Turkey’s government on Thursday unveiled a budget for next year that envisages a sharp rise in public spending and a lowering of a key fiscal savings target that has formed the central pillar of its $10bn loan agreement with the International Monetary Fund.
Kemal Unakitan, finance minister, said the primary surplus – the budget surplus before interest payments – would be 5.5 per cent in the 2008 budget, compared with 6.5 per cent in each year since Turkey and the IMF agreed a recovery package from a devastating financial crisis in 2001.
The lowering of the primary surplus target could signal that Turkey is getting ready for a fundamental change in its relationship with the IMF when the loan agreement expires next May. An IMF team that had been in Turkey for the past two weeks left Ankara on Thursday without completing a scheduled review of the agreement, and discussions are to continue in Washington during the annual meetings of the Fund and the World Bank.
Ozgur Altug, chief economist at Raymond James Securities, said in a note to investors on Thursday: “We sense that the government is not willing to renew the [$10bn loan] deal, but relations with the IMF will continue in a weaker form.”
Mr Unakitan said that lowering the target did not mean any easing of the government’s tight fiscal policy. The budget envisages a rise in spending next year of 10 per cent, economic growth of 5.5 per cent, inflation of 4 per cent, and a rise in income per head to $7,000 (€4,390, £3,435) from about $5,500 this year.
The government’s decision to reduce the primary surplus target could be part of a wider reorientation of economic policy away from strict adherence to IMF-inspired targets that may either be no longer relevant or conflict with the government’s wider economic agenda; an agenda increasingly focused on maintaining high levels of economic growth based on structural reforms, privatisation, and foreign direct investment inflows.
“Our experts decide on the primary surplus that Turkey needs, and 6.5 per cent is not any kind of magic number,” Mr Unakitan said. “With or without the IMF, fiscal discipline and continued structural reform are what Turkey requires.”
Analysts said the lowering of the primary surplus target for next year may also reflect the reality that it has failed to meet it for 2007 because of election-inspired extra spending earlier in the year. But they suggested that the Turkish central bank, which this week cut its benchmark interest rate by 50 basis points, might have felt more comfortable in cutting rates further in the next few months if the 6.5 per cent target had been retained.
