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REPUBLIC OF TURKEY PRIME MINISTRY Ref: B.02.1.HM.0.DE İ .02.00/500/49192 Ankara, July 30, 2002 Mr. Horst Köhler Managing Director International Monetary Fund Washington, D.C., 20431 U.S.A. Dear Mr. Köhler: 1. Turkey has maintained the strong implementation of its economic program. We met the end-May performance criterion for the consolidated government sector primary surplus, and the end-June performance criteria for base money and net international reserves (Annex A). We have also continued to make good progress in structural areas, including toward meeting prior actions and structural benchmarks (Annex B), although the end-June performance criterion on state bank restructuring has been missed by a small margin, as described below. 2. This steadfast implementation has delivered positive results, with both the 3 percent growth target and the 35 percent inflation target for 2002 well within reach, even taking into account the effect of recent political developments. Although the currency depreciation of recent months may still have further effects on prices, with annualized inflation of only 25 percent for the first half of 2002, our 35 percent end-year target remains readily achievable. The prospects for achieving the GNP growth target of 3 percent are also good: in the first three months of the year GNP grew by a seasonally adjusted 7 percent quarter on quarter, and more recent data on capacity utilization, industrial and agricultural production, exports, and tourism suggest that the economic recovery has continued in the second quarter. 3. We remain fully committed to the program, and will make every effort to keep it on track, political uncertainties notwithstanding. Even with the marked worsening of financial market indicators over the past few months, interest rates and the exchange rate remain broadly within our conservative program assumptions. And, with a floating currency, and our ongoing efforts in banking and other structural areas— facilitated by the strengthened independence of institutions, such as the Central Bank of Turkey (CBT) and the Bank Regulation and Supervision Agency (BRSA)—Turkey’s economy is now more robust than before. We have also strengthened the program through introducing new structural commitments in key areas, including fiscal policy and banking reform. Moreover, continued broad support for the economic strategy from public opinion and civil society will also help ensure the program’s continued strong implementation. 4. While early elections could delay legislative reforms, the government remains committed to timely implementation of those aspects of our policy strategy that are the prerogative of the executive branch . Parliament has been reconvened and is likely to set an election date of November 3. As a result, our legislative reforms will inevitably
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- 2 - face some delay. Even so, the government and its economic team are committed to completing all technical preparations for such legislation, and to submit such legislation to parliament, according to the timetable outlined in this letter. In addition, the vast
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