Excerpted From: World Bank Press Review

Headlines for Monday, January 27, 2003

U.S. Offers Billion to Turkey

The United States, seeking to ensure Turkey's military cooperation in an eventual war against Iraq, is offering at least billion to compensate Ankara for economic damage it might suffer as a result of playing an active role in the U.S.-led coalition, the International Herald Tribune writes.

"If Turkey helps us in the war, we want to help Turkey with the economic consequences of its role in that war," a senior U.S. official said Sunday, speaking on the condition of anonymity.

Separately, a well-placed international financial official said Sunday that Washington was offering "at least billion, and possibly a great deal more over a period of three years."

The billion figure has already been rejected as inadequate by Recip Tayyip Erdogan, chairman of the governing Justice and Development Party and putative future prime minister. "Some words are going around about 2 billion plus 2 billion," Erdogan said in an interview Sunday. "These types of amounts with this type of crisis will not solve Turkey's problems."

The Turkish leadership is worried about the domestic political fallout that could result from being seen as too pro-American by a largely anti-war Muslim population.

Ankara, already grappling with a deeply troubled economy, is also worried about billions of dollars of damage to its economy, especially in the tourism sector, that could result from its involvement in a possible U.S.-led war.

Washington is also telling Gul that Turkey must push through - within the next few days - critical economic reforms, including radical cuts in public spending, if Turkey is to convince the International Monetary Fund to disburse .7 billion.

The International Monetary Fund, worried by fiscal slippage in Turkey's economic program, warned at the weekend that US compensation in the event of an attack on Iraq may be insufficient to rescue the country from any renewed financial difficulties., the Financial Times writes.

A senior IMF official, interviewed at the World Economic Forum in Davos, said that a primary fiscal surplus [of revenues over expenditure before interest payments] of 6.5 per cent of Gross Domestic Product continued to be necessary if Turkey, aided by a bn loan from the IMF, was to have a good chance of securing debt sustainability.

Depending on the budget the new government is due to finalize this week, the primary surplus, which fell short at about 4.5 percent last year, may also be below the required level this year.

The IMF-backed program was going very well until the elections were called last year, said the official. But analysts say that the previous government, a coalition of three parties, loosened the purse-strings in a failed attempt to win the November 3 election.

The ruling Justice and Development party (AKP), elected by a landslide, was then lulled into complacency by an initially exuberant reaction from financial markets. The government may also harbor exaggerated expectations of a US bail-out in the event of a war on Iraq.

The US is understood to have offered Turkey a choice of bn in grants and bn in loan guarantees or bn in grants and bn in loan guarantees.

But the IMF official warned that Turkey would not be helped by further borrowing and said that it was unclear whether US grants would be big enough to meet its eventual needs.

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