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     By David Chance

     LONDON, Sept 18 (Reuters) - Turkey's embattled lira will rebound from all-time lows hit this year and inflation will decline as the country's battered economy recovers from recession, Economy Minister Kemal Dervis said on Tuesday.

     Speaking at a conference in London, Dervis said preliminary budget plans for 2002 envisaged the lira appreciating by seven or eight percent.

     ``I think the exchange rate has overshot,'' Dervis told the conference as he rejected calls from some economists at the investment conference to re-peg the lira to a hard currency.

     While stressing that budgetary planning for 2002 was at an early stage and that Turkey was still holding talks with the International Monetary Fund, Dervis said he believed the budget could build in ``a real appreciation of 7-8 percent, maybe a little bit more.''

     The lira has lost more than half its value against the dollar since Turkey abandoned a currency peg in February and agreed a new deal with the IMF, which has lent it $15.7 billion to help a structural reform package.

     Dervis, who criticised the exchange rate peg of the prior IMF agreement as setting the currency at too high a level which choked exports and did not take account of the fragility of Turkey's banking system, said the country was now used to the concept of a freely floating exchange rate.

     Turkey's central bank will move to inflation targeting for setting monetary policy in the fourth quarter of this year and Dervis said he was optimistic that the country would achieve rapid reductions in inflation, which would in turn allow it to cut punitive interest rates.

     He said consumer price inflation this year would come in at around 60 percent.

     ``I think we have to pull it down to maybe half of that,'' Dervis told the conference.

     OPTIMISTIC ON GROWTH DESPITE WORLD SITUATION

     After implementing structural reforms of the budget, banking sector, agriculture and industry, Dervis said that Turkey was now poised to recover from the recession which has plagued the country as a result of the IMF-agreed austerity packages.

     Turkey is currently in its worst recession since 1945.

     The IMF and the government believe the economy will shrink 5.5 percent this year.

     ``We hope there will be a rebound in the real economy (in 2002) of 4-5 percent in real terms,'' Dervis said.

     He also rejected calls from analysts at the conference to restructure Turkey's domestic debt burden for 2002, saying there would be no restructuring.

     Asked by Reuters after the meeting whether Turkey would restructure domestic debt next year, as many analysts have suggested, he said he did not plan such action.

     Financial analysts who addressed the conference were considerably less bullish than Dervis and called for more action to reduce the country's debt burden after an $8 billion debt swap earlier this year.

     ``More action will be needed on the debt front,'' Marco Annunziata, emerging market economist at Deutsche Bank, told the conference.

     Annunziata said that given the rise in global tension in the wake of attacks on the United States, Turkey should also look again at ``perhaps going back to a hard currency peg.''

     Dervis said that although Turkey would be affected by any downturn in the global environment as a result of increased geo-political tensions, he believed exports and tourism would be relatively unaffected.

     He also said that Turkey needed to be more closely integrated with the Western world and the European Union and called for entry talks to the EU to be speeded up.

     Turkey first applied to join the EU in 1963.

     ``To have a modern Muslim country as part of Europe and part of NATO is an asset which has become more valuable to do than it has been in past decades,'' Dervis said.
^ REUTERS@