BOLDLY proclaiming the dawn of a new era, veteran politician Necmettin Erbakan finally attained a life long ambition by becoming prime minister of Turkey on 28 June. He heads the first Islamist-led government since the foundation of the modern republic by an ardent secularist, Kemal Ataturk. in 1923. The realities of power in a coalition government with partners who disdain many of Erbakan's convictions has dictated caution rather than revolution so far. Anxious not to estrange Turkey's traditional allies, there has been a regional readjustment rather than a radical rupture with the West.

In practice, the coalition's thin majority gives considerable leverage to the minority partner, the True Path Party (DYP) led by Deputy Prime Minister and Foreign Affairs Minister Tansu Ciller. Control of key ministries and government departments including the Treasury. give the DYP a strong voice in the direction of economic policy.

Observers expect the division of cabinet seats and government departments to inhibit any radical innovations by the Islamists, whose declared goal is the creation of a productive economy characterised by no interest and no taxation.

Commentators speculate that Ciller, ever the opportunist, may not wait her turn to take over the rotating premiership two years from now and could bring down the coalition at any time. Electoral calculations apart, the only thing standing in her way are parliamentary corruption probes, originally orchestrated by the Islamists themselves, which are now expected to be dropped as the price for her continuing support.

Scandals involving Ciller had already led to the acrimonious collapse in early June of a minority coalition between the DYP and its arch-rival the Motherland Party (ANAP).

The two foes had only joined forces in March in an effort to exclude the Islamists from power.

Having bided its time in the political vacuum created by inconclusive elections last December, Erbakan's Welfare Party (Refah) has every incentive to make the most of its eventual success in forming a government. Its sights are clearly set on winning an outright majority in the next general elections. Erbakan has moderated much of his radical rhetoric, in an attempt to ease fears, particularly within the military, that he will overturn the secular traditions of the modern Turkish state.

Since he assumed office, little more has been heard of Erbakan's previous pledge to scrap a controversial airforce training pact with Israel. The coalition's founding protocol says the government will fulfil Turkey's obligations while protecting its interests within the EU customs union that started on 1 January. Previously, Erbakan had pledged to renegotiate the EU agreement, which he dubbed as unfair.

U-Turn

In another apparent U-turn, Refah voted on 30 July for an extension of the mandate for another five months of Operation Provide Comfort (OPC), the allied operation that provides air cover for the Kurdish areas of northern Iraq and prevents Baghdad from asserting its authority there. Erbakan claimed, however, to have secured the agreement of the US, France and the UK which provide the air cover to adjust the terms of OPC so that it would not aid and abet the Kurdish Workers Party (PKK), which is pursuing an insurgency in the southeast of Turkey from bases inside Iraq.

The prime minister also said that he had secured the allies' agreement to a lifting of UN sanctions on Turkish trade with Iraq, similar to the exemption enjoyed by Jordan.

A Foreign Ministry spokesman subsequently said the allies would welcome a formal application to the UN. Turkey was already expected to benefit substantially from the reopening of Iraq's oil export pipeline across Turkey when limited oil sales resume under UN Security Council Resolution 986, the oil-for-food deal.

In some respects. Refahs posture is breathing fresh air into a series of sterile disputes with its neighbours. Damascus openly hopes Refah's emergence will lead to an improvement in their poor relations with Ankara, dogged for years by disputes over Turkey's impounding of the Euphrates river and Syria's support or Kurdish militant movements.

Similar sentiments have emanated from Iran where bakan chose to go in August for his first official visit abroad. The visit to Tehran, which culminated in the signing of an $18,000 million long-term gas supply agreement, caused jitters in Washington.

where President Clinton had only just signed the toughest ever sanctions legislation against Iran. In the wake of the visit, US commentators have started to write openly of Turkey's drift away from the Western orbit and into an as yet undefined, but intimate relationship with Iran, America's most hated rogue state.

Political commentators in Turkey are less perturbed by Refah's steady ascent. They point out that Refah's ideas are grounded in Sunni orthodoxy and that its approach to change is evolutionary. It is not a militant revolutionary movement to be compared to the forces that overthrew the Shah in Iran or those battling the regime in Algeria, they say. Nor is the party a monolithic grouping.

Its membership ranges from radical fundamentalists to those who are less interested in the party's Islamist message than its promise of better living standards and honest government.

Successor

Refah's phenomenal rise in the 1990s has been fuelled by growing disillusionment with the squabbling, mainstream secular parties and their failure to tackle Turkey's pressing economic and social problems.

Within the party, rural traditionalists are giving way to urban modernists, most strongly represented by Istanbul mayor Tayyip Erdogan, who is widely tipped as a possible successor to Erbakan, who will be 70 in October.

Turkey's lower income groups are the first to have been rewarded by the new government, which has handed out 50 per cent salary increases for civil servants, and raised the minimum wage. Such populist measures are to be expected from a coalition that lacks a strong majority, say commentators.

The Refah economic agenda includes ideas for taxing wealth instead of income, restructuring the banking sector to eliminate interest rates in favour of profitsharing, public offerings instead of block sales when state ventures are privatised, and rolling back full lira convertibility in favour of a restoration of fixed exchange rates.

Erbakan is anxious to deny that the burst of spending on salaries is a blatant bid to win favour with voters ahead of early general elections. Tansu Ciller has reiterated that the coalition will not intervene on interest rates. However, observers say there are already signs of strain within the coalition over economic policy, with Ciller warning that the DYP will intervene against its partner if Refah goes too far.

The view of the Islamists is long term, as they seek to transform what many among them see as an economy in financial thrall to a class of rentiers into an efficient, productive one that will benefit everyone.

Refah is set against any resort to state control to achieve these objectives and presents itself as a firm supporter of free markets. The Islamists claim to be more supportive of privatisation than any previous administration. When pressed to be more specific about their policies, leading Islamist figures, including Erbakan himself, never tire of invoking God as the provider.

In the financial markets of Istanbul, there are fewer worries about the long-term visions than about the immediate question of where the money is going to come from.

The wage hike will impose a huge new burden on the budget, as will a planned resettlement programme for eastern Turkey, where the army has cleared whole villages in a bid to defeat Kurdish separatists.

The outlook for the eonomy this year remains troubled. At the end of June. inflation was running at an annualised rate of 82.9 per cent and economists warn that it could spiral towards three figures again.

The State Planning Department in a recent report said the budget deficit, a prime cause of rising prices, looks likely to exceed the target of TL 861 million million set by the previous administration.

The SPO based its analysis on actual figures for January-May and took into account the recent pay increases, current interest rates and the structure of short-term domestic debt.

New Finance Minister Abdullatif Sener, who is from Refah, has conceded that the deficit could go as high as TL 1,300 million million.

Gross national product grew by a staggering 9.1 per cent in the first quarter on the back of strong consumption. The danger of overheating was apparent from the January trade deficit, which shot to $1,290 million, an increase of 135 per cent compared with January 1995. Imports have continued to surge while exports have flagged further. Unofficial estimates by organisations such as the Istanbul Chamber of Commerce indicate the 1996 trade deficit could jump to $20,000 rnillion-22,000 million compared with $14,000 million in 1995. On this basis, the country could suffer a record current account deficit, economists predict.

So far, further depreciation of the Turkish lira has been offset by inflows from tourism and expatriate workers, and the central bank's foreign exchange reserves, which have fluctuated at about $15,300 million.

Erbakan's hopes of averting an economic crisis by the autumn rest on a package of measures announced on 31 July. These are designed to raise an additional $10,000 million to close the budget gap, and pay for the extra spending on measures like the wage increase.

The 10-point package includes:

the sale of foreign exchange and foreign exchange indexed bonds with oneyear terms. These are aimed partially at persuading Turkish banks to repatriate much of an estimated $9,500 million held abroad.

Raising lower limits on foreign exchange deposits held by expatriate workers in a central bank programme, but shortening their maturities.

The sale of state land and housing.

announced by Ciller on 22 July, along with a 6 per cent levy on short-term foreign financing for exports.

An acceleration in privatisation generally, particularly of the long-delayed centrepiece in the privatisation programme, the telecommunications company.

More efficient cash management of state economic enterprises through a central treasury account for their finances.

Incentives for increased social security premium payments.

The collection of fees from about 18,000 out of a total of 21,000 holders of mining licences who are in default.

Brokers and bankers in Istanbul expect the bond sale to be very successful, but consider the other measures, intended to raise a total of about Th 575 million million, to be overly ambitious. These measures will require time consuming legislation that could delay their implementation. Whether the programme will reassure Turkey's Western creditors also remains to be seen.

Shortly before the package was announced, US ratings agency Standard & Poors placed its single, B+ long-term and single B short-term foreign currency debt rating on credit watch with negative implications. The US' Duff & Phelps and London-based IBCA followed suit with similar reviews.

IBCA said its move reflected growing concern about the new coalition's lack of urgency in tackling the deteriorating fiscal situation. Unless the coalition can successfully implement a comprehensive stabilisation programme, the agency forecasts sustained upward pressure on inflation and interest rates, and further decline of the lira. IBCA duly notes the central bank's high foreign exchange reserves, but also points to about $7,800 million worth of debt. Short-term debt also remains vulnerable to changes in international investor sentiment.

Istanbul bankers believe the treasury has prudently decided to wait until Turkey's profile improves before launching any more international borrowing. The treasury has already raised about $1,900 million of the $2,500 million in fresh borrowing that it requires this year. In July, it held back on another samurai bond issue in the Tokyo market, but may return sometime in September.

Turkey's Islamists now have an opportunity to prove they can do better than their secular rivals, although they are still constrained by working in a coalition. This has obliged Erbakan to be more pragmatic than principled in his first few weeks in office and there is no guarantee that this coalition will not collapse as ignominiously as its many predecessors. The real test of the Islamists impact will come at the next general election when Refah will be keen to expand its 21 per cent share of the vote it gained last time into a more commanding mandate.

Exchange rate $1 = TL 86,140 (August 1996)