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Friday, August 20, 1999 Published at 15:54 GMT 16:54 UK

Business: The Economy

Oil blaze hits Turkey's economic plans

Officials are just beginning to discover the extent of the damage

The fires that have been raging at Turkey's main oil refinery since Tuesday's earthquake have been put out.

Officials at the Tupras plant in Izmit say firefighters are still dealing with one small blaze in a tank, but that cleaning-up has already begun.

They now have their first chance to assess the damage to a refinery that could have a huge impact on the country's future.

It was at the heart of a privatisation drive by the government and was due to be sold off next year.

[ image: The refinery provides fuel for much of the industry in north west Turkey]
The refinery provides fuel for much of the industry in north west Turkey
The Izmit complex is the largest of the four refineries owned by the state-run oil company, Tupras.

It was expected to put $1bn into the nation's coffers - now the most pessimistic reports suggest the refinery could be out of action for a year.

"Some of the enterprises that were slated for privatisation will have to be delayed until there is reconstruction to the actual plant," said Amer Bisat of Salomon Smith Barney.

"There is, however, the question about the privatisation stance itself. Will the government have the political stamina to push through what is obviously a politically difficult decision to diversify state-owned assets at a time of national emergency? That is still an open question."

[ image: Prime Minister Bulent Ecevit and his government were already struggling with the economy]
Prime Minister Bulent Ecevit and his government were already struggling with the economy
In what was something of an understatement, Prime Minister Bulent Ecevit told reporters: "The economy was in a difficult position. Now it has become more difficult."

But strategy aside, there are other, more pressing, economic issues facing his government.

The Tupras refinery supplied more than one-third of Turkey's retail and industrial grade fuel.

The BBC's Caroline Wyatt: "The economic damage has run into billions"
Diesel and liquified petroleum gas is being shipped in from the European oil market to meet the fuel shortfalls - and at a high price, because a recent export ban by Russia has tightened Mediterranean supplies considerably.

The earthquake struck Turkey's populous north-west, an area that accounts for a third of the country's economic output. Many large companies have been badly hit.

Part of a Pirelli tyre factory near Izmit collapsed

Minibus and Jeep maker Otokar will be shut down for a week

Production was suspended at cement firm Bolu Cimento and tyre maker Brisa

And unsurprisingly car glass manufacturer Trakya Cam reported serious damage to its stocks of finished products.

Other companies, such as Turkey's leading car maker, Tofas, escaped damage but have closed down so employees can help friends and relatives affected by the quake.

Tourism already faltering

And tourism, which attracts 10m visitors a year will suffer, although threats from Kurdish rebels had already hit the industry hard.

The cost of repairing the damage will be massive. Turkey's leading business newspaper, Finansal Forum, put the figure at $25bn.

Tusiad, an association of businessmen and industrialists, thinks it could be as high as $40bn.

All this comes at the time when the Turkish economy was already under attack on a number of fronts.

Inflation at 50%

The government was struggling with a deficit of $20bn and annual inflation running at 50%.

[ image: Last week, Turkish trade unions demonstrated against laws cutting back on welfare spending.]
Last week, Turkish trade unions demonstrated against laws cutting back on welfare spending.
It had just secured a crucial $5bn loan from the International Monetary Fund, dependent on Turkey pushing through a number of reforms, including the privatisation plan and social security changes.

Some steps had already been implemented. In a country where women could theoretically retire at 38 and men at 43, a new law forces men to work until they are 60, and women until they are 58, a move which will cut sharply the welfare bill.

And foreign investors, scared off by the risk of having to deal with Turkey's administrative courts, can now seek international arbitration.

But the scale of the rebuilding programme could force the government to send its economic proposals back to the drawing board.

However, there are signs that the IMF might bring forward the loan, even though not all the promised reforms are in place.

In a letter to the Turkish government, IMF managing director Michel Camdessus said: "The IMF will do all it can to help the Turkish government deal with this disaster.

[ image: The IMF's Camdessus is making encouraging noises]
The IMF's Camdessus is making encouraging noises
"They can be assured that we stand ready to help them in any way that we can."

While the earthquake will hamper Turkey's ability to reduce its deficit and bring in reforms, analysts think help is at hand.

"As the recent Russian experience demonstrated, the IMF will likely be more forthcoming and lenient towards Turkey under these circumstances," said Ceyla Pazarbasioglu, senior economist at ABN Amro.

IMF support would help Turkey to borrow at better terms in international capital markets and attract desperately-needed foreign investment. Some $7bn in foreign capital fled Turkey during emerging market jitters last year.

And Ed Butchart, equity strategist with Merrill Lynch, believes that a "canny government" could use the situation to persuade the public to make necessary "fiscal economies".

Confidence in the government

That could be a one-off tax to pay for the task of reconstruction, or further cuts in public spending and the welfare system.

But despite the problems facing Turkey, there is confidence in the government. Its strong performance since taking office four months ago raises optimism that it can cope with the impact of the quake.

The international ratings agency, Fitch IBCA, saw no need to change its view that Turkey's prospects of carrying out a successful stabilisation programme were good.