Turning point

In November 28 Turkish Economy Minister Kemal Dervis stepped into the Grand National Assembly building in Ankara and performed an extraordinary act for a public official: He apologized.

In November 28 Turkish Economy Minister Kemal Dervis stepped into the Grand National Assembly building in Ankara and performed an extraordinary act for a public official: He apologized.

Standing behind a slender white podium, Dervis gazed out on Turkey’s legislators, sitting expectantly in their red gazelle-hide chairs, in the main hall of the massive, Soviet-style building commissioned by Kemal Atatürk. Sounding chastened, he admitted to mistakes early in his tenure as economic chief.

“When I first arrived, despite having followed Turkey closely, I wasn’t able to measure how serious the situation was, how large the outstanding debt , the secret debt , was, how deep problems ran in the banking system,” confessed Dervis, who had returned to his homeland only nine months before after several years as a senior official of the World Bank in Washington, D.C. “So I was too optimistic when I said things will recover this summer, that we could return to positive growth during the fall.”

Perhaps even more gratifying to the assembled politicians were the contrite remarks that followed. “I also made another mistake at the beginning,” conceded Dervis. “Perhaps I said certain things that could be taken as politically motivated. I never meant to give political messages. I was only trying to explain the economic program. But I shouldn’t have done that.”

He spoke for 20 minutes, and when he finished, he was greeted with applause, mainly from members of the ruling coalition. Later that day the 550-member Parliament voted 223 to 103 to refrain from debating, and thereby killed, a censure motion against Dervis for mismanaging the economy mounted by the opposition Islamist Saadet (Happiness and Contentment) Party.

“This was the first time that we ever saw someone take responsibility , no other politician would do it,” says Asli Aytaç, a 27-year-old industrial engineer at Ankara’s prestigious Middle East Technical University. “It will bring Dervis more support.”

The 53-year-old economy minister (whose surname is pronounced “dervish”) told Institutional Investor, “I hadn’t really thought about it, but the speech created a lot of goodwill.” His comment came during a wide-ranging interview in his wood-paneled, Hereke-carpeted office in the Undersecretariat of the Treasury a couple of miles from Parliament (see box, page 88).

Dervis will need all the goodwill he can muster to salvage Turkey’s foundering economy and , more critical for the long term , put it firmly on the path toward modernity set forth by Kemal Atatürk eight decades ago. A country of grand aspirations , it longs to gain admission to the European Union , Turkey is also a country in deep trouble, suffering through its worst recession since 1945. The economy shrank 8.5 percent in 2001, while the Turkish lira lost half of its value against the dollar, even as Turkey’s chronic inflation surged to 67 percent year over year and interest rates reached 73 percent. Public sector debt rose relentlessly to $150 billion, or more than 100 percent of GDP. Urban unemployment hit 11 percent. Turkey is clearly at a turning point.

“We still have three months. If we can succeed in moving forward on concrete things like cutting the cabinet and public spending, then we can get more time from society,” estimates Nesrin Nas, a member of Parliament from the center-right ANAP (Motherland) Party and economic adviser to Deputy Prime Minister (and former prime minister) Mesut Yilmaz. “It is up to Dervis and the prime minister to convince the whole Turkish public that we must change.”

Last March Dervis was greeted as a near-messiah when he took office. Turkey was reeling from a bungled lira devaluation the month before. The press and the public quickly invested Dervis with their fondest hopes for political as well as economic salvation. As a political outsider with strong economic credentials, including a Ph.D. from Princeton University and a network of international financial contacts, Dervis was hailed as someone who could surmount political infighting, government corruption and economic mismanagement.

Disillusionment soon set in on both sides. As Dervis acknowledged in his apology, he hadn’t realized how serious Turkey’s plight was and made overly optimistic pronouncements about a quick solution. “He was initially introduced as the man who could liberate Turkey from crisis, and he accepted this and made populist statements,” says Abdullah Gül, a deputy from the opposition Islamist Ak (Justice and Development) Party. “The credibility of the government is very low and has hit market confidence.”

Poverty and unemployment have exploded. For the first time in decades, thousands of white-collar workers , in banking, media and advertising , have been tossed out of work. Turkish professionals are increasingly looking abroad for opportunities. Businessmen have been calling for Ankara to loosen its budget constraints. Demonstrations against the government’s handling of the economy have become commonplace. Seyfi Yiùgit, a shopkeeper who has worked in Istanbul’s covered bazaar for 21 of his 27 years, complains that “Kemal Dervis comes from America, from the World Bank; he doesn’t know about the situation here. He has tightened the belt, he doesn’t know the real problems, he only knows the banks’ problems.”

Foreign investors have plenty to be nervous about: soaring inflation, Ankara’s towering debt, the vulnerability of the banks and the sluggish pace of reform. They also fret that politicians will revert to the status quo ante the moment the crisis passes.

Even Turkey’s heightened strategic importance post,September 11 has not been an unalloyed boon. To be sure, it means that the West , notably the U.S. , is more disposed to help the country financially. In November the International Monetary Fund agreed to extend more aid to help Turkey bridge a $10 billion financing gap. The bailout, the country’s third in 12 months, could make Turkey the Fund’s biggest single debtor. “Turkey’s geography is very important,” says Zafer Kurtul, chief executive officer of Akbank, Turkey’s biggest private bank. “It’s all about location, location, location.” But this arrangement also promotes moral hazard: Turkey’s leaders can complacently assume that if things get too bad, the West will step in to help.

“The IMF board was not happy with how Dervis publicly said Turkey was important; they felt their hand was being forced,” confides an IMF official. The September terrorist attacks also pretty much scuttled Ankara’s hopes of an export- and tourism-led recovery. And Turkey stands to suffer if the West’s war on terrorism shifts to neighboring Iraq, with which Turkey still has significant trade.

To restore confidence under these grim circumstances, Dervis must demonstrate that the government’s commitment to thoroughgoing reform is in earnest. In his ten months in office, he has accomplished a good deal, most notably, getting a running start on restructuring the ailing banking system (see story below). It was the banks’ perceived solvency problems that triggered Turkey’s latest crisis. But does Dervis have the political capital, or the investor confidence, to be the agent of change that Turkey so desperately needs?

Certainly, the task is enormous. The ruling coalition is fractious, and under IMF pressure Dervis must battle Turkey’s famously backbiting political establishment to further dismantle the statist spoils system. Weary of imposed hardship, Turks yearn for something better. But time is growing short.

“Turkey must accept that Turkey has to change,” says Parliament member Nas. “The problem is the mentality of everyone from businessmen to workers to unions. Until now Turks thought that by neglecting productivity and efficiency and just by making some money from the state’s interests in the economy, everything was going well. They should realize that this crisis will not end without having a new system.” A World Bank official , a former colleague of Derviüs’s , describes the country’s predicament in these blunt terms: “Turkey is on the knife edge. Either it goes over the edge and faces a restructuring scenario like Argentina, or it goes Mexico’s way and the risk premium comes down.”

Ironically, Dervis and Prime Minister Bülent Ecevit must repudiate Atatürk’s legacy even as they seek to build on it. Atatürk sought to promote rapid modernization through cultural transformation (emancipation of women, replacement of the Arabic script, rejection of Islam as the state religion) and state ownership of industry, thus avoiding dependence on foreign capital. Inevitably, the country’s nationalistic, statist regime spawned the political spoils system that bedevils Turkey today. “The driving force of Turkish politics for the past 20 years has been patronage and clientilism to capture state resources and redistribute them,” says Sabançi University economist Izek Atayas. One diplomat describes Turkey this way: “The government is addicted to borrowing, and the people are addicted to spending.”

The system corrupted not only politicians but also businessmen, who increasingly looked to the state for favors. “It was the politics of spoils,” says Atayas. “We had a system of off-budget government expenditures; everyone was part of the game. The private sector was after handouts from the state.” Politicians openly used state banks and industries to enrich themselves, their friends and their supporters.

The country’s elite are naturally loath to abandon a system that has served them so lavishly. “The fact that almost 50 percent of the economy is still under the control of the government is a major structural problem,” says Bülent Aliriza, a political scientist at the Center for Strategic and International Studies in Washington. “The government doesn’t want to give away any sources of patronage or power.” Concludes Ergun Özbudun, a political scientist at Ankara’s Bilkent University: “We are really pushed to the wall , we have no more resources to redistribute in a clientilist manner. There is no other way. This is a transforming moment.”

The man on whom so many hopes hang for facilitating that transformation is, heritage notwithstanding, an outsider , an advantage and a disadvantage in gaining public trust. Although Kemal Dervis was born in Istanbul into a family of Albanian aristocrats who had served in Ottoman courts (his mother, however, is German), he was educated at the London School of Economics and Princeton. Armed with a doctorate in development economics, he landed a position in the mid-1970s as an adviser to the then,prime minister, Ecevit. In 1978 Dervis joined the World Bank in Washington, where he would live with his American wife and two sons for some two decades.

Dervis rose impressively at the bank, becoming vice president for the Middle East and Africa in 1996. In May 2000 he was made vice president of poverty reduction and economic management. “Dervis is very sincere, hardworking and charming,” says Harinder Kohli, a Washington-based economic consultant who worked with him at the World Bank. “His strength originally was his intellect and expertise as a research economist, but his real talent was in building relationships with countries. Deep down in his heart, he always wanted to work in Turkey.”

Indeed, in the early 1990s Dervis dabbled in Turkish politics from a distance as a founding member of an elite political group, the New Democracy Movement. The party enjoyed a measure of popular support but drew a meager 0.5 percent of the vote in the 1995 general election on a platform of reforming Turkey’s political structure. It then disappeared from the political limelight. Officially, Dervis belongs to no party.

When Turkey’s lira crisis erupted early last year, Stanley Fischer, then the IMF’s first deputy managing director, whispered in Prime Minister Ecevit’s ear that he ought to invite Dervis to Ankara to help out in the emergency. Ecevit heeded his counsel, and Dervis jumped at the chance to return home.

The lira crisis was quintessentially Turkish. At a meeting of Turkey’s National Security Council, President Ahmet Necdet Sezer had pressed Ecevit to cleanse his government of allegedly corrupt elements. The offended prime minister had stormed out and announced that the government was in crisis. Markets panicked, and Turkey’s fixed-exchange-rate system promptly fell apart, along with the lira. Only by promising sweeping structural reforms , notably, an overhaul of state banks, tighter fiscal conditions and progress on privatization , was Dervis able to negotiate an emergency $8.1 billion loan from the IMF that forestalled a banking system collapse and possible debt default.

Politics is now the big impediment to reform. Ecevit’s three-party coalition, consisting of his own center-left DSP (Democratic Left Party), the conservative ANAP and the ultra-conservative, ultranationalist MHP (Nationalist Action Party), is riven by disputes, especially over economic policy. Each party controls different ministries. Privatization, for example, was handed over to the ANAP party, while transport and foreign trade was awarded to the MHP. Technically, Dervis has no ministry of his own but is merely the “state minister in charge” of the Treasury. In other words, he lacks complete economic authority. As Yarkin Cebeci, J.P. Morgan Chase & Co. economist in Istanbul, puts it, “At the end of the day, Dervis is in charge of the economy , but he only controls the Treasury.”

The MHP has been the most obdurate in opposing change. “Because of its nationalist ideology, the MHP is much more statist and has a difficult time swallowing economic reforms,” says political scientist Özbudun. “And since Dervis was made a minister out of the DSP’s quota, the MHP might feel it would be giving too much power to the DSP if it supports reforms. Also, reforms are painful, and the MHP is playing a populist role to gain votes.”

One incident highlights the resistance to reform within the coalition. As a condition for its May bailout, the IMF demanded that Türk Telekom be given an independent board before privatization. Minister of Transport and Communications Enis Oksuz, an MHP member, tried to stack the new board with other MHP members. IMF officials as well as Dervis objected, but the MHP refused to back down. The Fund pointedly postponed a board meeting at which it was to approve disbursement of a first installment of the loan package. Oksuz had to resign, and in a messy compromise, a new board was formed comprising retired generals as well as MHP officials. “The telecom row proves that the bureaucracy and state apparatus won’t comply unless forced,” says Can Paker, who runs the Turkish operations of German consumer products maker Henkel and is president of the Turkish Economic and Social Studies Foundation, or Tesev, in Istanbul.

Outside the coalition lurk other political threats. Former prime minister Tansu Çiller, who leads the DYP (True Path Party), has been a vocal critic of the coalition’s economic management. However, she has been accused by political opponents of massive corruption and lacks popular support. The Islamist Ak Party, led by onetime Istanbul mayor Recep Tayyip Erdoùgan, enjoys the support of 20 percent of the population, according to polls, ostensibly making it the most popular party in the country. But many secular Turks distrust Erdoùgan and fear an attempt to Islamicize the government. Observers see support for Ak (white in Turkish) as mainly an expression of disgust with the prevailing order. “The Ak Party is popular because they are seen as the new guys,” says Özbudun.

For his part, Ecevit is respected for his honesty, but at 76 is infirm and hard-pressed to keep his coalition intact. Although the next general elections are scheduled for 2004, many observers expect them to be held well before then. “Ecevit is surrounded by crooks waiting for him to go,” observes a foreign diplomat.

The coalition’s problematic future troubles investors. “We give Turkey credit for its fiscal performance and for getting some of the politics out of the economy,” says Mohamed El-Erian, an emerging-markets portfolio manager at Pacific Investment Management Co. “But there is still a level of political fluidity that means those gains can be reversed. The question is, Can Dervis continue to carry the politicians along? , the fact that growth has not picked up makes resistance stronger.”

Some observers insist that new leadership is vital. “Turkey will get credibility only after a political change,” argues Tesev’s Paker. “If the coalition continues, Turkey will come out of the crisis more slowly.” The head of a major foreign bank in Istanbul also expresses skepticism about the government: “If Dervis gets $10 billion [from the IMF], then Turkey is off the hook for 2002. But that is not enough. Undoubtedly, the [reform] laws were passed under duress, so there is a question whether they will be implemented. The political system is in deep trouble.”

This is a not uncommon perception, and it makes the coalition’s progress on reforms, despite the nay-saying and infighting, all the more remarkable. Dervis has seen through 15 new laws to curtail government interference in everything from the central bank to the sugar industry. Parliament has also passed 34 constitutional amendments that, among other things, increase the number of civilians on the National Security Council, the body traditionally used by Turkey’s military to exercise influence over the government. “The constitutional amendments might not have been perfect,” says Sabançi University economist Atayas. “But it would have been hard to believe seven months ago that such changes were even possible.”

Yet a daunting number of agenda items remain undone. Recovery is the immediate priority. Derviüs, as sanguine as ever, sounds as if the worst were already over. “In the past few weeks,” he said in early December, “we have seen the first signs of a recovery in sales figures, capacity utilization and behavior of the exchange rate. The old business cycle is still alive, and when stocks run out, production has to start again. There is a feeling we have seen the bottom of the cycle.” Ankara projects 4 percent growth for 2002 and anticipates running a primary budget surplus of 6.5 percent. “If the government has a surplus of 6.5 percent, if there is concrete action on the budget and some growth next year, if we don’t see another crisis, then it is almost clear that in 2002 the domestic debt will be sustainable,” allows Akbank CEO Kurtul. “But there are a lot of ‘ifs.’”

The government must still strengthen the undercapitalized and debt-ridden banking system, slash the number of government employees, speed up privatization, pare agricultural subsidies, rein in the public debt and ready the country for membership in the EU. Pitched political battles loom. Just for a start, the MHP presides over the Ministry of Agriculture and Rural Affairs and fears that cutting farming subsidies would cost the party its rural voter base.

The European Commission, in a recent review of Turkey’s progress toward meeting EU membership criteria, determined that Ankara still had a long way to go in reforming its economic, legal and regulatory systems. “Turkey has to assume responsibility to meet the criteria,” declares Özdem Sanberk, Turkey’s former ambassador to the EU and now director of research foundation Tesev. “The government says EU membership is our objective, but the EU doesn’t see the political will.”

Staunch supporters of Dervis in the business and academic communities believe that he has been unjustly maligned by political opponents. Erdal Aksu, the manager of a restaurant in Ankara’s upscale Gaziosmanpaüsa neighborhood, swears that “we need 250 Kemal Dervises, not one, because the other people aren’t doing anything.” One backer defends Dervis by contending that “his mistakes were not due to personal shortcomings, but lack of contact with Turkish politics. He should have adopted the position of a technocrat who was determined to solve Turkey’s problems, of someone who doesn’t have a political function.” At the same time, other admirers are casting about for a way to propel him into politics. “Among the young, modern, forward-looking generation, there is an expectation that Dervis should go into politics,” says Tesev’s Sanberk.

Nevertheless, forming a credible political party in Turkey is no easy task. Parties need at least 10 percent of the vote to gain any seats in Parliament, and most start-ups , and their leaders , quickly vanish. Dervis could conceivably join an existing party , ANAP, for one, would welcome him into its free-market fold , but those who know Dervis doubt that he would be willing to assume a subordinate role. For now, Dervis states unequivocally, “I will not be drawn into a discussion of politics,” when the idea of his running for office is broached. “The question is,” says one influential banker, “does Dervis have the will to power?” The prevailing view on Dervis’s political prospects is probably that of one senior government official, who says: “Going into politics now would be a mistake. He would lose. He must focus on the economy first.” But as a foreign diplomat in Ankara slyly observes: “If Dervis fails, he can say he did his best but faced too much resistance. If he succeeds, he’ll get all the credit.”

And, presumably, a platform to run for prime minister.

Getting politicians off bankers’ backs

Banks have long been at the rotten core of Turkey’s political spoils system. State banks reported to different ministries, each typically controlled by a political party within the ruling coalition. Politicians directed the banks to make loans to special interests (such as supporters), without regard for the banks’ balance sheets.

“This system affected the entire macroeconomy and the rest of the banking system,” says veteran banker Vural Akiüsik. “One effect was to crowd out good customers from the markets.”

Reforming the banking system has thus been the top priority , and the biggest achievement so far , of Turkey’s economy minister, Kemal Dervis. He has largely freed the state banks from political pressure and has cut back short-term lending. They now lend to ordinary Turks, at competitive rates. Moreover, the state banks’ government-related lending now shows up plainly in the public ledger for all to see.

Ironically, Ziraat Bank, one of the two state banks being restructured by Akiüsik for eventual privatization, is now the most profitable in Turkey. Akiüsik attributes this to the bank’s diverse retail customer base. But another critical factor is the almost 70 percent of Ziraat’s balance sheet that consists of high-interest government paper. Although Akiüsik discounts the risks of so concentrated a position, he intends to reduce the bank’s holding of government paper to roughly 40 percent, the same level as at most of Turkey’s private banks. Paid a nominal $1,600 a month, the comfortably off Akiüüsik took the job of restructuring Ziraat and Halk Bank out of a sense of duty. He recalls: “Dervis said, ‘The government needs you.’ I said, ‘Yes.’”

Akiüsik reports that he must contend with some political meddling but nothing to compare with the old days. “I’m still getting calls from people making general demands like, Why aren’t you giving agricultural loans during the fertilizer season?” he confides. “Sometimes they don’t understand that I have other priorities.” Akiüsik has been shutting bank branches and laying off employees (14,000 to date).

Reforming the private banking system was at least as urgent a mission for Derviüs. It’s badly undercapitalized (total capital: just $120 billion), and banks have preferred to buy high-yielding government debt rather than make loans. The Banking Regulation and Supervision Agency is pushing banks to meet 8 percent capital adequacy standards and has taken over 18 troubled banks since 1998. All have been sold, merged or liquidated.

“We are trying to improve private banks’ capital base, provision for nonperforming loans, implement transparent financial statements and review their commitments,” says Engin Akçakoca, head of the banking agency. Ankara’s aim in part: to attract foreign buyers. , D.G.

Dervis: ‘We’ve seen the bottom of the cycle’

Prime Minister Bülent Ecevit recruited former World Bank vice president Kemal Dervis to be Turkey’s economy minister just ten months ago , in the midst of an economic crisis. One of Dervis’s first tasks: to secure emergency aid from the International Monetary Fund. The Princeton University,educated economist has barely sat down since, amid Turkey’s continuing political and economic tumult. Yet Dervis now has a rare chance to implement serious reforms that could impel the country’s statist economy into the modern era (and gain Turkey entrée, eventually, into the European Union). Failure, however, could consign the country to second-rate economic status for years. Here, in excerpts from a series of interviews, Dervis discusses his potentially pivotal role as economic czar with Institutional Investor Senior Writer Deepak Gopinath.

Institutional Investor: What are the biggest challenges you’ve faced so far?

Dervis: Cutting the link between populist policies and public banks was important , and very tough [see box, page 28]. It generated a lot of complaints, a lot of reactions. It was not easy to make people see that this was really a change that is irreversible, and that we are not going to go back to the old habits. The second critical area has been agricultural support policies. Moving to a system of targeted income support and away from one of price support, where the benefits go disproportionally to rich farmers, is a really good reform. We’re still in the middle of it; the new system will be implemented next year.

What reforms remain on your agenda?

We have three principal ones. We have to complete the financial sector reforms, including providing incentives for further restructuring and mergers in the banking system. By the end of 2002, we would like to see a very healthy, strong Turkish banking system, with the public banks ready for privatization. We would like to see two strong banks ready to be privatized in 2003. Completion of financial sector reform will put many of our ills behind us.

Second, we absolutely must accelerate privatization of state companies and improve the business environment. There have been many delays here. It is not so much a question of legal barriers, as problems to do with governance, bureaucracy, duplication and overstaffing. So we have to attack all these problems and give a new impetus to privatization.

Third is civil service reform and public sector organization and governance reforms. We have done a lot in terms of deregulation, but we now have to take a close look at the civil service itself and the structure, numbers compensation policies, mobility across agencies, reduction of duplication, reduction in the number of agencies, reduction, hopefully, in the number of ministries.

The private sector seems to lack confidence that there’s political will behind reform.

It would be wise to look at Turkey in terms of Italy 15 or 20 years ago. The political system is fragmented, there is a lot of clientilist politics, regional factors play a part, and provincial politicians are quite strong. So you do not have a very strong, clear majority. You’ll probably have quite a bit of change among Turkish ministers, maybe even governments. And that’s what happened in Italy for years. Yet Italy developed rapidly, it is one of the most prosperous countries in the world today, and it integrated to the euro.

Why? Because there was a layer of nonpolitical management of the economy in the Italian government, so despite the instability on the political side, there was continuity and competence. This provided a lot of stability. Second, the Italian private sector was very resilient, resourceful, dynamic.

I see very much the same in Turkey. I see a very resilient, dynamic private sector. What we are trying to do with all these reforms is to put in place institutional management at the top levels , the central bank, the bank supervision agency , so that we have management of the economy that is to some degree insulated from politics and will withstand political changes.

You could fall into pessimism by looking at, oh God, six political parties with nobody having a clear majority , that kind of thinking is why the markets are wary , but it’s not the end of the world. It is not that the basic model of society is being questioned; it is not that economic policies are being questioned. And on top of that we are creating an infrastructure that can manage the economy even if political coalitions break up.

How long can you count on public opinion to back reforms?

Public opinion is very much linked to the performance of the economy, as one would expect, and in the past few weeks, we’ve seen the first signs of a recovery , in sales figures, capacity utilization, behavior of the exchange rate and so on. In the past six weeks or so, there has actually been an increase in public support for the reform program. Now I wouldn’t say we are in a phase of great joy, but definitely there is a feeling that we’ve seen the bottom of the cycle.

Some contend the current budget constraints are excessive?

No, because we believe that the debt dynamics are the key obstacle to growth in Turkey and that overcoming negative expectations about debt is the single most important thing we can do in economic policy. And for that we need a strong fiscal policy. Also, thanks to a strong fiscal policy, we’re obtaining a lot of international support. That is perhaps one of the big differences between Turkey and Argentina, which unfortunately had a lot of trouble with fiscal targets.

Foreign investors give you credit for meeting fiscal targets but are concerned about Turkey’s high interest rates [more than 70 percent in mid-December].

Interest rates are still high, but they’re becoming reasonable. The spreads on our Eurobonds are becoming much more acceptable. Real interest rates are declining significantly , they still offer good returns to investors , but they’re not in the territory we would generally like. But the combination of the strong fiscal surplus with the resumption of growth will lead to debt dynamics that will reduce the debt-to-GDP ratio [57 percent] as we go forward, putting us finally on a trend toward lower rates. We have finally recognized all the contingent liabilities that were hidden in the financial system, which caused a once-and-for-all jump in the debt ratio, but we’re now set to see it decline by 10 percentage points a year, according to our own and the IMF’s calculations.

What if your reform program runs into unexpected trouble?

We are building in a cushion of safety against unexpected events, such as a big hike in oil prices or political instability. We want our financial reserve levels to be not just minimal, but a sufficient fraction of imports. We also want public banks to have solid balance sheets so that they’re not forced to borrow short-term in an emergency. So we’re trying to reduce debt and take whatever fiscal measures are necessary. But we’ve not increased tax rates; we’ve done it through expenditure reductions and price measures. There’s now enough safety in the system to absorb some negative shocks , I’m not saying a major shock, but we can’t base our life on that assumption.

When do you plan to turn your attention to fighting inflation?

That is the next major challenge. And it is not an easy one because obviously we lack a strong nominal anchor [like the old fixed exchange rate]. But one thing will help: The nominal exchange rate has overshot, and the real exchange rate has also overshot. If there is a resumption of capital movements favorable to Turkey, then we will see an appreciation of the real exchange rate in six to eight months, and that would of course help in moderating price growth. And in combination with our monetary target, that should get us to a point where inflation declines. At that point we would like to introduce formal inflation targeting.

How important is it for Turkey to join the European Union?

The future of Turkey really is in the EU, and most Turks share this view. It is true, of course, that we are a very large country and not as dependent on the EU as smaller Eastern European countries. The EU isn’t our only lifeline or important relationship. Having said that, however, I believe that gradual but steady integration of Turkey into Europe is in Turkey’s interest. Despite some really tough problems, we will continue to aim for EU membership.

Skeptics saw your return from the U.S. in November with promises of an IMF bailout package as less a testament to Turkey’s economic performance than to its political importance.

The fact that Turkey is a good international citizen and a good ally certainly facilitates our relationship with the international institutions and their shareholders. But at the same time the support goes for the economic program , had it been primarily strategic and military, maybe the G-7 would have opted for bilateral aid. The Fund will not extend support on political grounds , certainly, it is economics that drives the process.

Some speculate that you might run for higher office yourself someday.

As I told you, I will not discuss politics.