the wage policy described above
for civil servants, the wage contracts for public sectors workers are
due for renegotiation in the months ahead. In these negotiations the overall
macroeconomic targets of the program, as well as the need to strengthen
the financial position of the SEEs, will be taken into account. 23. Minimum wage increases are determined by the Minimum Wage Commission,
consisting of representatives of the government, the trade unions, and
the employers. As in 2000, the government will endeavor to ensure that
the minimum wage increase in 2001 will be in line with targeted inflation. 24. In order to facilitate the decline in inflation, the government will
play a more active role in the discussions between social partners, as
well as in its contacts with the private business sector, so as to facilitate
wage settlements, as well as pricing decisions of the private sector,
that are in line with the inflation target. Monetary and exchange rate policies 25. The goal of monetary policy in the aftermath of the financial crisis
of late 2000 has been to move NDA gradually closer to its mid-November
2000 level, so as to facilitate the recovery of foreign exchange reserves,
while avoiding an excessive increase in total base money supply. More
specifically, NDA was lowered to TL 1,840 trillion on December 11, 2000.
NDA will not exceed TL 1,460 trillion on January 11, 2001. Correspondingly,
we request the end-December 2000 NDA performance criterion-which is to
be computed as the average between the stock of NDA on December 11 and
the stock of NDA on January 11 (on account of the volatility in base money
demand at end-2000 due to religious holidays)-to be revised to TL 1,650
trillion (Annex E). At the same time, we request
the revision of the end-December 2000 NIR floor to US$10.4 billion (Annex
F) at the new program cross-exchange rates. This new target takes
into account the lower post-crisis external reserves position of the CBT.
For 2001, the NIR floor is set to increase to US$12 billion by June. 26. Between December 11, 2000 and January 11, 2001, the demand for base
money, as well as net international reserves, is expected to experience
large seasonal movements related to religious holidays and the end-year
closing of books. During this period movements in NDA and NIR will be
closely monitored in consultation with Fund staff, and monetary policy
will be promptly tightened if these movements exceed the normal seasonal
fluctuations. 27. During the first half of 2001, the monetary framework will continue
to be characterized by the pre-announced exchange rate path with no band.
As already announced, the devaluation rate will be lowered from 1 percent
per month in the last quarter of 2000, to 0.9 percent per month in the
first quarter of 2001, and to 0.85 percent per month during the second
quarter of 2001. Regarding NDA, we will continue the policy of gradual
reduction of the excess of NDA created during the crisis. This policy
is reflected in the NDA ceilings (performance criteria) included in Annex
E, for end- January, February, March, and June 2001, which also reflect
the decline in reserve requirement coefficients effective as of January
12. Thus, by end-June 2001, about 50 percent of the excess of NDA created
during the crisis (adjusted for the change in reserve coefficients) will
be eliminated. While, for the purpose of assessing compliance with the
performance criteria, only the above test dates will be relevant, NDA
between test dates is not expected to exceed systematically, or by large
amounts, a linear interpolation of the NDA ceilings (with the exception
of the second and third week of March which are affected by religious
holidays). Should capital inflows be stronger than currently envisaged,
NDA will be kept below the above baseline, so as to avoid, to the extent
made possible by our exchange rate commitment, that capital inflows lead
to an excessive increase in money supply and to an interest rate level
that is not consistent with the attainment of the program's inflation
targets. The appropriateness of the NDA ceilings in the above two paragraphs
will be reassessed during the forthcoming program reviews, in light of
developments in the external accounts and inflation. 28. As envisaged in our Letter of Intent dated December 9, 1999, as of
July 1, 2001, a gradually widening band will be introduced around the
central exchange rate path, and more flexibility will be given to NDA
policy, so as to permit a gradual shift to a monetary framework that allows
greater focus on the direct pursuit of price stability. This shift is
deemed necessary to avoid being locked into a monetary framework that-while
appropriate during the initial phase of disinflation-may lead to unnecessary
rigidities in the long run. 29. More specifically, as of July 1, 2001:
30. The increased flexibility in managing monetary policy that will gradually
become available as of the second half of 2001 will be used by the CBT
with the primary goal of sustaining disinflation. We will thus start a
gradual shift from a monetary framework centered on the exchange rate
to one centered on formal inflation targeting, which has been successfully
adopted by several other countries. As a necessary step to support this
shift, a new central bank law will be enacted by end-April 2001 (a condition
for the completion of the eighth review) with the goal of designating
price stability as the primary monetary policy objective of the CBT, enhancing
its operational independence in the pursuit of that objective, increasing
its degree of accountability for monetary policy decisions, and enhancing
the transparency of monetary policy formulation. All this will also be
necessary to make the central bank legislation consistent with the Maastricht
Treaty, with a view to Turkey's prospective participation in the European
Union. As regards monetary policy transparency and accountability, the
CBT has already started publishing quarterly inflation reports to analyze
inflation developments. Also, work has started on enhancing the analytical
and statistical capabilities of the central bank, in line with the requirements
of inflation targeting. 31. In order to reduce the burden on banks of reserve requirements, as
of the reserve requirement period starting on January 12, 2001, the reserve
requirement coefficient on Turkish lira deposits will be reduced from
6 percent to 4 percent. No other change in liquidity and reserve requirements
will be made during 2001. The liquidity implications of these changes
have been taken into account in setting the NDA ceilings for 2001. 32. The above monetary framework is consistent with our disinflation
goals, as well as with the goal of maintaining our net international reserves
at a comfortable level, and above the floors (performance criteria and
indicative targets) indicated in Annex F. Structural issues 33. Structural reform remains a key component of our economic agenda.
Actions in this area have been formulated in close collaboration with
the World Bank and will be supported by loans from the Bank. Privatization 34. Our privatization program remains guided by the need to improve economic
efficiency, and reduce the domestic and external borrowing requirement
of the public sector. Of the US$3.5 billion collected in privatization
receipts in 2000, US$2.7 billion arise from the sale of enterprises in
the portfolio of the Privatization Agency (PA), US$0.3 billion from the
transfer of operating rights (TOR) of power plants, and US$½ billion from
the first installment of the sale of the GSM license. The privatization
deals concluded in 2000 have already secured privatization receipts for
2001 amounting to US$2.1 billion (of which US$2 billion from the sale
of the GSM license). Thus, while falling short of the original target,
the total amount receivable for privatization deals concluded in 2000
amounts to US$5.6 billion, as much as collected since the privatization
program started in 1986. 35. To accelerate privatization in 2001, the government will carry out
a tender for the sale of 33.5 percent of the shares of Turk Telecom to
a strategic investor with transfer of strong management rights. To this
effect:
The tender committee will select the winning bid by end-May 2001. 36. Establishing an appropriate regulatory framework for a competitive
market in electricity and divesting state assets in that sector through
outright sales are key elements of our reform strategy which aims to increase
economic efficiency and attract foreign direct investment. To this end,
we will:
37. To allow further progress in 2001, by December 20, 2000, we will
transfer additional companies to the PA (implementing, with some delay,
the actions envisaged in one of the program's structural benchmarks).
The companies will include, in addition to agricultural companies (see
below), some factories of MKEK (machinery and chemicals) and of ETI holdings. 38. Altogether, and taking into account privatization receipts expected
in 2001 from deals concluded in 2000, we expect total privatization receipts
to reach some US$6-7 billion (3-3½ percent of GNP) in 2001. With the exception
of US$1.1 billion that will be used by the PA for operational costs and
transfers to the SEEs, all the above privatization receipts, and any addition
to them from whatever source, will be transferred to the treasury for
debt reduction. Social security reform 39. Building on the breakthrough pension reform adopted in 1999, the
government has designed a second package of reforms aimed at improving
the administration of the pension funds and introducing a voluntary private
pension system. Four decree-laws had been adopted in September, but, based
on the recent constitutional court decision, they will have to be submitted
as laws to parliament (although they remain temporarily in force). These
laws call for the creation of a social security agency supervising the
activities of SSK (the major public pension fund), Bag-Kur (the pension
fund for self-employed and farmers), IS-Kur (employment agency in charge
of the management of unemployment insurance), and the administrative restructuring
of these institutions. Moreover, legislation already submitted to Parliament
envisages parametric adjustments in SSK and Bag-Kur (such as the increase
in health premia and co-payments) and the introduction of a voluntary
private pension system. Fiscal management and transparency 40. We are determined to continue improving fiscal management and transparency.
The Report on the Observance of Standards and Codes-Fiscal Transparency
Module of the IMF was published in July. After closing 25 budgetary funds
and 2 EBFs during the first half of the year, we had intended to close
another 21 budgetary funds and 4 EBFs in October 2000 (a structural benchmark).
However, due to a constitutional court decision, the necessary decree-laws
could not be passed by the Council of Ministers. They will be submitted
to parliament and enacted by mid-February 2001 (a structural benchmark).
The closure of the 15 remaining budgetary funds (with the exception of
the Support Price Stabilization Fund (DFIF), needed to channel the resources
from World Bank loans) and one EBF will be enacted by June 2001, as stated
in our December 9, 1999 Letter of Intent (a structural benchmark). As
a result, all budgetary funds (with the exception of DFIF) will be eliminated
in the 2002 budget, and the number of EBFs will be limited to six. No
new budgetary fund or EBF will be created. 41. Also in the area of fiscal transparency, we intend to submit to parliament
by end-June 2001 a law on public finance and debt management that defines
clear borrowing rules and limits for the public sector, and incorporates
into the budget on-lending and debt guarantee operations of the treasury
(a structural benchmark). Regarding the government's contingent liabilities,
we have further improved transparency by publishing the maturity structure
of government guarantees and the terms of other contingent liabilities.
In 2001, we will include in the monthly reports of the Treasury a "lending
minus repayments" item following the IMF's Government Finance Statistics
standards, thus expanding the coverage of the budget balance to include
net treasury payments of guaranteed debt. As envisaged in the December
1999 Letter of Intent, the 2001 budget law sets explicit limits on the
issuance of new guarantees in 2001 (meeting one structural benchmark). 42. To improve expenditure management, we will complete by mid-2001 the
implementation of a computerized accounting system that will allow a better
monitoring of spending and costs in government units. Moreover, a new
budget classification in line with international standards will be completed
by June 2001 for implementation on a pilot basis for the 2002 budget (with
the support of the Public Financial Management Project with the World
Bank). We also intend to initiate in 2001 the necessary studies to move
toward accrual-based accounting, with a view to starting pilot implementation
with the 2002 budget. Tax administration 43. In 2000-01, we will continue to strengthen tax administration, with
a view to increasing tax compliance, which is an essential condition for
ensuring the efficiency and equity of the tax system. To this end, the
computerization of operations has been completed in all major tax offices
as planned (covering more than 90 percent of tax revenues) and will be
rolled out in most of the remaining offices in 2001. We will improve the
processing and sharing of taxpayer data (including third-party information)
by merging and reorganizing the three data processing centers and we will
gradually extend the assignment of tax identification numbers (TINs) to
a broader range of taxpayers. Specific steps regarding the TINs will be
identified at the time of the January review mission. Building on these
improvements, we will strengthen the enforcement of tax laws and regulations
by expanding the range and scope of verification and audit of taxpayers.
These measures will increase tax collection, as well as lead to a reduction
in tax arrears without any tax amnesty. Agricultural policies 44. Substantive progress has been accomplished under the program in reforming
agricultural policies with the objective of phasing out indirect support
policies by end-2002 and replacing them with direct income support (DIS).
This will promote greater economic efficiency of agricultural policies,
and allow stricter control on their fiscal cost and better targeting to
the poorest farmers. The support purchase price for tobacco was raised
in line with targeted inflation in 2000, and the spread of the support
price for wheat over international prices was lowered to 35 percent. The
support price for sugar beets was raised in November by 25 percent. After
the approval of the Agricultural Sales Cooperatives (ASCUs) law, progress
has been made in analyzing their financial position in preparation for
their restructuring. Business plans for the 2000/01-crop year have been
approved for all ASCUs and are in line with the 2000 budget allocation.
Finally, credit subsidies have been fully phased out. 45. Looking ahead, the support prices for wheat will be increased in
2001 by no more than targeted inflation, and its spread with respect to
international prices will be at most 20 percent. DIS-for which an allocation
has been included in the 2001 budget-will be extended at the national
level. The payment will be made in two installments annually. The farmers'
registry is expected to be substantially completed by July 2001 and the
first payment to registered farmers will be made in the second half of
2001. We expect this reform to be supported by an Agricultural Reform
Investment Program from the World Bank. 46. The phasing out of the indirect support policies would lead to a
reduced involvement of the state in the production and marketing of agricultural
products. This will lead to a rapid privatization of the SEEs involved
in this area. To that effect, at least six sugar factories of TSFAS (the
SEE involved in the purchase and processing of sugar beets) will be transferred
to the PA's portfolio by December 20, 2000 (prior action), with the aim
of completing their privatization by end-2001. The remaining sugar factories
will be transferred to the PA portfolio during 2001 with the aim of completing
their privatization by end-2002. A sugar law reforming the sugar market
will be submitted to parliament by February 15, 2001 and enacted by March
15, 2001. Restructuring TEKEL and reforming the tobacco sector will involve:
47. The government is committed to strengthening the banking sector through a two-pronged strategy aimed at both strengthening discipline on and sustaining confidence in banks. The principal milestones of this strategy are the establishment of an independent Banking Regulation and Supervision Agency (BRSA) and the Prime Minister's announcement that the government will, until further notice, fully protect depositors and other creditors in domestic deposit-taking banks. The following paragraphs focus on: (i) the actions taken by the BRSA since its inception; (ii) the steps undertaken to implement the guarantee of depositors and creditors; (iii) the strategy to resolve the banks already taken over by the SDIF and to recover part of the value of their assets; (iv) the strategy for keeping the rest of the banking system sound, (v) information on the actions regarding public banks, and (vi) other issues related to bank supervision.
51. The financial needs of the SDIF will continue to be covered by loans from the Treasury. The interest rate charged on the loans to the SDIF, as well as the schedule of payments of interest and repayment of principal, will be in line with the financial needs of the SDIF, including its need to build up a sufficient amount of liquid reserves. To insure that the SDIF will be able to resolve (liquidate, or recapitalize and sell) intervened banks in the least cost manner, without any disruption to depositors and other creditors, the SDIF has the authority to borrow resources from the Treasury as needed.
53. Subsequent to these steps, the SDIF will proceed with its announced
schedule to sell all banks under its control:
54. The financial restructuring for the two banks acquired by the SDIF in October 2000 will be carried out and detailed plans for their resolution will be announced to the public by end-January 2001. A similar approach will be followed as has been adopted for the above eight banks owned by the SDIF, but with up to a two-month delay at every stage. The timetable for the resolution of the bank taken over in December 2000 will be discussed as part of the January 2001 review mission.
56. The resolution of any bank intervened in the future, as called for
in the Banking Law, will be handled following procedures similar to those
described in the above paragraphs. 57. Regarding the state banks, the stock of duty losses of Halk Bank
and Ziraat Bank will be converted into securities bearing market interest
rates, in line with progress in implementing the restructuring plans of
these banks. The interest on the stock of duty losses will accrue in 2001
at a rate equal to the monthly weighted average of treasury bill and discount
bond rates times 1.33 for Ziraat Bank and times 1.60 for Halk Bank. The
strategy to privatize the state banks will proceed on the basis of the
law enacted in November 2000. 58. Consultation with the banking community on draft new regulations
on internal risk management systems and on adjusting capital adequacy
requirements to reflect market risks is ongoing and has delayed their
adoption from end-August, as originally planned. The regulations will
be adopted by end-January 2001 (a structural benchmark) and will be effective
as of January 1, 2002. 59. As required by the banking law approved in June 1999, the BRSA will
issue by end-January 2001, a regulation redefining indirect exposure to
shareholders (connected lending). 60. As for the tax deductibility of loan loss provisioning, a tax regulation
will be adopted providing for the full deductibility of the provisions
that banks are mandated to make based on bank supervision regulations.
At the same time, the deductibility of general provisioning will be eliminated.
This regulation will be adopted by end-March 2001 and will be implemented
with effect from April 1, 2001 (a structural benchmark). Statistical issues 61. Improving the statistical base for economic policy has been an ongoing effort in the last few years. In this respect, the CBT has recently introduced new reporting requirements for bank lending rates. In the period ahead, the institutional capacity to compile balance of payment statistics needs to be strengthened, in light of the difficulties in this area encountered in recent years (especially regarding the external service accounts). To this end, the amendment in the CBT law will provide the CBT with the explicit mandate to compile balance of payment statistics, and with the authority to request from nonbank entities (as well as banks) the information necessary for this purpose. The CBT intends to continue the ongoing work to improve the measurement of external service receipts. * * * 62. We believe that the policies and measures described herein are adequate to achieve the objectives of our program, but we stand ready to take additional measures, if necessary, to keep the program on track, consulting regularly with the Fund. Purchases under the arrangement will be subject to monthly reviews during the first quarter of 2001 and quarterly reviews thereafter for the duration of the arrangements.Very truly yours,
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Mr.Recep ÖNAL |
Mr.Gazi ERÇEL
Governor of the Central Bank |
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