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REPUBLIC OF TURKEY PRIME MINISTRY THE UNDERSECRETARIAT OF TREASURY General Directorate of Foreign Economic Relations Ref : B.02.1.HM.0.DEİ.02.00/ 8735 Ankara, January 30, 2001
1.
The strict implementation of the strengthened policies described in
our Letter of Intent (LoI) of December 18, 2000-together with the support
of the international financial community-rapidly restored market confidence
after the financial turmoil in late 2000. We remain fully committed
to the strategy laid out in the December 18 LoI. That letter remains
the main document outlining our policies for 2001-02, which are here
updated in some specific aspects in light of recent developments. This
update relates to: (i) monetary policy implementation within the existing
framework; (ii) the reform of the tobacco sector; (iii) the rolling
out of tax identification numbers (TINs); and (iv) banking. We hereby
also request completion of the fifth review under the Stand-by Arrangement. 2.
We will continue to manage monetary policy within the framework set
forth in the December LoI. The preannounced exchange rate path will
remain the main monetary anchor of the program. Within this constraint,
the Central Bank of Turkey (CBT) will manage monetary policy with the
goal of maintaining an adequate level of foreign exchange reserves,
and, to the extent made possible by our exchange rate commitment, of
keeping monetary conditions at a level supportive of our inflation target.
The December LoI indicated that should capital inflows be stronger than
envisaged at that time, NDA would be kept below its ceiling so as to
avoid excessive money creation. This policy has been strictly implemented
in January, thus helping to restore confidence. The CBT will continue
to monitor developments in base money, and reduce NDA in response to
higher-than-projected capital inflows, keeping in close consultation
with Fund staff. Moreover, in light of the large margin of NDA with
respect to its ceiling that is expected to be registered at end-January,
we have revised downwards the NDA ceiling for the dates following January
31, so as to increase the predictability of monetary policy (Annex A).
Correspondingly, the NIR floors have been revised upward (Annex B).
The appropriateness of the NDA and of the NIR floors will be reassessed
during the forthcoming program reviews, in light of developments in
external accounts and inflation. NDA between test dates is not expected
to exceed systematically, or by large amounts, the ceilings set for
the test dates following January 31, except during the March religious
holidays (for which a more detailed indicative path for NDA will be
discussed during the February program review). In the event of significant
deposit withdrawals and in accordance with the protocol between treasury,
the SDIF, and the CBT, the latter is committed to provide liquidity
to the affected Savings Deposits Insurance Fund (SDIF) bank (banks),
if needed to implement the guarantee. Should this lead to a breach of
the NDA ceiling, the CBT will consult with the Fund staff to examine
the factors behind the breach, and will be committed to move NDA back
within the ceiling with open market operations immediately thereafter.
Finally, in order to facilitate monetary management, state banks will
be more prompt in adjusting their borrowing rates to money market conditions. 3.
The reform strategy for the tobacco sector and the restructuring of
TEKEL, one of the main component in our agricultural policy reform and
in our privatization drive, is being strengthened with respect to the
December LoI. We will transfer the state monopoly agency (TEKEL) to
the Privatization Agency (PA), instead of transferring only its tobacco
processing units. To this end, a law-which will also reform the tobacco
sector and phase out support purchases of tobacco-will be enacted by
end-February 2001 (a structural benchmark, Annex C). 4.
As stated in the December LoI, strengthening tax administration is essential
to improve efficiency and equity of the tax system. Among other steps,
we have increased the number of TINs from 13 million at end-1999 to
15.2 million at end-2000. We intend to increase by 50 percent the number
of TINs from the end-2000 level by end-2002. To that end, the necessary
tax regulations will be enacted by end-September 2001 (a structural
benchmark, Annex C). 5. Regarding banking, the resolution of the SDIF banks is proceeding according to schedule. The transition bank set up to reorganize the assets and liabilities of the five banks that will have their license revoked will be sold or otherwise resolved by end-September 2001 (a structural performance criterion). The strategy for dealing with the remaining two banks taken over by the SDIF after September 2000 is still being developed as information on these banks is being refined. SDIF intends to sell the larger of these two banks (Demirbank) using a "fast track" process, taking advantage of substantial investor interest already expressed in this bank. The bidding terms will be announced by end-January 2001 and will be followed by a brief due diligence process; after that we expect to complete a speedy sale. In the case of the remaining bank, the SDIF will follow the same sales process used for the banks taken over before October 2000 but with a two-month time lag. Regarding bank regulation, a new regulation meeting EU standards that defines direct and indirect ownership relationships in connected lending is still being discussed with the banking industry and is expected to be introduced by end-February 2001 (a structural benchmark).
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Recep
ÖNAL |
Gazi
ERÇEL
Governor of the Central Bank |
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