IMF puts off key Turkish loan

The Istanbul stock market: Waiting for good news from the IMF

The International Monetary Fund (IMF) has postponed a crucial loan to Turkey, claiming that there has not been sufficient progress on reforms.

The Fund had been due to begin work on Tuesday on a review of the Turkish economy, ahead of the payment of the latest $1.6bn (£1.1bn) tranche of its $8bn economic rescue package.

But the Fund said the review was to be indefinitely postponed, "pending fulfilment of a few prior actions".

The IMF has accused Turkey of dragging its feet over reform in the banking sector - in particular the closure of some loss-making banks.

Turkish financial markets had not expected the postponement.

Just before the IMF announcement, the Istanbul stock market had closed up some 2%, in anticipation of a trouble-free loan payment.

Tough love

The IMF loan package was agreed earlier in the year in an attempt to stave off a financial crisis in Turkey.

But it was tied to stringent terms, including a shake-up of management at Turk Telekom, the main state telephone company, and tough action in the financial sector.

Some progress has been made.

Last week, the government appointed a new board to Turk Telekom.

And minutes after the IMF announcement, the government said it was closing down Emlak Bank, a loss-making state bank.

But the IMF and other lenders have not been satisfied: the pace of bank closures has been slow, and Turk Telekom's new board is not reckoned to be free enough from political influence.

Testing times

The IMF's decision has ratcheted up uncertainty in Turkish financial markets, which had seemed to stabilise over the last few weeks.

The Turkish lira: An unstable currency

The Fund said it looked forward to beginning the review soon, but is unlikely to start work on it in less than a week.

IMF money is seen as crucial to rescuing the Turkish economy from its current slump.

The country's gross national product shrank by 4.2% in the first quarter of 2001, and the Turkish lira has been jittery since a 40% devaluation after it was allowed to float in February.

Approval of a total $1.7bn in World Bank loans for the financial sector and agriculture is also due in early July, and is unlikely to go ahead without IMF support.