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COUNTRY REPORT

Turkey

January 2002

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Turkey at a glance: 2002-03OVERVIEWDespite a lack of popular support, the ruling coalition is expected to cling topower until the end of 2002. An early election, which could become morelikely when the economy starts to recover strongly, could see some new partiesgaining ground. The government remains committed to the IMF programme,and although the risk of an immediate crisis has diminished, Turkey still facescontinued lira volatility, rising inflation and large domestic debt redemptions.Although forecast to decline, the fiscal deficit will remain worryingly high.After an estimated 8.2% contraction in 2001, real GDP growth will be weak in2002 but should strengthen in 2003. The current account will show a surplusin 2001-02, before returning to deficit in 2003.

Key changes from last monthPolitical outlook• The ruling coalition leaders have sought to avoid confrontation regarding

economic and political reforms being called for by the IMF and the EU.However, deep divisions remain and a government crisis triggered by anunexpected event cannot be ruled out.

Economic policy outlook• Parliament has accelerated the passage of economic reform legislation, with

the IMF demanding concrete action in certain areas before it officiallyagrees to provide additional funds under a new stand-by agreementexpected to last for three years.

Economic forecast• On the basis of third-quarter national accounts data, the Economist

Intelligence Unit has revised upwards its real GDP estimate for 2001 to –8.2%,from –8.4% last month. We have also cut our inflation forecast for end-2002to 42%, although this is still above the government’s target of 35%. Lowerimports than we had expected in the third quarter of 2001 have led us torevise upwards our 2001 current-account estimate to almost 3% of GDP.

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ISSN 0269-5464

Symbols for tables“n/a” means not available; “–” means not applicable

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Turkey 1

EIU Country Report January 2002 © The Economist Intelligence Unit Limited 2002

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2002-037 Political outlook9 Economic policy outlook

10 Economic forecast

14 The political scene

22 Economic policy

33 The domestic economy33 Output and demand34 Sectoral trends37 Employment, wages and prices39 Financial indicators

41 Foreign trade and payments

List of tables

11 International assumptions summary12 Gross domestic product by expenditure13 Forecast summary22 Amounts pledged to Turkey by IMF under existing stand-by accord24 The consolidated central government budget25 Structural policy conditionality (updated to end-2001)31 Average yields on Treasury bills and government bonds at auction31 Domestic debt32 Outstanding external debt34 Gross domestic product35 National accounts by sector35 Industrial production36 Tourist arrivals from abroad37 Workforce and unemployment38 Real hourly wages of production workers in manufacturing39 Trends in inflation40 Selected financial indicators

2 Turkey


41 Exchange rates41 Foreign trade43 Current account44 Capital account44 Foreign-exchange and gold reserves

List of figures

13 Gross domestic product13 Turkish lira real exchange rates33 Real GDP38 Inflation and wages39 ISE general index41 Trade balance

Turkey 3


Summary

January 2002

Despite a lack of popular support, the ruling coalition will cling to power untilthe end of 2002. An early election, which could become more likely when theeconomy starts to recover strongly, could see some new parties gaining ground.The government is committed to the IMF programme, and although the risk of afurther crisis has diminished, Turkey still faces lira volatility, high inflation andlarge domestic debt redemptions. Although forecast to decline, the fiscal deficitwill be worryingly high. After an estimated 8.2% contraction in 2001, real GDPgrowth will be weak in 2002 but should strengthen in 2003. The current accountwill show a surplus in 2001-02, before returning to deficit in 2003.

The ruling coalition has held together, but remains fragile. Parliament hasapproved revisions to the Civil Code. Changes to the Political Parties Law havebeen proposed. The EU responded positively to the constitutional reform packageapproved in October, but sticking points remain unresolved. Disagreement withthe EU over its common defence plan appears to have been settled. Cyprus talksare to resume in mid-January.

The IMF will provide Turkey with additional funds. In addition to US$4bn stilloutstanding under existing facilities, it is expected to provide US$12bn under anew three-year agreement. At the end of November the IMF releasedapproximately US$3bn available under the May 2001 agreement. The governmentlooks set to hit its 5.5% of GNP primary budget surplus. Fiscal targets for 2002are tight, but proposed public-sector retirements could prove problematic.Approval of reform legislation accelerated during negotiations with the IMF inDecember 2001-January 2002. The move to inflation targeting has beenpostponed until some time in 2002. New banking sector reforms have causedcontroversy. Domestic borrowing costs fell in the final quarter of 2002. Turkeyreturned to the international bond market in November-December.

Real GDP fell by 7% year on year in the third quarter of 2001. Gross value addedof industry fell by 9.2%. But tourism demand was strong, with arrivals up by17% in the first nine months of the year. The unemployment rate rose to 8% inthe third quarter of 2001 compared with 6.9% a year earlier. Consumer priceinflation was over 67% in November. The Istanbul Stock Exchange rallied at theend of 2001, buoyed by expectations of a new IMF agreement.

The foreign trade deficit was US$7.5bn in January-September 2001 compared withUS$19.1bn a year earlier. The smaller deficit and higher tourism earnings helpedto produce a current-account surplus of US$2.5bn in the nine-month period.

Editors: Robert O’Daly (editor); Merli Baroudi (consulting editor)Editorial closing date: January 15th 2002

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2002-03

The political scene

Economic policy

Domestic economy

Foreign trade andpayments

4 Turkey


Political structure

Republic of Turkey

Parliamentary republic

Based on European models and constitution of 1982

Unicameral Meclis (parliament) of 550 members directly elected for a five-year term

Universal direct suffrage over the age of 18. Only parties gaining more than 10% of thenational vote are eligible for seats in parliament

April 18th 1999; next election due by April 2004

President, elected by an absolute majority of the Meclis for a seven-year term. Currentpresident is Ahmet Necdet Sezer, elected in May 2000. Next election is due in May 2007

On June 9th 1999 parliament voted in a coalition government led by Bulent Ecevit,comprising the Democratic Left Party, the Nationalist Action Party and Motherland Party

Islamist: Felicity Party (Saadet, SP) and Justice and Development Party (AKP), bothsuccessors to the former Virtue Party, which closed in June 2001; centre-right: MotherlandParty (Anap), True Path Party (DYP); centre-left: Democratic Left Party (DSP), RepublicanPeople’s Party (CHP); nationalist right: Nationalist Action Party (MHP); independent pro-Kurdish: People’s Democracy Party (Hadep)

Prime minister Bulent Ecevit (DSP)Deputy prime minister Devlet Bahceli (MHP)Deputy prime minister Husamettin Ozkan (DSPDeputy prime minister Mesut Yilmaz (Anap)

Kemal Dervis (independent) Mustafa Yilmaz (DSP)Sukru Sina Gurel (DSP) Fikret Unlu (DSP)Recep Onal (DSP) Resat Dogru (MHP)Mehmet Kececiler (Anap) Tunca Toskay (MHP)Yilmaz Karakoyunlu (Anap) Faruk Bal (MHP)Ramazan Mirzaoglu (MHP) Edip Safter Gaydali (Anap)Suayip Usenmez (MHP) Hasan Gemici (DSP)

Agriculture Husnu Yusuf Gokalp (MHP)Culture Istemihan Talay (DSP)Defence Sabahattin Cakmakoglu (MHP)Education Metin Bostancioglu (DSP)Employment & social security Yasar Okuyan (Anap)Energy & natural resources Zeki Cakan (Anap)Environment Fevzi Aytekin (DSP)Finance Sumer Oral (Anap)Foreign affairs Ismail Cem (DSP)Health Osman Durmus (MHP)Housing & public works Tunca Toskay (ad interim)Industry & trade (ad interim responsibility for transport & communications) Ahmet Kenan Tanrikulu (MHP)Interior Rustu Kazim Yucelen (Anap)Justice Hikmet Sami Turk (DSP)Tourism Mustafa Tasar (Anap)

Sureyya Serdengecti

Official name

Central Bank governor

Form of state

Legal system

National legislature

Electoral system

National elections

Head of state

National government

Main political parties

The Council of Ministers

Ministers of state

Key ministers

Turkey 5


Economic structure

Annual indicators

1997a 1998a 1999a 2000a 2001b

GDP at market prices (TL trn) 28,836 52,225 77,415 124,583 170,170

GDP (US$ bn) 189.9 200.3 184.9 199.3 139.9

Real GDP growth (%) 7.5 3.1 –4.7 7.4 –8.2

Consumer price inflation (av; %) 85.7 84.6 64.9 54.9 54.4a

Population (m) 63.0 63.9 64.8 65.7 66.5

Exports of goods fob (US$ m) 32,631 31,220 29,325 31,664 33,795

Imports of goods fob (US$ m) –48,029 –45,440 –39,768 –54,041 –39,648

Current-account balance (US$ m) –2,679 1,984 –1,360 –9,819 4,078

Foreign-exchange reserves excl gold (US$ m) 18,658 19,489 23,346 22,488 19,067

Total external debt (US$ bn) 84.8 97.2 101.8 117.8 116.0

Debt-service ratio, paid (%) 20.1 23.9 26.2 31.6 32.4

Exchange rate (av) TL:US$ 151,865 260,724 418,783 625,219 1,216,333

January 15th 2002 TL1,394,000:US$1; TL1,247,072:€1

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total

Agriculture, forestry & fishing 14.5 Private consumption 71.5

Industry (excl construction) 23.1 Government consumption 14.1

Construction 5.2 Gross fixed investment 22.4

Services 57.2 Stockbuilding 2.2

GDP at factor cost 100.0 Exports of goods & services 24.0

Imports of goods & services –31.5

GDP at market prices 100.0

Principal exports 2000c US$ m Principal imports 2000c US$ m

Clothing & other finished textile products 7,471 Electrical/non-electrical machinery, appliances & parts 13,800

Electrical/non-electrical machinery, appliances & parts 3,328 Mineral fuels & oils (incl crude oil) 9,481

Road vehicles & parts 1,577 Road vehicles & parts 5,446

Iron & steel 1,557 Iron & steel 2,725

Fruits & vegetables 1,278 Plastics & products 2,147

Main destinations of exports 2000c % of total Main origins of imports 2000c % of total

Germany 18.8 Germany 13.2

US 11.2 Italy 8.0

UK 7.4 US 7.2

Italy 6.4 Russia 7.2

France 6.0 France 6.5

Netherlands 3.2 UK 5.0

EU 52.5 EU 48.9

a Actual. b EIU estimate. c Excluding “suitcase” trade.

6 Turkey


Quarterly indicators

1999 2000 20014 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Central government finance (TL trn)Revenue & grants 2,122.3 2,493.2 2,682.0 3,147.2 2,929.8 3,520.2 4,122.4 4,481.7Expenditure & net lending 2,738.5 3,793.6 4,093.6 3,779.9 3,867.1 3,550.3 6,793.6 7,925.2Balance –616.2 –1,300.4 –1,411.6 –632.8 –937.3 –30.0 –2,671.2 –3,443.4

OutputGDP at constant 1987 prices (TL bn) 27,240 22,975 28,059 38,027 29,500 22,473 25,439 n/a

% change, year on year –2.1 5.6 6.4 7.8 8.3 –2.2 –9.3 n/a

Industrial production indexa (1995=100) 113.5 118.1 119.7 120.9 121.4 116.2 107.9 108.5 % change, year on year –2.2 4.3 1.4 9.9 6.9 –1.6 –9.9 –10.3 Manufacturinga 111.3 116.3 118.1 118.9 119.9 114.5 104.9 105.6 Mining 101 86 96 108 103 84 93 99

Employment, wages & pricesEmployment, manufacturing (‘000) 735.5 742.8 778.7 789.6 770.4 755.2 742.3 n/a % change, year on year –5.6 –0.4 2.7 5.0 4.7 1.7 –4.7 n/aUnemployment rate (% of the labour force) 7.4 8.3 6.2 5.6 6.3 8.6 6.9 n/aHourly earnings, manufacturingb (1995=100) 1,358 1,640 1,726 1,892 2,033 2,150 2,248 2,535Consumer prices (1994=100) 2,334 2,666 2,861 3,034 3,321 3,615 4,358 4,812 % change, year on year 66.1 68.8 61.7 52.7 42.3 35.6 52.3 58.6Wholesale prices (1994=100) 1,871 2,173 2,329 2,404 2,573 2,827 3,652 4,086 % change, year on year 58.2 66.6 59.1 48.3 37.5 30.1 56.8 70.0

Financial indicatorsExchange rate TL:US$ (av) 497,779 563,714 610,611 646,581 679,968 796,915 1,183,340 1,397,890 TL:US$ (end-period) 541,400 589,478 619,588 667,491 673,385 1,023,021 1,255,790 1,552,330Interest rates (av; %) Deposit 69.3 38.9 40.8 40.7 68.2 87.4 81.0 n/a Interbank money market 69.8 42.0 40.3 38.9 105.7 174.7 71.8 62.3M1 (end-period; TL trn) 4,307.1 4,212.8 4,961.8 5,723.3 6,612.1 6,320.8 7,785.3 n/a % change, year on year 77.0 39.9 86.8 83.0 53.5 50.0 56.9 n/aM2 (end-period; TL trn) 40,604 43,610 48,075 52,773 56,831 71,609 84,212 n/a % change, year on year 98.3 85.3 74.0 61.3 40.0 64.2 75.2 n/aStockmarket indexc (end-period; 1986=1) 15,209 15,920 14,466 11,350 9,437 8,023 11,204 7,626 % change, year on year 485.4 250.4 192.2 87.0 –37.9 –49.6 –21.5 –32.8

Sectoral trendsProduction Crude steel (‘000 tonnes) 3,671 3,229 3,777 3,694 3,557 3,620 3,847 3,809 Cement (‘000 tonnes) 7,523 4,823 10,803 11,411 11,357 6,264 8,961 n/a Cars (‘000) 70.8 54.3 86.7 81.9 82.8 53.1 70.8 n/a

Foreign trade (US$ m)Exports fob 7,339 6,693 7,097 6,678 6,856 7,298 8,052 7,622Imports cif –11,846 –11,324 –14,149 –13,971 –14,537 –10,586 –9,817 –10,043Trade balance –4,508 –4,633 –7,052 –7,293 –7,681 –3,288 –1,766 –2,421

Balance of payments (US$ m)Merchandise trade balanced (fob-fob) –3,232 –3,783 –5,981 –6,411 –6,202 –2,080 –587 –1,443Services & income balancede 672 311 1,364 3,802 1,856 425 897 2,435Net transfer paymentsd 1,171 1,201 1,353 1,250 1,421 1,118 849 899Current-account balanced –1,389 –2,271 –3,264 –1,359 –2,925 –537 1,159 1,892Reserves excl gold (end-period) 23,340 23,111 24,742 24,255 19,952 18,560 16,588 18,987

a Seasonally adjusted. b Gross earnings per production worker. c ISE National-100. d Central Bank of Turkey. e Including other goods.

Sources: Central Bank of Turkey; State Institute of Statistics; OECD, Main Economic Indicators; IMF, International Financial Statistics; Standard & Poor’s, Emerging Stock Markets Review.

Turkey 7


Outlook for 2002-03

Political outlook

Although popular support for the present three-party coalition led by BulentEcevit remains very low, with the IMF-backed economic reform programmeintroduced after the crisis of February 2001 continuing to bite, there are no signsthat the government faces imminent collapse. The very fact of its own unpopularityprovides a strong incentive for the government to remain in office for as long asit can, so as to avoid an early election which would almost certainly result in aresounding defeat. The Turkish public is evidently dissatisfied with Mr Ecevit’sperformance, but on past form it does not seem likely to resort to violent unrest,as in Argentina. The coalition appears to be clinging to power in the hope thatthe economy will start to pick up again and public discontent will be allayed.

But the ruling coalition is still deeply divided and therefore a government crisiscannot be completely ruled out. The main fault line within the ruling coalition isthat between the strident nationalists of the Nationalist Action Party (MHP), ledby deputy premier Devlet Bahceli, and Mr Ecevit’s Democratic Left Party (DSP).The fading force of the third partner, Mesut Yilmaz’s Motherland Party (Anap),which has been badly shaken by corruption scandals and has been slowly losingbackbenchers to the opposition, is another source of weakness for the govern-ment. Mr Bahceli has resisted liberalisation of Turkey’s hitherto restrictive humanrights regime, mainly because his party takes a hawkish stand on the Kurdishquestion. The MHP is reluctant to make concessions on this score to improveTurkey’s chances of starting accession negotiations with the EU, which it regardswith some suspicion. It has also resisted pressure to reduce the state’s role in theproductive economy, as demanded by the IMF, although resistance from MHPministers seemed to ease in the final months of 2001. However, as a last resort,Mr Bahceli has been prepared to be reasonably flexible on previous occasions, soas to maintain at least a semblance of government unity.

If the government were to fall and early elections were held, the MHP wouldalmost certainly do better than the DSP, although it is far from certain whethereither party would reach the 10% threshold required to win representation inparliament. However, both the MHP and the DSP, as well as Anap, would be wellbehind the opposition parties—notably the new “modernist” Islamist party, theJustice and Development Party (AKP) led by Tayyip Erdogan. Rather than takethis risk, Mr Bahceli, like the other coalition leaders, will probably prefer to holdon, at least until the end of 2002, by which time they will hope that theeconomic reforms will have begun to yield positive results.

Another serious cloud over the future of the government is caused by Mr Ecevit’spoor state of health, since he is now 76 and apparently affected by Parkinson’sdisease. If he were forced to step down without a successor waiting in the wings,then the government would likely fall apart. However, nominating a successorwill be far from easy, since Mr Ecevit has tended to run his party as a one-manband, and a last-minute appointment might have to be made. Alternatively,assuming his health does not completely break down before then, Mr Ecevit

Domestic politics

8 Turkey


might step down so as to allow a new leader to take the party into the nextelection, which must be held by April 2004 at the latest.

With Turkey’s main political and economic problems still on the domestic front,events in the latter part of 2001 have suggested that, over the next two to threeyears, its foreign relations will provide more hopeful prospects. On the centralissue of its relationship with the US, Turkey has benefited from the fact that sinceSeptember 11th the Bush administration has become acutely aware of thestrategic importance of Turkey, both in its campaign in Afghanistan and in theMiddle East. Since Turkey is one of the US’s closest allies in the Muslim world,and occupies an important strategic position as well as possessing substantialmilitary power, the US would suffer quite severely if it decided to alienate Turkey.With Turkish co-operation, the US can benefit from the use of Turkish airbasesand intelligence, as well as political support. Although Turkey will probably playa less central role in the initial stages of peacekeeping operations in Afghanistanthan was originally expected, it is quite likely to take over command of theInternational Security Assistance Force (ISAF) in Afghanistan in mid-2002. Atthat stage, the success of the operation will depend quite heavily on Turkey.

US-led military action in Iraq is possible, despite serious misgivings among theUS’s European allies in the international coalition against terrorism. Turkey hasalso voiced overall opposition to the idea, unless Saddam Hussein’s responsibilityfor the September 11th attacks can be clearly demonstrated. It would also requirefirm promises from the US that the territorial integrity of Iraq would bepreserved—in effect, that an independent Kurdish state would not be created inthe north of the country. If these conditions are met, however, it now appearspossible that Turkey could give logistical support to such an operation, andmight even allow the use of its airbases in support.

Relations with the EU and prospects for Turkey’s eventual accession to the Unionappear to be better than they have been for many years, although accession isunlikely until the latter half of the decade at the earliest. So far, EU leaders haveappreciated the steps Turkey has taken to meet the political part of theCopenhagen criteria—an essential condition if accession negotiations are tobegin. Both sides recognise, however, that more needs to be done, by passinglaws to give effect to the recent constitutional amendments, and generallyturning words into deeds.

Looming over this prospect, there is the distinct possibility that the EU coulddecide by the end of 2002, even if there is no preceding settlement between theGreek and Turkish Cypriots, that the internationally recognised Republic ofCyprus, ruled by the Greek Cypriots, could be included in the next enlargementof the EU, which is expected to take place in 2004-05. If this happens, then theTurkish government has threatened that it could officially annex the north ofthe island. This would almost certainly scupper Turkey’s own prospects ofaccession to the Union and therefore the Ecevit government will be reluctant tocause a permanent deterioration in relations with the EU. In a welcome turn-around, the Greek and Cypriot leaders agreed to restart direct bilateral talks inmid-January 2002. Even if these negotiations have not reached a successfulconclusion by the end of 2002, there is the possibility that the EU might delay

International relations

Turkey 9


Cypriot accession for a time, if a reasonable chance of success was apparent andif the Turkish attitude was encouraging. With this obstacle removed, it seems justpossible that by the end of the outlook period the opening of accessionnegotiations with Turkey might at least be on the horizon.

Economic policy outlook

With the risk of domestic debt default looming, the IMF announced in mid-November, as the Economist Intelligence Unit had forecast, that it would provideTurkey with additional financial aid. Although the exact level of support and thetiming of future disbursements were still not known, it is assumed that Turkeywill obtain US$12bn in fresh funds under a new stand-by agreement expected tolast three years. These funds would be in addition to the amount still availableunder the existing programme (approximately US$4.5bn). But in 2002 Turkey isexpected to repay about US$5.5bn owed under the more costly supplementalreserve facility (SRF) obtained in December 2000. IMF approval for the newstand-by accord is understood to depend on a number of preconditions. Theseare assumed to include the passage through parliament of key legislation onpublic procurements and a free tobacco market, as well as the implementation ofrecently announced fiscal austerity measures. Moreover, once the stand-byaccord comes into effect, the IMF is expected to continue to tie the release ofeach tranche of credit to specific conditions for fiscal, monetary and structuralpolicy, as it did in 2001.

While our baseline forecast assumes that Turkey will avoid another financialcrisis in 2002-03 (thanks to additional international support) and that confidencewill gradually return to the financial markets over the forecast period, thisscenario could be severely disrupted by a range of domestic and external factors.These include political instability or reform fatigue in Turkey and the possibilityof a deeper and more prolonged downturn in the US with significant knock-oneffects for the EU. International and investor confidence could be damaged moreseverely than we are anticipating in the wake of Argentina’s decision to declare amoratorium on its external debt repayments. Market concerns regarding Turkey’sstructural and fiscal imbalances and/or the feasibility of IMF plans for dealingwith them may also resurface.

The government will have to work hard to achieve the key fiscal target of apublic-sector primary surplus (excluding interest payments) of 6.5% of GNP in2002, as agreed with the IMF. A fiscal package was announced in mid-November,and the government has started to detail and implement the revenue-raising andexpenditure-cutting measures envisaged. However, with our economic growthforecast for 2002 substantially below the figure stated in the government’s budgetassumptions, the revenue-raising measures, some of which have been includedin a fiscal package announced in mid-November, are unlikely to generate therevenue expected. Indeed, they could stall the return to economic growth, whichwould in turn have a negative impact on revenue. Genuine spending cuts willalso be difficult to achieve, in view of the costs of retiring public employees andthe pressure that lower public-sector employment will exert on social securitybalances. Privatisation revenue will be constrained by adverse global market

Policy trends

Fiscal policy

10 Turkey


conditions. Further spending cuts and revenue-raising measures may have to beannounced, and given the fragility and the fractiousness of the governmentcoalition it is doubtful whether it has the political will to face down populardiscontent.

Although the government has achieved its IMF fiscal targets in the past twoyears, our forecast is for the consolidated central government deficit to be higherthan the government’s target in nominal and relative terms, although this willbe reduced to some extent by our forecast of higher inflation, which will boostnominal GDP. As a percentage of GDP, the deficit will rise from about 14.5% in2000 to over 20% in 2001-02, before declining to 14% in 2003. This assumes,however, not only that market confidence is retained and the cost of interestpayments is kept down, but also that the sale of Turk Telekom, planned to takeplace virtually every year since 1995, is also successfully completed.

Turkey had planned to move to formal inflation targeting as the main nominalanchor of monetary policy at the end of 2001, but the move has been delayeduntil some time in 2002 when the authorities consider conditions to be bettersuited. Once the move does occur it is unclear whether the Central Bank ofTurkey will actually be able to set interest rates independently, given that a sharptightening of monetary policy would aggravate the country’s already fragilepublic finances and the difficulties facing the banks.

In the meantime, controlling base money growth is to be used to try to achievethe inflation targets, with adjustments to offset trends towards or away fromdollarisation of bank deposits. Given that inflationary expectations are higherthan the government’s 2002 year-end target for consumer price inflation of 35%,there is a danger that policy will require money to be uncomfortably tight fromthe point of view of government borrowing costs, private-sector credit use andbanking sector liquidity.

Economic forecast

The international environment is inauspicious for Turkey to cope with thedemands of the latest financial crisis. World growth has slowed sharply, as thedownturn in the US economy has continued into the second half of 2001, andis likely to be exacerbated by the terrorist attacks on September 11th. The EU isalso slowing sharply, with the deteriorating external environment interactingwith a much sharper than expected weakening in domestic demand, especiallyin Germany, Turkey’s single largest export market. A strong rebound of theglobal economy in 2002 is unlikely given continued overcapacity in the US,the EU and Japan; the likely need in the US for the current negative savingsratio to be at least eliminated; the impact on confidence in the US andelsewhere of the terrorist attacks; and the continued vulnerability of manyemerging markets, including Turkey. Lower oil prices and interest rates shouldcontribute to a recovery in the second half of 2002 and a rebound in worldgrowth in 2003.

International assumptions

Monetary policy

Turkey 11


International assumptions summary(% unless otherwise indicated)

2000 2001 2002 2003c

GDP growthWorld 4.7 2.2 2.4 4.2OECD 3.8 0.9 0.9 3.0EU 3.3 1.5 1.3 2.5

Exchange rates¥100:US$ 1.08 1.22 1.29 1.24US$:€ 0.924 0.896 0.960 1.015SDR:€ 0.700 0.703 0.740 0.762

Financial indicators€ 3-month interbank rate 4.48 4.28 3.13 4.60US$ 3-month Libor 6.53 3.78 1.91 5.07

Commodity pricesOil (Brent; US$/b) 28.5 24.3 18.3 20.2Gold (US$/troy oz) 279.3 268.8 255.0 250.0Food, feedstuffs & beverages

(% change in US$ terms) –6.1 –1.0 11.9 13.4

Industrial raw materials (% change in US$ terms) 13.4 –9.7 1.3 14.8

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The Turkish economy is estimated to have contracted by about 8% in 2001, asprivate consumption and fixed investment expenditure collapsed owing to theuncertain policy outlook, low consumer and business confidence, a deepreduction in the availability of bank credit combined with high real interest rates,fiscal tightening, and higher import costs in the aftermath of the devaluation.These trends, already firmly in place before September 11th, have beenexacerbated by the knock-on effects of the attacks on the global economy, whichwill hit Turkey particularly hard. Although expectations of additional funds fromthe IMF have already allowed the lira to rally and interest rates to fall, theeconomic recovery is expected to be relatively weak in view of modest wagegrowth and lower employment, damaged investor confidence, outstandingproblems related to banking and corporate debt, political uncertainty, tight fiscalpolicy, sluggish external demand for Turkish exports of goods and the damagingeffect of the terrorist attacks on tourism. As a result, we expect weak growth ofaround 2% in 2002. Assuming that there is a recovery in EU and global demandfrom the middle of 2002 and that the government’s continued commitment toan IMF-backed reform programme restores some degree of business andconsumer confidence, real GDP growth in Turkey is expected to accelerate to amore respectable rate of 4-4.5% in 2003.

We expect consumer price inflation to fall to 42% at end-2002, well below theend-2001 rate of 68.5% but still above the government’s target of 35%. Althoughthe lira has stabilised and international oil prices are expected to be lower onaverage this year than in 2001, inflationary expectations will remain hard tobreak. The lira’s gains at the end of 2001 and in early 2002 are also likely to giveway to further nominal depreciation, increasing the price of imports, a significantcomponent of domestic production. In 2003 we expect the average rate ofinflation to remain high, at 43%. Along with the recovery in economic activity,

Economic growth

Inflation

12 Turkey


which will put added pressure on prices, we do not believe that inflation-ratetargeting will be able to provide a sufficiently rigorous nominal anchor to beardown on inflationary pressures.

Gross domestic product by expenditure(TL bn at constant 1987 prices; % change year on year in brackets unless otherwise indicated)

2000a 2001b 2002c 2003c

Private consumption 80,774.0 72,927.9 74,578.2 76,537.3(6.2) (–9.7) (2.3) (2.6)

Public consumption 10,311.0 9,434.6 9,528.9 9,624.2(7.1) (–8.5) (1.0) (1.0)

Gross fixed investment 33,281.0 22,632.4 23,424.6 24,977.5(16.9) (–32.0) (3.5) (6.6)

Final domestic demand 124,366.0 104,994.9 107,531.7 111,139.0(9.8) (–19.5) (3.2) (6.0)

Stockbuilding 3,082.0 –2,455.0 –1,750.0 1,000.0(1.1)d (–4.7)d (0.6)d (2.5)d

Total domestic demand 127,448.0 102,539.9 105,781.7 112,139.0(11.6) (–17.5) (0.7) (4.3)

Exports of goods & services 39,198.0 42,155.8 44,008.7 46,776.5(19.2) (7.5) (4.4) (6.3)

Imports of goods & services 47,498.0 34,633.4 37,789.8 42,224.4(25.4) (–27.1) (9.1) (11.7)

Foreign balance –8,300.0 7,522.4 6,218.9 4,552.1(–3.0)d (13.3)d (–1.2)d (–1.5)d

GDPe 118,789.0 109,087.3 111,250.6 116,191.1(7.4) (–8.2) (2.0) (4.4)

a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth. e Total includes statisticaldiscrepancy.

Following the authorities’ decision to abandon the crawling-peg exchange-rateregime in February 2001, the lira was volatile within a generally weakening trenduntil mid-November, when the IMF announced that it would provide additionalfunds to ease Turkey’s financing requirement. At the beginning of December thelira had appreciated, falling below TL1,450,000:US$1 compared with a value ofover TL1,600,000:US$1 in early October (but still well down on TL685,391:US$1on February 21st, the day before the authorities decided to float the currency).Although we expect a more stable lira in 2002-03, the rally now appears to haverun its course, and the lira is forecast to continue to depreciate in nominal terms,declining broadly in line with the differential in wholesale price inflationbetween Turkey and the US. Renewed confidence in the lira is crucial to thesuccess of the IMF programme and the recovery of the economy in 2002-03.

The current-account balance swung into surplus in the second and third quartersof 2001, as the value of imports slumped and exports rose following the lira’sdevaluation. A surplus of about US$4bn (2.9% of GDP) is expected for the year asa whole. In 2002 we expect the surplus to narrow to about 1% of GDP, as weakexternal demand for Turkish exports and the negative impact on tourism of theUS terrorist attacks are likely to continue to offset the positive effects of thedevaluation. A small deficit is forecast in 2003, when import expenditure will rise

Exchange rates

External sector

Turkey 13


again as domestic demand expands. This will be partially offset by an increase inexport revenue and a muted recovery in the tourism sector. In view of IMFsupport and our assumptions of a measure of market confidence and a slightlymore stable currency, capital flows are expected to be positive or neutral in2002-03. Although not built into our central forecast, there is a continuing riskof balance-of-payments difficulties or a major decline in reserves.

Forecast summary(% unless otherwise indicated)

2000a 2001b 2002c 2003c

Real GDP growth 7.4 –8.2 2.0 4.4

Industrial production growth 5.5 –10.7 2.0 4.5

Gross fixed investment growth 16.9 –32.0 3.5 6.6

Unemployment rated (av) 6.6 9.0 9.9 12.2

Consumer price inflation (av) 54.9 54.4a 51.2 43.0 Year-end 39.0 68.5a 42.0 35.3

Short-term interbank rate 56.7 90.0 70.0 60.0

Government balance (% of GDP) –14.6 –21.4 –20.8 –14.0

Exports of goods fob (US$ bn) 31.7 33.8 35.8 40.3

Imports of goods fob (US$ bn) 54.0 39.6 44.6 52.4

Current-account balance (US$ bn) –9.8 4.1 1.4 –3.6 % of GDP –4.9 2.9 1.1 –2.6

External debt (year-end; US$ bn) 117.8 116.0 121.8 123.5

Exchange rates TL:US$ (av) 625,219 1,216,333 1,818,103 2,564,681 TL:¥100 (av) 580,195 1,000,911 1,412,119 2,076,665 TL:€ (av) 577,530 1,089,469 1,745,379 2,603,151 TL:SDR (year-end) 877,353 1,906,733 2,873,114 3,479,097

a Actual. b EIU estimates. c EIU forecasts. d April of each year.

14 Turkey


The political scene

With the economy continuing to suffer the after-effects of the financial crisis ofFebruary 2001, public support for the three-party coalition government led bythe prime minister, Bulent Ecevit, remains at rock bottom. According to a recentopinion poll by the Sonar polling organisation, Mr Ecevit’s Democratic Left Party(DSP) has the support of only 4% of the electorate, with his two coalitionpartners, the right-wing Nationalist Action Party (MHP) and the centre-rightMotherland Party (Anap), scoring 9% and 8% respectively. At these levels, noneof the ruling parties would reach the 10% threshold required to win any seats inparliament under the existing electoral law. However, the realisation by all threeparties that a breakdown of the government would probably result in an earlyelection and their own demise has apparently inclined the coalition party leadersto try to keep the government going, in the hope that the IMF-backed economicreform programme and a pick-up in the global economy will start to lift theTurkish economy and, with it, popular support for the coalition parties.

In spite of the widespread popular discontent—manifested by large publicdemonstrations by the trades unions and others—public protests have so farbeen orderly, with none of the violent riots and looting experienced in Argentina.This may in part be attributed to the stronger social controls in what is still afairly conservative Muslim society, and also to the fact that Turkey’s economiccrisis has been less severe. Although some tensions undoubtedly remain, disputeshave abated within the government over both the application of the IMF’sreform programme and meeting EU political standards required to openaccession negotiations, as the coalition leaders have apparently realised theyneed to be seen to be pulling together. This was highlighted in December by thedismissal from the government of the MHP minister of state, Abdulhaluk Cay,whose hardline positions in favour of the immediate execution of AbdullahOcalan, the Kurdish rebel, and against Turkey joining the EU were clearly out ofstep with government policy. He was replaced in early January by Resat Dogru,also of the MHP.

Apart from the loss of public confidence in the government’s ability to managethe economic crisis, probably the greatest source of concern for the three-partycoalition is the frail health of Mr Ecevit. The prime minister is now 76 and saidto be suffering from Parkinson’s disease and other medical problems. OnNovember 3rd, in a report submitted to the Anap executive, the deputy chairmanof the party, Erkan Mumcu, voiced these concerns when he attacked Mr Ecevitfor his lack of leadership and vision. On November 17th Mr Mumcu then accusedMr Ecevit of being “out of date”, a remark for which he later apologised. But ifthe prime minister was to resign suddenly, the government would probablycollapse, almost certainly exacerbating political and economic uncertainties. Thisscenario appears unlikely at present, but there has naturally been speculation asto who might succeed Mr Ecevit as leader of the DSP in the medium term. Onthe right of the party, names mentioned include those of the deputy premier,Husamettin Ozkan, and the culture minister, Istemihan Talay, while possiblecandidates from the liberal wing are the foreign minister, Ismail Cem, and aminister of state, Sukru Sina Gurel. Behind the scenes the prime minister’s wife,

The coalition governmentis holding together

Mr Ecevit’s future is underdiscussion

Turkey 15


Rahsan Ecevit, who generally backs the traditionalist left of the party, can beexpected to wield an important influence. None of the speculative candidateshas as yet officially declared himself, and all have publicly avowed their loyaltyto the prime minister. Nevertheless, it is thought possible that around the end of2003, as the last possible date for the next general election (due by April 2004)draws near, Mr Ecevit might step down to allow a younger man to lead the partyinto the elections.

Tensions between the government, particularly Mr Ecevit, and the president,Ahmet Necdet Sezer, the former Chief Justice of the Constitutional Court whowas unexpectedly elected to his present position in May 2000, have also been asource of political uncertainty. Constitutionally, the Turkish president has limitedpowers: he can return a bill to parliament for reconsideration if he has anyreservations about it, but if the deputies then approve their original text he isbound to promulgate it as law. In the case of constitutional amendments, thepresident can order a referendum, but this provision has only been used twicesince the present constitution was introduced in 1982. Beyond this, he cannormally only exert moral pressure through the media. On October 16thPresident Sezer duly endorsed all but one of the 34 constitutional amendmentswhich had been passed by parliament on October 4th (October 2001, page 16).The exception was a clause that would have increased MPs’ own salaries by up to60% and improved their pension rights. In rejecting this amendment Mr Sezercalled for a national referendum on the issue—something the government wasclearly anxious to avoid given its current unpopularity, quite apart from thenature of the amendment itself. Accordingly, on November 21st MPs passed arevised amendment withdrawing the salary increases but improving theirpensions, which the president was able to accept.

In June 2001 parliament passed a bill to reform the tobacco market, but this wasreturned by the president on the grounds that it failed to protect the interests oftobacco farmers (July 2001, page 28). Mr Sezer’s intervention caused considerabledelay to the bill, as it was not until January 3rd 2002 that parliament passed theoriginal text for a second time. Similarly, on November 28th the presidentreturned a bill designed to deny the State Security Courts the function of tryingcases involving organised crime and major fraud in the banking sector. This wasagain passed by parliament in its original form on December 7th. Apart fromexercising his constitutional powers (such as they are) over legislation, thepresident has also used his position to attack the government for its failure tosuppress corruption, its refusal to endorse proposals for reform of the PoliticalParties Law and the electoral law, and its reluctance to express support for furtherreforms being demanded by the EU (see below). Mr Sezer has compounded thegovernment’s difficulties by raising these issues and has almost certainly strucksympathetic chords with public opinion.

With the slump in popularity of the ruling coalition, the main opposition partieshave naturally been gaining support, but none appears to be in a position to takeover power or inspire general confidence. According to the Sonar opinion poll,Tayyip Erdogan’s newly formed Justice and Development Party, or AKP (October2001, pages 15-16), has around 17% support, but Mr Erdogan will have difficulty

Disputes between executiveand president continue

Uncertainty remains overfuture political landscape

16 Turkey


in overcoming many voters’ worries about his stridently Islamist past and allegedcorruption during his term as mayor of Istanbul in 1994-98. Tansu Ciller’s TruePath Party (DYP), the third largest party in parliament, and the Republican People’sParty (CHP) led by Deniz Baykal, which failed to reach the 10% threshold in the1999 election, each scored around 14% in the Sonar poll, but both parties arehandicapped by their respective leaders’ less than exemplary politicalperformance during the 1990s.

For many voters, the brightest hope appeared to be the prospective formation ofa new centre-left party, which could take over the electoral base won by the DSPin the 1999 elections. This outcome was held out by Erdal Inonu, the formerleader of the CHP’s predecessor, the Social Democrat Populist Party (SHP), whohas been out of politics since 1993. There was also a degree of optimism thatsuch a party might be joined by Kemal Dervis, the independent minister of stateand the main driving force behind the current economic reform programme.However, on November 28th Mr Inonu announced that he would not be takingan active part in the formation of a new party. Meanwhile, hopes that Mr Derviswould emerge as a prospective leader of the party also faded, as he showed noopen inclination to abandon his independent status, and at the same time hispublic support seemed to be receding. This appeared to leave the initiative withsecond-rank figures, such as Murat Karayalcin, Mr Inonu’s successor as leader ofthe former SHP, or other veterans of the centre-left like Aydin Guven Gurkan orErcan Karakas, none of whom has Mr Ecevit’s previous popular appeal.

Following two years of discussions, parliament passed a revised version of theCivil Code on November 22nd, replacing a version originally enacted in 1926 aspart of Ataturk’s widely acclaimed reforms. Based on the then Swiss Civil Code,the earlier version represented (at the time) a radical shift from its Islamicallyinspired predecessor, particularly as regards the rights of women in marriageand divorce, given that polygamy was previously allowed. However, 75 yearslater it was clearly out of date compared with similar laws in Westerndemocracies, since it designated the husband as head of the household,allowing the wife no say concerning the upbringing of the children and (until acontrary court decision in 1994) preventing her from seeking outside workwithout her husband’s permission.

Under the new Code, both parties have the right to choose where they live andboth have equal financial responsibility for the children’s upbringing. Thehusband is no longer counted as the “head of the household”, and both partieshave equal rights in family decisions. In case of divorce, they have equal rightsto division of property acquired during the marriage, in place of the previousprovision whereby the wife only had a right to property officially registered inher name. The normal legal age of marriage for both sexes is raised to 18,instead of the previous limits of 15 for women and 17 for men. Whether allmarried women will in practice benefit from these rights is doubtful, sinceexperience suggests that in conservative rural areas patriarchy often survives.Nonetheless, the legal changes should strengthen Turkey’s case to beginaccession negotiations with the EU, although the EU Commission had notspecifically demanded the reforms.

Parliament approves arevision of the Civil Code

Turkey 17


Following the passage of an important package of constitutional amendments,primarily affecting human rights, in October 2001 (October 2001, page 16),parliament has started to consider another set of constitutional changes affectingtechnical and administrative arrangements. Other, and politically morecontentious, proposals concern possible amendments to the Political Parties Lawand the electoral law, both of which were enacted by the former military regimein 1983. Most Turkish politicians claim that they support reforms to both laws,but disagree on the detail. Hence, the eventual changes (if there are any) willprobably be limited. On the first score, some changes will probably be needed asa result of the amendment in October to Article 69 of the constitution, regardingthe closure of political parties (October 2001, page 18). More broadly, ideas arebeing advanced to reduce the dictatorial role played by the party leader in mostpolitical parties, particularly his or her ability to dictate the slate of the party’scandidates in parliamentary elections, by requiring parties to hold primaryelections among their own members (at the moment, these are voluntary andrarely held).

So far as the electoral law is concerned, radical suggestions include the adoptionof the double-ballot system, with smaller constituencies than at present, similarto the arrangement used in elections to the French National Assembly. Thiscould be accompanied by permission for official electoral alliances betweenparties, with joint lists of candidates, which is currently forbidden. The thinkingbehind this proposal is that smaller parties would consolidate with their largerrivals, reducing parliamentary instability, though whether this effect could beachieved in Turkish conditions is open to question. There is also the suggestionof reducing the current 10% electoral threshold—if only because on their currentshowing the ruling parties could well fall short of it (see above). Opposition tothis idea is mainly based on the expectation that this would allow parliamentaryrepresentation of the People’s Democracy Party (Hadep), Turkey’s only specificallypro-Kurdish party. On these grounds, hardline nationalists in the MHPpredictably oppose both a reduction of the threshold and the double-ballotprinciple, since in the 1999 elections Hadep was the leading party in a number ofsouth-eastern constituencies.

On October 17th Günter Verheugen, the EU Commissioner for enlargement,hailed the approval of the amendments to the Turkish constitution as a “majorstep forward”, which showed “the determination of Turkey’s political leaders tobring Turkey closer to EU standards”. The Commission’s annual Regular Report onTurkey’s Progress towards Accession, which was issued on November 13th, describedthe constitutional amendments as a “significant step towards strengtheningguarantees in the field of human rights and fundamental freedoms”, althoughthe report also called for their comprehensive application through legal changes.In the circumstances, this was probably the most favourable judgment Turkeycould reasonably have expected. But tensions within the coalition governmentover the steps to be taken to meet the EU’s political requirements for the start ofaccession negotiations were more than evident in the mixed response given tothe Commission’s report. A report approved in October by the EuropeanParliament (EP), which has generally been more critical of Turkey in the pastthan the Commission, merely “[took] note” of the constitutional amendments,

Changes to the PoliticalParties Law are proposed

Changes to the electoralsystem are mooted

EU gives a positive responseto constitutional reforms

18 Turkey


calling for their full implementation and the removal of specified articles in thePenal Code and other statutes (see below).

The EU heads of government appeared to continue the upbeat mood at theEuropean Council meeting held in Laeken, Belgium, on December 14th-15th,at which the concluding declaration welcomed the changes to the Turkishconstitution, adding that the beginning of accession negotiations with Turkeyhad “drawn nearer”. Turkey was also invited, along with the other candidatestates and the existing EU members, to join the convention, to be headed bythe former French president, Valery Giscard d’Estaing, which is supposed todraw up a future constitutional outline for the EU.

In spite of this progress, it is likely that meeting the “Copenhagen criteria” ofdemocratic standards will not be entirely easy for Turkey. Likely sticking pointsare the EU’s demand for changes to the broadcasting law, so as to allow forradio and TV broadcasting in Kurdish, and the full abolition of the deathpenalty, given that the new version of the constitution still allows this to beapplied for “terrorist crimes” (October 2001, pages 17-18). On both theseissues, Mr Ecevit’s coalition partners in the MHP have taken a hardline positionagainst further reforms. Similarly, both the EP’s report and the Commission’sRegular Report repeated the need for changes to Articles 159 and 312 of thePenal Code, and Articles 7-8 of the Law for the Struggle against Terrorism (LawNo. 3713) of 1991. Article 159 provides that “Those who publicly insult orderide the moral character of Turkishness, the Republic, the Grand NationalAssembly [the Turkish parliament] or the Government, or the Ministries, themilitary or security forces of the State or the moral character of the judiciary”shall be punished by up to six years of imprisonment, while Article 312declares that “anyone who openly incites the public to hatred and enmity withregard to class, race, religion, religious sect or regional differences” can receiveup to three years in gaol. Article 8 of Law No. 3713 makes it illegal to issue“written or oral propaganda, together with meetings, demonstrations andmarches, which have the objective of destroying the indivisible integrity of theState of the Republic of Turkey, with its territory and nation”. All these clauseshave frequently been used to prosecute those allegedly criticising the army, orurging what are deemed to be anti-secularist or pro-separatist ideas. Althoughgovernment spokesmen have promised reforms to all these statutes, changes toArticle 312 in particular have been strongly opposed by the MHP, so this issueis likely to provoke serious conflict within the government.

For some time, Turkey has been in conflict with the EU’s plans to establish arapid reaction force, which in certain conditions could be independent ofNATO as part of a new European Security and Defence Policy (ESDP). SinceTurkey is not a member of the EU, but a vital member of NATO, the Turkishgovernment and military were concerned that they could be cut out of futureEuropean security structures, and demanded that Turkey be given a decision-making role. They feared that the proposed European force could be used inneighbouring regions such as the Balkans or Transcaucasia, in which Turkeyhas clear security interests, without Turkish involvement—or even, in the worstcase, that it might side with Greece or with Cyprus in military actions against

Sticking points remain

Conflict over EU defenceplan appears to be resolved

Turkey 19


Turkey. Almost certainly, the EU force would need access to NATO assets tocarry out most of its functions, and Turkey had threatened to veto this accessunless its concerns were dealt with. With EU member states able to provideonly limited resources, a Turkish veto would have severely restricted thecapability of the rapid reaction force. Although it could also, the UK argued,have encouraged EU countries like France, which are less enthusiastic about USinvolvement in European defence, to increase EU defence capabilities with aview to developing a European defence policy detached from NATO, therebyreducing Turkey’s influence even further.

On December 4th, after six months of talks in which the UK negotiated onbehalf of the EU, it was announced that agreement had been reached accordingto which Turkey would be involved at every stage in any EU operation requiringthe use of NATO assets (which would probably include the vast majority ofcases). The UK also pledged that the new force would not be used in a conflictbetween members of the EU and a NATO member which was not also a memberof the Union, in effect between Greece and Turkey. In any operation geographicallyclose to Turkey, but not employing NATO assets, there would be “intensifiedconsultation” with Turkey. This could include operations in the Balkans orTranscaucasia—the Aegean apparently having also been excluded by the previousundertaking. It had been hoped that these arrangements could be endorsed atthe Laeken summit, but Greece insisted that it could not be bound by pledgesgiven to Turkey by the British, and would need extra “assurances”, although whatthese were remained unclear. Nevertheless, the European leaders announced atLaeken that the ESDP was now “operational”. Critics of the ESDP argue that it isunlikely ever to amount to much since many EU member states are continuingto reduce their military spending and will fail to devote sufficient resources tothe rapid reaction force. The involvement of neutral EU countries like Ireland,Austria, Finland and Sweden would also make a coherent, effective andautonomous European defence policy very hard to achieve.

Since the September 11th terrorist attacks in the US, Turkey has been anxious todemonstrate its importance to the Western alliance, not least because of Turkey’sneed for additional funds to avoid a damaging default on its domestic debt.However, it has been reluctant to commit itself to a major military involvement,because this would probably not be supported by public opinion (October 2001,pages 19-20). On October 10th parliament endorsed a government decreeallowing the despatch of Turkish troops abroad, or the stationing of foreigntroops on Turkish soil, at a time and on the scale of the government’s choosing.At that time, it was expected that these troops would be used in support of thecampaign against the Taliban regime and the al-Qaida organisation, known as“Operation Enduring Freedom”. However, because of the rapid collapse of theTaliban, Turkish involvement became more likely to consist of participation inthe International Security Assistance Force (ISAF) to be sent to Kabul in supportof the interim Afghan government.

In mid-October it had been suggested that the peacekeeping force would bemade up of Muslim nations, under Turkish command. However, in the event,the UK assumed command of the ISAF when their first detachments landed atBagram air base, near Kabul, on December 20th. Turkey set the condition that

Turkey to take part in UNforce in Afghanistan

20 Turkey


its troops would only be used for the distribution of humanitarian aid and inhealth and reconstruction projects. In addition, the initial Turkish commitmentwas scaled down from the 3,000 troops initially reported in November to amaximum of 1,000, although it is likely to be significantly less given that theISAF is unlikely to be made up of more than 5,000-6,000 troops in total.Statements by Mr Ecevit and Mr Cem proposed that Turkey would help withthe training of a new national Afghan army and police force, and reactivate thechildren’s hospital which Turkey has run in Kabul for some time.

Although Turkey was evidently to play a less prominent initial role in thepeacekeeping operation than had earlier been suggested, the December 20th UNSecurity Council Resolution authorising the establishment of the ISAF stated thatcommand of the force would be rotated once every six months. At the parallelmeeting in London, Turkey proposed that it should take over the command forthe second six-month period, and this idea was said to have been favourablyreceived. Other Muslim countries that could be expected to participate—inparticular, Bangladesh, Jordan and Malaysia—supported this proposal strongly.However, it was thought that Russia and Iran, and the groups inside Afghanistanwho have strong connections with them, would be cool towards the idea.Nonetheless, the US and France evidently supported the proposal: on January 3rd2002 it was reported that President Bush was trying to persuade the British primeminister, Tony Blair, to agree that Turkey should take over the command afterthree months instead of six. This plan was separately supported by the Frenchdefence minister, Alain Richard.

Although Turkey was strongly supportive of the US campaign in Afghanistan,it is far less enthusiastic about the prospect of US military action against Iraq.When it was first suggested in September Mr Ecevit had voiced severereservations about the idea, since Turkey has a strong economic interest inpreserving good relations with Iraq. In the political sphere, it would stronglyoppose any break-up of the country which might result from the overthrow ofSaddam Hussein—with the possible establishment of an independent Kurdishstate—because of the potentially destabilising effect that this might have in thepredominantly Kurdish south-east of Turkey which borders on northern Iraq(October 2001, page 20).

Nonetheless, there were hints from official sources (including the Turkishambassador in Washington, Faruk Logoglu, in November and the defenceminister, Sabahattin Cakmakoglu, in December) of a possible change in theTurkish attitude if credible evidence is given that Iraq was behind the terroristattacks on the US. At the same time the New York Times claimed that Turkishleaders had signalled to the Bush administration that it might be able to usebases in Turkey for operations against Iraq. The issue evidently came to the forewhen Colin Powell visited Ankara on December 5th. When asked about Iraq, thesecretary of state told a press conference that “we have asked for nothing fromTurkey because no decisions or recommendations have been made to PresidentBush”. For his part, Mr Ecevit was reported to have confirmed to Mr Powell the“anxieties” Turkey felt about the possibility of military action against Iraq.

Turkey is cautious aboutpossible action against Iraq

Turkey 21


The Cyprus issue has been the cause of a major dispute between Turkey andGreece, and although a settlement of the division of island is not a specificallystated precondition for the opening of Turkish EU accession negotiations, itscontinued absence threatens to exacerbate tensions between the two countriesand damage Turkish relations with the EU, which at the end of 2002 is likely toinclude Cyprus in the list of countries to join the Union in the next wave ofenlargement. However, in November, almost two years after the last round ofUN-sponsored proximity talks broke down, Rauf Denktash, the leader of thebreakaway Turkish Republic of Northern Cyprus (TRNC), announced that hehad written to the Greek Cypriot president of the Republic of Cyprus, GlafcosClerides, suggesting a face-to-face meeting. When the two met in Nicosia onDecember 4th it was announced that the leaders would meet again in directdiscussions on January 15th 2002. Alvaro de Soto, the special advisor to the UNsecretary-general on Cyprus, who brokered the talks, stated that the two leadershad agreed that in the January discussions “there will be no preconditions; thatall issues will be on the table; that they will continue to negotiate in good faithuntil a comprehensive settlement is achieved; [and] that nothing will be agreeduntil all is agreed.”

Until November the Turkish government had maintained a hardline stanceon Cyprus, with Mr Ecevit stating that if the EU admitted Cyprus to theUnion in advance of an internal settlement. Turkey might either annex theself-proclaimed TRNC or establish a “special relationship” with the region,making it an autonomous part of Turkey. Although the lack of officialexplanations left it unclear, Turkey had evidently agreed on Mr Denktash’schange of tack, which was marked mainly by the observation that Mr Denktashwas evidently backing off his claim that the sovereignty of the TRNC shouldbe recognised before inter-communal talks could be restarted. Withinnorthern Cyprus, it is possible that Mr Denktash was coming under pressurefrom the large number of Turkish Cypriots, especially those of the youngergeneration, who favour an eventual settlement with the Greeks. Similarly, inTurkey the government was being criticised by the business community forits hardline stance on Cyprus, since this was likely to be the biggest barrier toTurkey’s accession to the EU.

A settlement on the island would also remove the risk of a serious clash withthe EU over Cypriot accession. With the prospects for Turkey’s eventualmembership of the EU evidently improving—as had been signalled at theLaeken summit—there was a stronger incentive for the Turks, both in Cyprusand on the mainland, to start to facilitate a resolution of the Cyprus problem.

Cyprus talks to resume inmid-January

22 Turkey


Economic policy

On November 15th the managing director of the IMF, Horst Köhler, announcedthat the Fund was in principle in favour of a new stand-by agreement to benegotiated with the Turkish government. His initial statement referred toadditional funds intended to close a “financing gap” estimated to be aboutUS$10bn. Although an official figure for the additional funds had not beenannounced as of mid-January, US$12bn appears a more likely sum. The newagreement, which the IMF was expected to approve in mid-January, is expectedto be for three years, starting in early 2002, and will supersede the existing three-year stand-by accord. This agreement, which was substantially amended andaugmented in May 2001 following February’s devaluation, was due to end inDecember 2002.

Amounts pledged to Turkey by IMF under existing stand-by accord

SDR bn US$ bna

Total pledged 15.1 19.0 December 1999 2.9 3.6 December 2000b 5.8 7.3 May 2001 6.4 8.1

Amount drawn 11.7 14.7

Amount outstanding 3.4 4.3

a Estimate. b Supplemental reserve facility (SRF), due to be repaid in 2002-03.

Source: IMF press release.

Since 1999 the IMF has extended nearly US$19bn in loans to Turkey. This figureincludes about US$7.5bn under a supplemental reserve facility (SRF) granted inDecember 2000 in the wake of a financial crisis. The remainder takes the form ofregular stand-by credits, which carry easier payment terms. Under existing arrange-ments, another US$4.3bn from the stand-by credit facility and about US$1bnfrom the SRF are still available. The funds to be provided under the new stand-byagreement will be in addition to this outstanding amount. But some of the extracredit may be used by Turkey to make repayments on its SRF borrowing. SRFloans normally have to be repaid quickly, with only an 18-month period ofgrace. For this reason, Turkey has to make repayments of about US$5.5bn to theIMF in 2002, with the balance due in 2003. The IMF has the option of extendingthe repayment period on these loans, but with a new stand-by accord in place,this option seems less likely to be invoked than previously thought.

No substantial change of direction is expected under the new stand-byagreement. On December 14th, after discussions between Turkish and IMFofficials, the IMF’s representative to Turkey, Odd Per Brekk, announced that thelira would continue to float and that banking sector restructuring, public financereforms and privatisation would continue. In addition, public-sector employmentwould be reduced and the tax system would be reformed (see below).

On November 28th, while the details of a new agreement were still undernegotiation, the IMF approved the release of a US$3bn tranche of the loanavailable under the May 2001 agreement. The tranche had been scheduled for

IMF agrees in principle to anew stand-by agreement

US$3bn loan tranche isreleased at end-November

Turkey 23


release two months earlier. The delay was in part because of the government’stardiness in fulfilling certain IMF conditions, such as submitting to parliamentdraft legislation on public procurements and enactment of the Tobacco MarketLaw (executed at the beginning of January 2002), but also so that the IMFcould exert pressure on the government to keep fiscal policy tight in the 2002budget. At the same time, however, the whole relationship between Turkey andthe IMF was having to be reviewed in view of the difficulties in restoringfinancial market confidence, the failure to achieve macroeconomic targets, andthe negative impact of the September 11th attacks on the financial marketsand economic prospects.

Keeping fiscal policy tight to stabilise the level of government debt remains oneof the cornerstones of the IMF-backed programme. The government is expectedto have achieved its target of a primary fiscal surplus of 5.5% of GNP in 2001. Inthe first 11 months of 2001 the primary budget surplus was TL13,965trn(US$10.5bn), well above the government’s target for the full year of TL11,568trn.But year-on-year growth in tax revenue lagged that in non-interest expenditure, asthe recession narrowed the size of the tax base and the government encountereddifficulties keeping the stock of private-sector tax arrears below 2% of GNP. Byway of compensation, however, non-tax revenue was boosted by income fromstate property, notably the fee paid for a mobile phone licence by the Is Bank-Telecom Italia Mobile (Is-Tim) consortium. Non-interest expenditure growth wasalso contained, despite a surge in budget support for the social securityinstitutions, which have had problems collecting contributions in the recession.

In the off-budget part of the broader public sector, state enterprises are thoughtto have performed satisfactorily in 2001, thanks to of regular price increases andreduced investment spending. However, a chain of bad debt still prevails in theenergy sector. The national electricity distribution company, Tedas, is understoodto have claims on customers amounting to over TL1,200trn (US$800m). As aresult, Tedas is similarly in debt to generators, particularly the state generatorTeas, and generators in turn are having difficulty in paying the state pipeline andgas monopoly, Botas, for fuel. As of mid-December, one million homes werereported to have had their electricity supply cut off for non-payment of bills.

The unemployment insurance fund, one of five remaining extra-budgetaryfunds, is estimated to have made a positive contribution of about TL1,000trn tothe fiscal balance in 2001. Since its establishment in June 2000, the fund hasbeen collecting mandatory contributions without paying out any benefits.However, the surplus will be much smaller in 2002: benefits will start to be paidas of February, and in a temporary one-year measure intended to stimulateemployment, the contribution rates paid by employers, employees and thegovernment are to be reduced by one percentage point each to 2%, 1% and 1%of gross salary respectively.

In contrast to the improvement in the primary fiscal position, the fiscal deficitwhen interest expenditure is included will, unsurprisingly, have soared in 2001.Interest payments from the budget in the first 11 months of the year were 98%higher than in the same period of 2000, due mainly to the high rates ofinterest—both nominal and real—at which debt was raised during and after thefinancial crises of December 2000 and February 2001.

Key fiscal target for 2001may have been achieved

24 Turkey


The consolidated central government budget(TL trn) 2000 2001 Jan-Nov

Realisation % of GNP Target % of GNP 2000 2001 % change

Total revenue 33,440 26.6 49,300 27.0 31,432 47,118 49.9 Tax revenue 26,504 21.0 37,710 20.7 24,649 36,023 46.1 Direct taxes 10,850 8.6 13,138 7.2 10,245 15,014 46.5 Indirect taxes 15,654 12.4 24,572 13.5 14,403 21,009 45.9 Other revenue 6,936 5.5 11,590 6.4 6,783 11,095 63.6 of which: income from state property 1,549 1.2 4,054 2.2 1,436 4,235 194.9 funds 2,206 1.8 3,084 1.7 2,033 2,627 29.2

Total expenditure 46,705 37.1 79,000 43.3 42,428 72,670 71.3 Interest payments 20,440 16.2 41,268 22.6 19,951 39,518 98.1 On domestic borrowing 18,792 14.9 37,598 20.6 18,538 36,439 96.6 On foreign borrowing 1,648 1.3 3,670 2.0 1,413 3,079 117.9 Non-interest expenditure 26,265 20.9 37,732 20.7 22,478 33,152 47.5 of which: personnel 9,979 7.9 14,630 8.0 9,013 13,455 49.3 other current expenditure 3,635 2.9 5,300 2.9 2,533 3,504 38.3 investment 2,472 2.0 3,750 2.1 1,868 3,052 63.4 tax rebates 1,632 1.3 2,050 1.1 1,470 2,374 61.5 social security 3,226 2.6 5,112 2.8 3,201 5,904 84.4 funds 1,995 1.6 911 0.5 1,751 945 –46.0

Primary budget balance 7,175 5.7 11,568 6.3 8,954 13,965 56.0

Budget balance –13,265 –10.5 –29,700 –16.3 –10,996 –25,553 132.4

Memorandum itemGNP 125,971 100.0 182,439 100.0 – – –

Source: Ministry of Finance, General Directorate of Public Accounts.

In its letter of intent (LOI) to the IMF dated November 20th, on the basis of whichit requested the release of a US$3bn credit tranche (see above), the governmentrevised its macroeconomic estimates for 2001 and its targets for 2002. Real GNPwas estimated to contract by 8.5% in 2001 and year-end consumer priceinflation (CPI) was set at 65%. The previous (July) projections contained a 5.5%contraction of GNP and 58% year-end CPI. For 2002 the LOI projected GNPgrowth of 4% (down from a forecast of 5% in July). But on the basis of publicstatements by the economy minister, Kemal Dervis, this figure was subsequentlyreduced further, to 2%. The LOI forecast 2002 year-end CPI at 35% (revised upfrom about 20% in July). These revisions to the 2001 and 2002 growth andinflation projections had already been announced in the wake of thepresentation of the budget to parliament in mid-October. The LOI forecast acurrent-account surplus of US$2.25bn in 2001 and a deficit of US$2bn in 2002.

Despite the recession and calls from backbenchers and other pressure groups toloosen fiscal policy, the government left unchanged the key target of 6.5% ofGNP for the primary fiscal surplus in 2002. According to the LOI, budgetrevenue is projected at 25% of GNP and non-interest budget expenditure at19.4%, just slightly down on the ratios contained in the draft budget presentedto parliament in October. The consolidated central government budget isforecast to produce a primary surplus of 5.6%. In addition, a surplus of 0.9% ofGNP is to be generated from parts of the public sector which are not includedin the central government consolidated budget, mainly state enterprises.

Macroeconomic targetsare revised

Tight fiscal targets aremaintained

Turkey 25


Structural policy conditionality (updated to end-2001)

Reforms Type of action Deadline Status

Banking sectorReduce the SDIFa banks’ overnight position by Condition for completion Doneat least two-thirds from the level on March 16th 2001 of 6th and 7th reviewsb

Eliminate the overnight position of the SDIF and the Condition for completion Donestate banksc of 8th review

Reduce the stock of repos of the SDIF and state banks Condition for completion By end-May Donewith the Central Bank of Turkey below TL7,000trn of 8th review 2001

Establish for Ziraat and Halk banks a common and Condition for completion Donepolitically independent board to report to the of 6th and 7th reviewsTreasury and appoint new management

Complete financial restructuring of state banks Condition for completion Doneof 6th and 7th reviews

Close Emlak Bank and transfer its liabilities and some Condition for completion By end-May Doneof its assets to Ziraat Bank of 8th review 2001

The SDIF to recapitalise Sumerbank to cover its Condition for completion Donenegative net worth of 6th and 7th reviews

Recapitalise the remaining seven SDIF banks to cover Condition for completion Donetheir negative net worth of 6th and 7th reviews

Organise a second transition bank or put into liquidation Condition for completion Donethe four banks for which there were no bidders of 8th review

Sell, liquidate or otherwise resolve the remaining Condition for completion By end-2001 Done (exceptSDIF banks of 12th review for Toprak)

a) Presentation by all capital-deficient banks of detailed Prior to 6th and 7th plans to strengthen capital reviews By end-April Doneb) Finalisation of banks’ commitment letters on Condition for completion 2001recapitalisation plans agreeable to IMF staff of 8th review

Parliamentary approval of amendments to Condition for completion DoneBanking Law of 6th and 7th reviews

Adopt connected bank lending regulations Within 1 month Doneof approval ofBanking Law

Bring banks’ accounting standards into line with From the start Under preparationinternational standards of 2002

Fiscal transparency and managementClose remaining 15 budgetary funds (BFs) (except DFIFd) and By end-June Donetwo extra-budgetary funds (EBFs) 2001

Reduce by at least half the number of revolving fundse By end-2001

Submit to parliament a law on public finance and debt management By end-June 2001 Done

Accompany the 2002 budget with accounts and financial outlookfor EBFs, social security institutions (SSIs), revolving funds, contingent Doneliabilities, state economic enterprises (SEEs) and local authorities

Submit to parliament a Public Procurement Law in line with By October 15th DoneEU standards 2001

Fiscal policy and debt managementApproval of tax measures Prior to 6th and Done

7th reviews

Approval of supplementary budget in line with programme Condition for completion Doneexpenditure figures and offsetting higher than expected of 8th reviewexpenditure arising from civil servants’ and public-sector workers’wage agreements and an increase in the wheat support price

continued

26 Turkey


Reforms Type of action Deadline Status

Enact tax regulation to extend the use of tax identification Condition for completion By end-May Donenumbers of 8th review 2001

Reduce the stock of private-sector tax arrears from end-2000 By end-2001level of 2% of GNP (including interest and penalties)

Increasing the role of private domestic and foreign capital in the Turkish economyParliamentary approval of legislation to facilitate the Prior to 6th and Doneprivatisation of Turk Telekom (TT) 7th reviews

Appointment of new professional board and management Condition for completion Donefor Turk Telekom of 8th review

Contract advisors to develop a corporatisation plan for TT Condition for completion Doneof 8th review

Complete privatisation plan for TT By end-2001

Parliamentary approval of Tobacco Market Law Condition for completion By end-May Donef

of 8th review 2001

Parliamentary approval of a law to fully implement the Before mid-2001 Doneconstitutional amendment on international arbitration parliamentary recess

a Savings Deposit Insurance Fund, under whose management failed private-sector banks have been placed. b Reviews of the progress of thestabilisation programme are carried out before the disbursement of IMF funds. The 6th and 7th reviews took place just prior to the IMF’sapproval of additional funds on May 15th. c Ziraat Bank, Halk Bank and Emlak Bank. d Support Price Stabilisation Funds (DFIF). e Special accountsor institutions recording expenditure against revenue from the sale of public services. f Approved by parliament for a second time withoutamendment in January 2002, thereby bypassing the presidential veto.Source: Letter of intent, Treasury.

The 2002 budget, which was approved by parliament on December 14th,foresees a sharp real decline in interest expenditure to 15.3% of GNP in 2002from a projected 22.6% in 2001. This optimistic target is based on assumptionsof lower nominal and real interest rates, lengthening debt maturities andsubstantial use of foreign borrowing, including IMF funding for budget purposes.Further debt swaps are also possible. The rise in the Turkish lira value of foreigncurrency-denominated domestic debt arising from the depreciation of the lira isnot included in the budget, but is added directly to the debt stock.

On November 16th the government announced a package of austerity measuresintended to achieve its ambitious fiscal targets. The package, which was also setout in November’s LOI, foresees:

• a real increase in petroleum consumption tax; the imposition of fuelconsumption tax on natural gas; an increase in motor vehicle tax in excess ofthe inflation rate; and unspecified increases in property taxes in major cities,which will reduce the need for central government financing of localgovernment;

• a series of measures to cut personnel spending at budgetary institutions andstate enterprises, including pensioning-off public-sector workers over the age of50 who qualify for retirement; tougher limits on new recruitment; tougher limitson overtime; the elimination of some bonuses; and higher real rents for public-sector lodgings;

• the streamlining of government organisations such as the village affairsdepartment, which is responsible for village infrastructure, notably byeliminating the regional tier of management;

Turkey 27


• cuts in health spending, particularly on prescribed drugs, and an increase inhealth contributions paid by subscribers to Bag-Kur, the social security fund forthe self-employed;

• a further reduction of budget support to agriculture; and

• a rise in state enterprise prices in real terms; the elimination of discounts andexemptions so that all users of products and services provided by stateenterprises pay the full price; a clampdown on non-payment for electricity; areduction in rail and air services; and a general tightening of administrativeexpenditure at state enterprises.

Some of the austerity measures announced in November have already come intoeffect. There were significant rises in the prices of cigarettes, spirits, sugar andtelephone services in November. Turkish Airlines announced savings measuresshortly after September 11th, and the state railway company (TCDD) is alsocutting unprofitable services. On December 3rd the prime minister, Bulent Ecevit,issued a circular detailing measures to be taken by government institutions andstate enterprises regarding employment, personnel costs and expenditures suchas advertising. The circular foresees the obligatory retirement of employees agedover 50 that are considered “suitable” by the heads of their organisations. It alsodefers one of the bonuses to be paid to public-sector workers in 2002 until 2003.These measures are opposed by trades unions. It was not clear at the time ofwriting how many people would be retired, whether voluntary retirement (evenfor those under the age of 50) would be preferred to forced retirement, or howmuch the operation would cost in redundancy payments. An enabling act wasbeing drafted to facilitate the streamlining of government organisations. At thebeginning of December the government appeared to decide to retain premiumpayments to producers of cotton, sunflower and olives, in contradiction of itsearlier pledge to the IMF. Legislation to increase Bag-Kur contributions, whichwas pledged for the end of November, is still awaited.

With a new stand-by agreement still under negotiation, the Turkish parliamentaccelerated the approval of reform legislation called for by the IMF. Extensiveamendments to the law on state tenders (public procurement) and the TobaccoMarket Law were approved in early January. A law on public debt managementis also before parliament. This and the Tobacco Market Law were beingregarded as the minimum legislative preconditions for the new IMF stand-byagreement. Having minimised the number of budgetary and extra-budgetaryfunds, the government expected to achieve its target of cutting the number ofrevolving funds by half by the end of 2001.

The LOI pledges that a law on foreign direct investment (FDI) will be submittedto parliament by January 15th 2002. This follows consultations with the WorldBank. Reportedly, the establishment of a “one-stop” foreign investment agencyis under consideration. Several other measures to reduce red tape are promised,and other legislation affecting the business environment is under review.

In addition, a law on “public finance management and internal control” ispledged for mid-2002. More generally, the government is continuing to workwith the World Bank on public expenditure management, the transparency ofpublic accounts and on combating corruption.

Structural reform effortsare stepped up

Public-sector retirementsare a thorny issue

28 Turkey


The government expects to raise a modest US$1.5bn from privatisation in 2002compared with US$2.8bn in 2001, most of which derived from payment for themobile phone licence secured by the Is-Tim consortium in 2000. Last year wasnot a particularly favourable one for the sale of state assets, owing to therecession and a severe stockmarket slump (see The domestic economy: Financialindicators). Secondary share offerings for the state-controlled refiner, Tupras, andfor the petroleum products distribution company, Poas—a majority stake inwhich was privatised in 2000—could not be held in late 2001 due to marketconditions after September 11th and were put off until 2002. In the steel sector,the merger of state-owned Isdemir and state-controlled Erdemir has yet to beconcluded, which is blocking any privatisation initiative.

The LOI sets a late-May 2002 deadline for the privatisation of a majority stakein the state-run Vakifbank. The bank appointed Merrill Lynch as its advisor onNovember 2nd and a challenge to the constitutionality of the 2001 law pavingthe way for the sale was rejected by the Constitutional Court on December 5th.The controversial Tobacco Market Law vetoed by President Ahmet Necdet Sezerin mid-2001 (July 2001, page 28) was approved by parliament for a secondtime at the beginning of 2002, paving the way for cigarette plant privatisation.Sugar refineries are also scheduled for sale in 2002.

The government is understood to be considering the introduction of legislationto facilitate privatisation, possibly by establishing an independent privatisationauthority to take over the functions of the Privatisation Administration (OIB),the cabinet subcommittee which currently has the final word on majorprivatisation decisions.

Although slated for privatisation in 2001, the planned sales of the fixed-linetelecommunications monopoly, Turk Telekom, and the national carrier, TurkishAirlines, are not expected to go ahead in 2002. But preparations for the sale ofTurk Telekom have continued. On October 31st the new board appointed ArthurAndersen to prepare a corporatisation plan.

On October 24th Mr Dervis and the energy minister, Zeki Cakan, appeared toreach agreement to abandon the “transfer of operating rights (TOR)” model forhanding over regional power distribution rights and the operation of a numberof public-sector power plants to the private sector. This will in theory pave theway for outright privatisation of the assets in question, in line with February’sElectricity Market Law and the preferences of international financial institutions.However, privatisation of the power and gas sectors still faces importantobstacles, ranging from a lack of confidence in the proposed free market and theabsence of secondary legislation to the threat of litigation by those previouslyawarded TOR deals. On November 2nd the seven members of the new energymarket regulator required under the Electricity Market Law were finally appointed,with Yusuf Gunay, a top prime ministry bureaucrat, named as chairman.

The Central Bank of Turkey kept its overnight money market rate at 59% (simpleinterest) throughout the third quarter of 2001 and most of the fourth, refusing tolower the rate apparently out of fear that this might weaken the lira further, withconsequent inflationary pressures. The expected introduction of “inflation-targeting”, under which monetary policy decisions are to be taken with a view to

Privatisation is to berevived in 2002

Telecoms and energysell-offs require more time

Planned new monetarypolicy is still on hold

Turkey 29


achieving a pre-announced quarterly inflation target, has been postponed untilan unspecified date in 2002. The decision was attributed in the November LOI tothe inflationary pressures generated by the bout of severe weakness of the lirathat followed the September 11th terrorist attacks in the US.

Until inflation-targeting is introduced, base money is expected to be the primemonetary indicator in 2002. The LOI states that base money will be allowed togrow in accordance with real output growth and target inflation, adjusted forany change in bank account holders’ preferences for local or foreign currency.IMF-agreed targets for Central Bank net domestic assets, net international reservesand base money were comfortably achieved up to the end of October 2001.

The amendments to the Central Bank Law approved by parliament in April 2001are now in full effect. As of November 5th 2001 the Central Bank is prohibitedfrom purchasing public debt instruments in the primary market. This closes thefinal door to Central Bank lending to the public sector.

Reforming Turkey’s troubled banking sector is another cornerstone of the IMF-backed stabilisation programme. Although substantial regulatory reforms havebeen introduced and the failed private banks and troubled state banks havebegun restructuring and consolidation, resolving the sector’s difficulties is farfrom over and the steps taken to do this remain highly controversial. In earlyJanuary 2002 the government introduced amendments at the committee stageof the debate in parliament of the bankruptcy bill (see below), which would havea major effect on the banking sector. The amendments, which are believed torespond to the IMF’s demands for measures to be taken as a precondition to anew stand-by agreement, triggered intense debate regarding the government’sintentions and cast further doubt on the health of the sector. The proposalswould cost an estimated US$5bn (in addition to the US$40bn already spent tobail out 19 failed private banks and the debt-laden state banks) and would allowmanagers and owners of failed banks to continue to run their banks. Theproposals include:

• enabling the Savings Deposit Insurance Fund (SDIF), which now controls thefailed private banks, to inject capital into troubled private banks (for a seven-yearperiod, in return for convertible bonds and on certain conditions) as analternative to seizing such banks from their owners, which has been the normalpractice to date;

• limiting such capital injections by the SDIF to banks with a market share ofat least 1% (which, according to the government, would encourage furtherconsolidation); and

• enabling the banking authorities to negotiate with the former owners of thebanks now under the SDIF concerning their debts to the banks in question, andin this context to withdraw ongoing court action against the former owners.

On November 31st the Banking Regulation and Supervision Authority (BRSA),the banking sector watchdog, ordered Toprakbank to be taken over by theSavings Deposit Insurance Fund (SDIF). The bank, which had been Turkey’s18th largest by assets as of end-2000, became the 19th troubled bank to be

Banking sector reformcontinues, amid controversy

30 Turkey


handled by the SDIF since 1997. Loans to companies controlled by the bank’sowner were cited among the reasons for the takeover order.

However, the SDIF appears to have made progress towards disposing of the other18 troubled banks, in accordance with a pledge to the IMF. Some of the bankshave been merged and some have been sold off together with parts of theirbalance sheets. Unicredito Italiano lost interest in Iktisat Bank and Kocbank’s bidfor Etibank was rejected, but Etibank has a new suitor in Oyakbank. Greek-Portuguese Novabank is still expected to buy Sitebank, while Turk Ekonomi Bankand Alternatifbank have expressed interest in Kentbank and Bayindirbankrespectively. Some bank subsidiaries have been sold off separately, while a fewbanks are being liquidated. The SDIF has held auctions to pass on portfolios ofdeposits (matched by assets in the form of Treasury bonds) to active banks. Anydeposits not “sold” in this way are to be transferred to the state-run Ziraat Bank.Following all these actions, the SDIF is expected to be left with a substantial partof the defunct banks’ balance sheets, particularly their unhealthy loan portfolios,which are gradually being passed on to a central “collection department”. TheSDIF may keep one of its banks open in 2002 for asset-management purposes,but not for collecting deposits.

All banks were under an obligation to meet the minimum 8% capital adequacyrequirement by the end of 2001. Amendments to the Banking Law giving theSDIF more flexibility in handling troubled banks are also reportedly on theagenda. At the same time, the two state banks, Ziraat Bank and Halk Bank, havecontinued to close branches and reduce their personnel.

Following discussions between government ministers and business leaders onNovember 29th-30th, a long-awaited package of measures addressing theproblems of non-financial companies was announced. The package includes twostrategies for helping viable companies which have run into financial difficulties.First, an asset management company is expected to be established to take overnon-performing bank loans, although no public funds will be used for thispurpose. Secondly, legal changes to the Bankruptcy Act and other laws have beenproposed to facilitate voluntary restructuring of the debt of viable corporationswith multiple bank creditors. Other items in the package include a decision inprinciple to introduce “inflation accounting” as of 2003 (protecting companycapital from erosion and preventing the taxation of profits which are onlynominal and not real), and a promise that arrangements will be made to allaythe concerns of the private sector over the introduction in 2003 of new wealthdisclosure and tax assessment rules.

Expectations of additional IMF credit alleviated the market’s fears of governmentdebt rollover difficulties in the final quarter of 2001 and so brought down yieldson lira-denominated Treasury bonds and bills. The yield at auction on three-month bills sold on October 9th was 92.5%, but at an identical auction twoweeks later the yield was only 78.6%. Yields subsequently rose back over 80%,but the downward trend resumed in early November, and on December 14th theTreasury was able to float three-month bills at a yield of 71%—the lowest yield atany auction for lira-denominated debt since February’s devaluation.

Two strategies to tacklecorporate debt problems

Domestic borrowing costsfall in final quarter of 2001

Turkey 31


The Treasury continued to be creative in its domestic borrowing during thisperiod. It raised US$532m through an auction of one-year US dollar-linked six-month bills on October 16th. The following day it sold TL645trn (US$460m)through a sale of six-month bills direct to the public. On December 10th-14th itsold €820m (US$730m) worth of euro-denominated six-month bills with putoptions to the public. Tax legislation facilitating direct offers of governmentsecurities to the public was approved by parliament on October 11th. TheTreasury plans to continue to issue foreign-exchange-indexed and floating-ratedebt in 2002 so as to extend the average maturity of its borrowing.

Average yields on Treasury bills and government bonds at auction(%)

2001Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

6-month bill/bond ratea 67.5 144.2 – 148.1 75.0 79.9 104.9 89.8 91.0 93.6 82.8 73.6

3-month bill rate 57.3 70.4 193.7 110.8 89.8 83.5 – 98.0 84.9 92.5b 74.3 71.0

a Or nearest maturity, excluding 3-month. b October 9th.

Source: Under-secretariat of the Treasury.

The domestic debt stock surged in the first half of 2001 due to the issue of “non-cash” debt to bail out state and troubled private banks. Since then, the stock hasgrown less rapidly. As of the end of November, 52.9% of domestic debt was inthe form of non-cash government bonds with an average maturity of 40.1months, 34.8% was in the form of cash government bonds with an averagematurity of 26.8 months, and 12.3% was in the form of Treasury bills with anaverage maturity of 3.2 months. The average maturity of domestic debt as awhole has gradually lengthened, reaching 31 months at the end of November2001. This compares with 21.9 months at the end of January 2001, 14.3 monthsat the end of May and 23.7 months at the end of October.

Domestic debt(TL trn; end-period)

2000 2001Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Domestic debt stock 36,421 44,428 45,427 50,851 59,209 84,546 90,332 96,395 101,814 105,769 109,306 Government bonds 34,363 40,993 39,381 43,397 49,043 71,156 78,035 83,934 86,506 91,694 95,273 Treasury bills 2,038 3,435 6,046 7,454 10,167 13,390 12,296 12,461 15,310 14,075 14,033

Borrowing 32,469 9,608 5,363 9,182 10,404 41,675 20,239 20,446 17,065 10,847 24,168 Government bonds 26,686 8,003 2,360 5,090 7,074 37,535 14,338 18,328 12,597 9,656 21,684 Treasury bills 5,783 1,605 3,003 4,092 3,330 4,140 5,901 2,118 4,468 1,191 2,484

Debt service 37,577 2,769 6,544 4,618 3,317 21,659 17,814 18,990 16,003 11,074 26,667 Principal 18,968 1,601 4,364 3,758 2,046 16,339 14,453 14,388 11,646 6,892 20,631 Interest 18,609 1,169 2,180 860 1,271 5,321 3,361 4,608 4,358 4,182 6,036


The rise in the debt stock and the increase in its average maturity stem in partfrom a series of “debt swaps” with public-sector debt-holders. On October 30th-November 1st the Treasury swapped TL15,800trn worth of lira-denominatedfloating-rate bonds—issued to troubled banks but later bought by the CentralBank of Turkey—for TL18,800trn worth of similar bonds with longer maturities

Another debt swap lifts thedomestic debt stock

32 Turkey


(of 5-9 years). This operation was carried out just before a prohibition on CentralBank purchases of Treasury securities in the primary market came into effect.Meanwhile, on November 25th the Treasury redeemed ahead of schedule someof the bonds which it issued to Ziraat Bank and Halk Bank in May as part of theirbail-out, paying a total of TL901trn in principal and interest to the two banks.

The expectation of IMF support helped the government make a strong returnto international bond markets at the end of 2001. On November 7th it issued€500m worth of euro-denominated bonds with a maturity of 3.25 years andyielding 744 basis points over German government bonds of a similarmaturity. This was Turkey’s first international bond issue since just before thedevaluation in February. The November bond issue was increased by €300mon December 12th at a lower spread of 695 basis points. On November 27ththe Treasury made its first international US dollar-denominated bond issuancein 2001 with US$500m in five-year bonds yielding 737 basis points over USTreasuries. The issue was augmented by US$250m on December 12th at a loweryield of 674 basis points. Prospects for international debt issuance were enhancedin November when the ratings agency, Standard & Poor’s, revised the outlookon its B– credit rating for Turkey from negative to stable. The LOI was vagueregarding international bond issuance in 2002, stating that the governmentintends to issue Eurobonds “to the extent demand from investors allows”.

Borrowing from the IMF raised the foreign debt of the Central Bank to US$22.1bnas of end-September 2001, compared with US$13.4bn at end-2000. As a result,Turkey’s total medium- and long-term debt—both public and private—rose byover US$7bn to US$98bn in the same nine-month period. This increase, however,was offset by a decline in short-term debt, which is owed almost entirely by theprivate sector and banks. Short-term debt fell mainly as a result of net repaymentof credit by banks, which were excluded from the international syndicated loanmarket for several months after February’s devaluation. In all, the foreign debttotalled US$118.8bn as of the end of September 2001, slightly down comparedwith the end of 2000.

Outstanding external debt(US$ m; end-period)

1996 1997 1998 1999 2000 2001Year Year Year Year Year 1 Qtr 2 Qtr 3 Qtr

Short-term debt 17,345 18,048 21,217 23,472 28,912 26,637 22,767 20,839Medium- & long-term debt 62,287 66,864 76,021 79,666 90,690 89,954 91,169 98,009Total outstanding debt 79,632 84,912 97,238 103,138 119,602 116,591 113,936 118,848

By lender: Short-term debt Commercial banks 6,493 8,160 9,935 11,540 17,306 15,814 12,639 10,709 Private creditors 10,852 9,888 11,282 11,932 11,606 10,823 10,128 10,130 Medium- & long-term debt Official creditors 18,628 17,192 17,851 17,104 20,278 21,080 24,258 29,170 Bilateral lenders 9,754 9,121 9,860 9,312 8,851 8,528 8,097 8,304 Multilateral organisations 8,874 8,071 7,991 7,791 11,427 12,552 16,161 20,867 Private creditors 43,659 49,673 58,170 62,562 70,412 68,874 66,911 68,839 Private lenders 30,578 35,941 44,134 46,600 48,279 47,091 46,097 47,179 Bond issues 13,081 13,731 14,035 15,962 22,133 21,784 20,814 21,660

continued

Turkey returns to inter-national bond markets

Public foreign debt hasrisen due to IMF credits

Turkey 33


1996 1997 1998 1999 2000 2001Year Year Year Year Year 1 Qtr 2 Qtr 3 Qtr

By borrower: Short-term debt General government 0 54 0 0 1,000 1,000 0 0 Central Bank of Turkey 984 889 905 686 653 608 581 632 Deposit money banks 8,419 8,503 11,159 13,172 16,900 15,276 13,078 10,964 Other sectors 7,942 8,602 9,153 9,614 10,359 9,753 9,108 9,243 Medium- & long-term debt Public sector 40,165 39,185 40,268 41,987 48,108 47,156 45,173 47,525 General governmenta 36,272 35,102 36,134 37,323 42,750 41,789 39,971 42,361 Other governmentb 1,078 934 683 860 1,190 1,125 1,082 1,095 State-owned enterprises 2,815 3,149 3,450 3,804 4,169 4,242 4,120 4,069 Central Bank of Turkey 11,389 10,868 12,073 10,312 13,429 14,278 17,685 22,075 Private sector 10,733 16,812 23,680 27,367 29,153 28,520 28,312 28,409 Financial institutions 3,354 5,535 6,879 7,482 7,581 6,845 6,452 5,644 Non-financial institutions 7,379 11,277 16,801 19,885 21,571 21,675 21,860 22,765

a Central and local government, universities and extra-budgetary funds. b Export-import Bank and Turkish Development Bank.


The domestic economy

Output and demand

Real GDP contracted sharply in the third quarter of 2001, the third successivequarter of negative growth. However, the rate of decline slowed slightly to 7%year on year, compared with 8.9% in the second quarter, bringing the rate ofdecline in the first nine months of year to 6.4%. Rising unemployment, flaggingconfidence and the erosion of real incomes by surging inflation continued torestrain consumer demand, while businesses remained discouraged by exchange-rate and price uncertainty, high interest rates, low credit availability and aslowing world economy. GNP (the measure used for government targets, whichincludes net factor income from abroad) fell by 8.5% year on year in the thirdquarter, compared with 11.4% in the second quarter.

Private consumption, which accounts for over two-thirds of GDP, fell by 9.4% inthe third quarter of 2001, representing a small improvement on the second-quarter decline of 11.6%. Public consumption, however, slumped by 14.3% yearon year in the three months to September, after contracting by 6% in the secondquarter. The government has had to tighten current spending to meet increasinglydifficult primary budget surplus targets established under the IMF-backedstabilisation programme, although the government’s wage policy has generallysought to compensate civil servants for higher than expected inflation since thedevaluation. The year-on-year decline in investment spending in the third quarter(–35.8%) was also steeper than the corresponding figure for the second quarter(–32.8%), due to a huge 40.3% year-on-year decline in private-sector investment.Exports of goods and services increased by 7.6% in January-September, mainly asa result of the devaluation, while imports contracted by almost 25% as domesticdemand collapsed, helping to reduce in part the fall in GDP.

Real GDP contracts by 7%in third quarter of 2001

34 Turkey


Gross domestic product(% real change, year on year; 1987 prices)

1999 2000 20013 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr Jan-Sep

Private consumption –2.9 –1.3 –2.6 4.0 4.6 9.6 5.6 6.2 –3.0 –11.6 –9.4 –8.2

Public consumption 9.1 5.7 6.5 –0.7 12.6 9.8 5.8 7.1 –0.6 –6.0 –14.3 –7.8

Gross fixed investment –13.9 –14.4 –15.7 9.6 17.8 20.6 17.6 16.9 –11.5 –32.8 –35.8 –28.2 Public sector –10.8 –23.4 –8.7 10.8 21.8 21.3 19.9 19.6 –6.5 –32.1 –20.8 n/a Machinery & equipment –5.5 –41.4 –4.3 54.7 37.2 –18.2 18.6 20.3 –5.6 –65.7 –25.5 n/a Building construction –9.1 2.7 –1.6 7.9 7.7 23.0 55.4 31.6 –13.1 –2.2 –21.2 n/a Other construction –15.1 –22.1 –15.0 –18.9 14.3 46.7 –2.0 12.2 –3.6 –8.0 –18.8 n/a Private sector –14.8 –8.5 –17.8 9.4 16.5 20.4 16.4 16.0 –12.4 –31.7 –40.3 n/a Machinery & equipment –20.0 –7.7 –24.1 23.6 38.8 52.6 33.0 37.2 –18.3 –44.4 –61.9 n/a Buildings –9.2 –9.5 –8.8 –9.5 –10.5 –9.9 –8.6 –9.7 –1.8 –7.9 –6.1 n/a

Exports of goods & services –10.6 1.2 –7.0 12.1 25.9 24.6 13.7 19.2 9.7 8.7 5.0 7.6

Imports of goods & services –2.1 5.2 –3.7 34.9 25.3 23.5 19.6 25.4 –14.4 –30.7 –27.6 –24.5

GDP by expenditurea –5.7 –2.5 –4.7 5.5 6.8 7.9 8.4 7.3 –2.1 –8.9 –7.0 –6.4

GNPb –7.6 –4.9 –6.1 4.2 5.4 7.2 7.8 6.3 –4.4 –11.4 –8.5 –8.3

a Including change in stocks and excluding statistical discrepancy. b Including net factor income from abroad.

Source: State Institute of Statistics.

There is circumstantial evidence of a sporadic increase in retail sales in Novemberand December, due to a temporary two-month reduction in the rates ofsupplementary vehicle purchase tax and value-added tax (VAT) on cars and otherconsumer durables, the Ramadan and New Year holidays, and cut-price sales atmany shopping centres. This increase in sales probably served to reduce stocksrather than immediately stimulate production.

Sectoral trends

According to national accounts data from the State Institute of Statistics (SIS),agricultural output, which accounts for about 15% of annual GDP and about25% of third-quarter GDP, was disappointing in the second and third quarters of2001. This was mainly as a result of low rainfall and other adverse weatherconditions. It is thought that the low use of fertiliser and other inputs due toreduced subsidies, the high cost of credit, and lower real farm incomes may alsohave contributed, as well as deliberate attempts to curb production of crops liketea, sugar and tobacco, which have been overproduced in the past. In the thirdquarter agricultural output fell by 4.5% year on year, compared with acontraction of 3.2% in April-June. All subsectors saw a decline in output on ayear-on-year basis in the third quarter, with the exception of fisheries and fruit.Cereals output was down by 8.5%.

Agricultural output isdisappointing

Turkey 35


National accounts by sector(% real change, year on year; 1987 prices)

1999 2000 20012 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr

Agriculture –8.3 –5.8 –3.5 –5.0 1.4 1.8 1.6 12.2 3.9 6.7 –3.2 –4.5

Industry 0.8 –8.3 –2.6 –5.0 2.9 5.2 10.1 5.5 6.0 –1.3 –8.5 –9.2

Construction –11.5 –12.9 –15.2 –12.5 –2.3 3.3 8.6 5.9 4.4 –5.2 –7.7 –8.8

Tradea –4.4 –8.6 0.2 –6.3 10.1 11.7 13.4 12.0 12.0 –4.0 –11.3 –7.3

Transport & communications 0.7 –0.2 –4.2 –2.4 5.5 5.5 4.4 6.8 5.5 –3.7 –8.2 –4.5

a Consists of wholesale and retail trade, and hotel and catering services.


According to the national income figures, industrial output fell by 9.2% in thethird quarter of 2001, after a contraction of 8.5% in the second quarter. Thispattern was confirmed by the quarterly industrial production index, which wasdown by over 10% year on year in July-September. However, on a quarter-on-quarter basis the industrial output index was up by 4.4% in the third quarter(including 3.5% growth in the manufacturing). This may indicate that the declinein industrial output has bottomed out. Year-on-year figures reflect to a largeextent the fact that industrial output growth was robust in 2000, acceleratingsteadily over the course of the year, except in December. Turkey’s good exportperformance in the first nine months of 2001 (see Foreign trade and payments)and quarter-on-quarter industrial employment growth (see Employment, wagesand prices) would appear to support this mildly positive interpretation of theindustrial output data.

Production declined on a year-on-year basis in all major subsectors of manu-facturing, except refining, in the third quarter, repeating the pattern of theprevious three-month period. The year-on-year contraction in the third quarterranged from 2.3% in the export-led textile industry (excluding clothing) to49.9% for the automotive sector, which continued to fare badly because of thecomparison with 2000, when strong consumer credit expansion fuelled a boomin car sales. There were also large declines in the output of investment goods andconstruction materials. The monthly index for October painted a broadly similarpicture with some exceptions. Refinery output was down by 4.9% year on year inOctober, while the main metal sector (mainly steel) managed a 4.2% increase inoutput compared with the corresponding month of 2000.

Industrial production(1997=100; % change, year on year in brackets)

1999 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Total 88.9 101.0 98.7 101.4 91.7 105.5 108.8 107.6 90.5 93.7 97.8 (–8.5) (0.7) (–6.3) (–0.9) (3.1) (4.5) (10.2) (6.1) (–1.3) (–11.2) (–10.1)

of which: manufacturing 86.7 100.6 96.5 99.7 88.9 105.5 107.4 106.4 88.0 92.3 95.5

(–9.8) (0.5) (–6.7) (–1.2) (2.5) (4.9) (11.3) (6.7) (–1.0) (–12.5) (–11.1) mining 88.7 98.5 113.5 100.2 85.3 95.0 107.2 102.1 83.6 91.8 97.8

(–8.3) (–7.5) (–13.1) (–9.7) (–3.8) (–3.6) (–5.6) (1.9) (–2.0) (–3.4) (–8.8) utilities 112.0 106.5 113.5 119.6 124.9 112.1 123.9 123.7 121.5 110.0 121.7

(1.8) (8.1) (2.7) (7.3) (11.5) (5.3) (9.2) (3.4) (–2.7) (–1.9) (–1.8)


Industrial output falls by9.2% year on year

36 Turkey


Refinery output maintained its strong performance in the third quarter, up by11.5% year on year according to the quarterly industrial production index.Maintaining this increase in the fourth quarter promised to be difficult due to ahigher baseline effect, although the state refinery company, Tupras, was hopeful ofcontinuing to increase output with the help of new investments and rising exports.

According to national accounts data calculated on an output basis, the year-on-year slump in construction continued in the third quarter of 2001.

The year-on-year rates of decline in gross value added in the trade and transportcategories of the national accounts slowed in the third quarter of 2001 comparedwith the second quarter. This can be explained largely by a sharp increase in thenumber of foreign tourists, which rose by over 17% in January-Septembercompared with the same period in 2000. A 7.3% year-on-year contraction in thetrade category in the third quarter included a 12.5% decline in wholesale andretail trade and a 20.3% rise in hotel and catering services.

But the pace of the year-on-year increase in the number of foreign visitorsarriving in Turkey declined slightly in the peak summer months, which had alsobeen a very successful season in 2000. In September—the month of the terroristattacks in the US—the year-on-year increase in foreign visitor arrivals was just5.3%. In the following two months the September 11th attacks continued toaffect business travel and cultural tours, and according to statistics from thetourism ministry, foreign visitor arrivals declined by 9.6% and 13.5% year onyear in October and November respectively. It is uncertain how long the negativeimpact of the terrorist attacks will continue.

Nevertheless, the record of 10.4m foreign visitors in 2000 will have been beatenby at least 1m in 2001. The increase in tourist arrivals stemmed mainly fromGermany, which accounts for about one-quarter of Turkey’s visitors, and otherwestern European countries, notably the Netherlands. However, the number ofvisitors from the UK, Turkey’s second largest tourism market after Germany, fellfrom 760,000 in the first nine months of 2000 to 721,000 in the correspondingperiod of 2001.

Tourist arrivals from abroad(% of total in brackets) Year Jan-Sep

1999 2000 % change 2000 2001 % change

OECD countries (Europe) 3,607,917 5,702,690 58.1 4,524,357 5,778,510 27.7(48.2) (54.7) (55.0) (60.0)

OECD countries (non-Europe) 564,290 733,238 24.9 556,441 572,272 2.8(7.5) (7.0) (6.8) (5.9)

Other European countries 1,174,212 1,239,936 5.6 968,339 1,025,873 5.9(15.7) (11.9) (11.8) (10.6)

CISa 1,054,595 1,380,731 30.9 1,094,904 1,165,553 6.5(14.1) (13.2) (13.3) (12.1)

Asia 904,103 1,124,328 24.4 895,329 882,180 –1.5(12.1) (10.8) (10.9) (9.2)

Total incl others 7,487,365 10,428,153 39.3 8,223,658 9,635,203 17.2

a Commonwealth of Independent States.


Tourism demand is strong

Turkey 37


Employment, wages and prices

In the third quarter of 2001 the official rate of unemployment rose to 8% of theworkforce, compared with 6.9% in the previous three-month period and 5.6% inthe corresponding quarter of 2000. Compared with a year earlier, the size of theworkforce increased by 760,000 to 23.8m, mainly owing to a rise in agricultural,unpaid, predominantly female employment. In contrast, the number of peoplein non-agricultural employment, excluding unpaid work, declined by 400,000year on year to 12.67m in the third quarter of 2001. The abundance of agriculturallabour may well be a summer-season response to inadequate employmentopportunities for urban “breadwinners” due to the recession.

However, on a more positive note, the number of people employed in industryrose by 180,000, or 5%, on a quarter-on-quarter basis, while the total number innon-agricultural employment, excluding unpaid work, was up by 260,000, or2.1%. The rate of underemployment—which refers to people working part-timewho wish to work longer hours, as well as those who do not consider themselvesproperly employed—fell to 5.7% in the third quarter of 2001, from 6% in thepreceding quarter and also in the year-earlier period.

Workforce and unemployment(‘000 unless otherwise indicated)

1999 2000 2001Oct 1 Qtra 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr

Workforce (‘000) 22,925 20,726 22,727 23,022 21,547 22,029 21,031 22,694 23,782

Participation rateb 52.1 46.7 50.9 51.3 47.8 49.2 46.4 49.8 51.9

Total employmentc (‘000) 21,236 19,006 21,312 21,727 20,182 20,578 19,222 21,127 21,785 Agriculture 8,595 6,256 7,627 8,163 6,628 7,187 6,268 8,222 8,676 Industry 3,664 3,617 3,814 3,851 3,811 3,733 3,628 3,584 3,764 Construction 1,346 991 1,503 1,437 1,402 1,329 1,029 1,183 1,138 Services 7,630 8,143 8,367 8,277 8,341 8,330 8,298 8,138 8,298

Unemployment rated 7.4 8.3 6.2 5.6 6.3 6.6 8.6 6.9 8.0

Underemployment rated 10.2 9.1 7.4 5.6 6.0 7.0 6.0 6.0 5.7

a Break in series. b Percentage of the population aged 15 or over in the work force. c Including underemployed. d Percentage of workforce.


Workers’ wages in the formal sector of the economy have fallen in real terms in2001, partly owing to the fact that pay deals were less generous than those ofprevious years, but mainly because of the impact of the surge in inflation in themonths following the devaluation of the lira in February 2001. Nominal hourlywages of production workers in manufacturing rose by only 34% year on year inthe third quarter. Deflated by the consumer price index, this represents a 15.5%fall in real terms following a 14.4% decline in the second quarter.

On a per employee basis, the year-on-year decline in the real income ofproduction workers in the manufacturing industry in the third quarter was13.8%. This measure points to a more significant discrepancy between public-sector and private-sector workers, with public-sector real incomes down by 7.9%year on year and those for the private sector down by 15.8%.

The official unemploymentrate rises to 8%

Real wages remain low inthe third quarter

38 Turkey


Real hourly wages of production workers in manufacturing(% change, year on year)

1999 2000 20011 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Public sector 3.5 15.1 32.9 22.5 24.2 12.0 10.2 17.2 5.5 –12.5 –14.2

Private sector 14.3 6.3 8.9 4.9 –5.2 –3.0 –3.8 2.1 –5.5 –15.3 –16.1

Total 12.2 8.7 14.6 8.9 –0.4 –0.7 –1.9 4.7 –3.4 –14.4 –15.5


Salaries of over 2m public servants, such as civil servants, teachers, police andhealth staff, are not permitted to fall behind inflation. Pay rises are granted inJanuary and July, but whenever cumulative consumer price inflation overtakesthese pay rises, increments are made so as to keep salaries two percentagepoints ahead. This system, which fails to dampen inflation expectations, hasbeen retained for 2002, with initial pay rises of 10% in January and 5% in July,the same as in 2001.

Monthly inflation figures surged in August-October owing to the weak lira andseasonal influences on prices of food and education-related goods and services.In the month of October wholesale price inflation rose by 6.7% and consumerprice inflation by 6.1%. In November the rates of increase eased slightly to 4.2%for both price series. Despite this, the upward trend in year-on-year inflationpersisted, reaching 84.5% for wholesale prices and 67.3% for consumer prices.Since the February 2001 devaluation, consumer prices have risen less rapidlythan wholesale prices due to depressed housing rents and below-averageincreases in the prices of health, education, entertainment, hotel and restaurantservices, all of which do not effect the wholesale price index.

In the coming months reduced purchasing power, the partial recovery of the liraagainst the US dollar and lower international oil prices should help to restrainmonth-on-month price rises. However, increases in public-sector prices andindirect taxes (see Economic policy) will act in the opposite direction. Thesefactors were already evident in the monthly data for November. Wholesale pricesof refinery products—one of the categories in which prices have risen most (111%)over the past 12 months—went up by only 1.9%, as international oil prices

Inflation continues to rise

Turkey 39


weakened and the stronger lira reduced the import bill. However, wholesaleprices of state-produced cigarettes leapt by 15% in the same month. All in all, adecline in the year-on-year figures is unlikely to begin at least until March, whenthe initial impact of the devaluation will drop out of the index.

Trends in inflation(% change, year on year; % change on previous month in brackets)

2000 2001Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Consumer prices 39.0 35.9 33.4 37.5 48.3 52.4 56.1 56.3 57.5 61.8 66.5 67.3(2.5) (2.5) (1.8) (6.1) (10.3) (5.1) (3.1) (2.4) (2.9) (5.9) (6.1) (4.2)

Wholesale prices 32.7 28.3 26.5 35.1 50.9 57.7 61.8 65.4 69.6 74.7 81.4 84.5(1.9) (2.3) (2.6) (10.1) (14.4) (6.3) (2.9) (3.3) (3.5) (5.4) (6.7) (4.2)


Financial indicators

The Istanbul Stock Exchange general index closed at the end of 2001 at 13,782points, a peak for the year and up from a low of 7,306 on September 21st in thewake of the terrorist attacks in the US. The end-of-year rally was primarily due toexpectations of fresh credit from the IMF and a resultant improvement inbusiness conditions. The rally was also supported by a recovery in the value ofthe lira, so that by December 31st the US dollar-based index had risen to 557.5points—more than 90% higher than at the end of September, but still over 30%lower than at the end of 2000. The recovery in share prices was accompanied bymuch higher trading volumes. The annual average volume of transactions inNovember was US$386m, the highest since May.

In September-November credit growth remained sluggish owing to a lack ofdemand from borrowers and caution on the part of lenders. There were below-inflation increases in Turkish lira-denominated loans, while foreign-currencyloans fell in foreign-currency terms. Consumer credit was particularly weak,continuing to decline in nominal as well as real terms.

In November the major private banks reduced consumer loan rates by 0.5-1.25percentage points to 5.5-6% per month, while there was a substantial fall inbad loans of 17.7% compared with the previous month. This was only partlydue to the rise in the value of the lira, which reduced the lira value of bad loansdenominated in foreign currency. Bad loans also fell from over 20% to 17.5%as a percentage of total bank credit. But it remains to be seen whether this canbe regarded as an improvement in the financial health of the banking system.An asset management company is to be established and changes are to bemade in the bankruptcy code and related legislation in an effort to resolvecorporate debt difficulties, but neither have yet taken effect.

In the final months of 2001 savers continued to shun the lira. The growth inTurkish lira deposits was below the rate of inflation, while foreign-currencydeposits rose in foreign-currency terms. Consequently, foreign-currency depositsstill accounted for almost 60% of total deposits as of the end of November,

The Istanbul StockExchange has rallied

Savers continue to shunthe lira

40 Turkey


notwithstanding the devaluation of the deposits resulting from the recovery ofthe lira. Deterred by high inflation and the prolonged weakness of the lira, bankcustomers continued to show a preference for foreign-currency accounts despitelow international interest rates. In December major banks were offering interestrates of 2.5-3.75% on one-month US dollar deposits, whereas their one-monthTurkish lira deposit rates had edged down more slowly to 56-59%.

Selected financial indicators(TL trn unless otherwise indicated; end-period; % change quarter on quarter/month on month in brackets)

2000 20012 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Oct Nov

Money supply:M1 (currency + sight deposits) 6,142 6,713 8,210 8,190 10,053 10,452 9,886 10,425

(18.0) (9.3) (22.3) (–0.2) (22.7) (4.0) (–5.4) (5.5)

Deposits and reposTL bank deposits 23,564 24,995 30,918 36,813 38,221 39,274 40,081 41,401

(9.6) (6.1) (23.7) (19.1) (3.8) (2.8) (2.1) (3.3)Foreign currency bank deposits 23,725 26,321 25,375 34,705 45,384 60,808 64,348 60,461

(10.8) (10.9) (–3.6) (36.8) (30.8) (34.0) (5.8) (–6.0)Customer repos (banks + brokers) 7,480 7,243 5,977 3,868 5,795 4,037 3,268 3,834

(2.2) (–3.2) (–17.5) (–35.3) (49.8) (–30.3) (–19.0) (17.3)

CreditsBanking system credit volume 24,370 27,794 30,374 34,351 36,734 41,378 42,083 39,892

(15.1) (14.1) (9.3) (13.1) (6.9) (12.6) (1.7) (–5.2)Domestic loans of deposit money banksa 20,529 23,815 25,689 28,032 29,452 32,314 32,875 31,295

(16.3) (16.0) (7.9) (9.1) (5.1) (9.7) (1.7) (–4.8)Consumer credits and credit cards 4,650 6,027 6,695 5,965 5,523 5,081 4,933 4,774

(n/a) (29.6) (11.1) (–10.9) (–7.4) (–8.0) (–2.9) (–3.2)

Past due loans (PDL) 2,528 2,757 3,121 4,037 6,043 8,398 8,473 6,976(12.3) (9.1) (13.2) (29.3) (49.7) (39.0) (0.9) (–17.7)

PDL as % of banking system credit volume 10.4 9.9 10.3 11.8 16.5 20.3 20.1 17.5

a Excluding loans to financial sector.

Source: Central Bank of Turkey.

The lira began to appreciate in nominal terms against the US dollar and theeuro in mid-October, reflecting mounting expectations of extra IMF assistanceand fading fears of debt rollover difficulties. From a low of TL1,636,942:US$1on October 19th, the lira gradually appreciated to TL1,427,863:US$1 onDecember 14th—similar to the level of TL1,421,809:US$1 recorded the daybefore the September 11th attacks. This was the most sustained rally staged bythe lira since it was allowed to float in February 2001. Immediately before thedevaluation, the lira stood at TL685,391:US$1.

In real terms the recovery of the lira has been even more striking, consideringthe high inflation figures of the autumn months. Nevertheless, the real valueof the lira in November remained more than 25% below its January level,according to the Central Bank of Turkey’s real exchange rate index. It alsoremained more than 15% below its level of December 1999, the month beforethe ill-fated “crawling-peg” currency system was introduced.

The lira shows signs ofrecovery

Turkey 41


Exchange rates(TL ’000 per currency unit unless otherwise indicated; end-period; Central Bank buying rates)

1999 2000 20014 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Oct Nov

US$ 540.1 671.8 1,020.1 1,252.8 1,518.7 1,587.4 1,474.0

€a 542.1 618.6 901.2 1,022.2 1,063.4 1,433.7 1,313.6

Real exchange rateb 127.3 147.6 113.5 111.8 98.5c 96.5c 106.9c

a Ecu before 1999. b Trade-weighted; 1995=100. c Provisional.


Foreign trade and payments

A pattern of rapidly declining imports, rising exports and a narrowing tradedeficit that set in following February’s devaluation persisted throughout the thirdquarter of 2001. According to provisional figures from the State Institute ofStatistics, in the first nine months of 2001 the US dollar value of imported goodscalculated on a customs basis fell by 23.3% year on year, while exports (excludinginformal “suitcase” trade with the former Soviet Union) rose by 11.8%. As aresult, the trade deficit narrowed to just US$7.5bn, compared with US$19.1bn inthe same period of 2000.

The slump in imports—a result of weak domestic demand due to the recessionand the weakness of the lira—continued unabated in August and September.These months saw particularly sharp year-on-year falls (of around 50%) inimports of investment and consumer goods. Imports of intermediate goods forTurkish industry fell by 18-19% in the same period, consonant with the sharpdecline in industrial production and greater use of local inputs.

The EU accounted for only 44.7% of Turkey’s reduced imports in the first ninemonths of 2001, compared with 49.1% in the year-earlier period. This wasmainly because the value of Turkey’s crude oil and gas purchases continued torise while imports of most other items contracted sharply.

Foreign trade(US$ m unless otherwise indicated; customs basis; excl “suitcase” trade)

Year Year Jan-Sep 1999 % change 2000 % change 2000 2001 % change

Exports fob 26,587 –1.4 27,775 4.5 20,542 22,975 11.8 of which: capital goods 1,796 35.6 2,091 16.4 1,577 1,933 22.6 intermediate goods 10,841 –2.8 11,441 5.5 8,605 9,858 14.6 consumption goods 13,892 –4.1 14,193 2.2 10,314 11,150 8.1

Imports cif 40,671 –11.4 54,503 34.0 39,679 30,452 –23.3 of which: capital goods 8,729 –17.8 11,270 29.1 8,154 5,295 –35.1 intermediate goods 26,553 –10.1 35,815 34.9 26,195 21,807 –16.8 consumption goods 5,062 –5.6 7,187 42.0 5,175 3,076 –40.6

Trade balance –14,084 –25.6 –26,728 89.6 –19,137 –7,477 –60.9


Falling imports help toreduce the trade gap

42 Turkey


The devaluation of the lira and producers’ efforts to find alternative marketsabroad to offset the contraction of domestic demand continued to boost exports,which increased by 26.1% year on year in August and by 6.7% year on year inSeptember (the difference between the two months is partly due to a baselineeffect, and the figures may be subject to revision). During this period, exports ofrefinery products; plastics; cotton; cotton yarn and cotton textiles; steel;mechanical and electrical equipment and appliances; and above all the automotiveindustry continued to show substantial year-on-year increases. Exports of someagricultural products (like fruit and vegetables) also continued to perform well,whereas exports of clothing and finished textiles products—Turkey’s single mostimportant export industry—stagnated. Figures from the Assembly of Exporters’Unions (TIM) suggest that exports continued to record strong growth in Octoberand November, rising by 20.8% and 17.6% respectively year on year.

In the first nine months of 2001, 52.2% of Turkey’s exports went to the EU—almost unchanged since the same period of 2000. Exports to Middle Eastcountries accounted for 11% of total exports. The figures exclude substantialinformal trade with Iraq and, to a lesser extent, Syria and Iran.

After recording a modest deficit of US$537m in the first quarter of 2001, thecurrent account produced surpluses of US$1.2bn and US$1.9bn respectively inthe second and third quarters. This was in stark contrast to the record deficits in2000, which totalled US$6.9bn in January-September. The narrowing merchandisetrade deficit was the main reason for the improvement in the current-accountbalance, with higher earnings from the informal “suitcase” trade with Russia andother former communist countries, which is not included in the formal customs-based trade figures discussed above, also playing a part. But this contributionpetered out in the third quarter, when earnings from “suitcase” trade declinedslightly compared with a year earlier.

Besides a marked improvement in the merchandise trade balance, there was alsoa substantial increase in tourism revenue, particularly in the second quarter of2001, compared with a year earlier. But current transfers, consisting mainly ofremittances from Turks employed abroad, fell sharply in the second and thirdquarters. Remittances may have been discouraged by the weakness and volatilityof the lira. The condition of the lira may also help to explain a huge drop inincome from “other official and private goods and services”, the nature of whichis not fully explained. Net revenue from this item fell to just US$281m in thesecond quarter of 2001 and to US$385m in the third quarter, compared with atotal of US$2.78bn in the same period of 2000.

Exports continue to rise

The current-accountbalance remains in surplus

Turkey 43


Current account(US$ m; % change year on year in brackets)

1999 2000 2001Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr

Exports fob 29,325 7,580 7,976 7,775 8,333 31,664 8,174 8,837 8,747(–6.1) (7.5) (15.9) (8.3) (1.4) (8.0) (7.8) (10.8) (12.5)

of which: “suitcase” trade 2,255 637 650 784 873 2,944 767 714 772(–38.9) (43.5) (48.1) (26.7) (15.9) (30.6) (20.4) (9.8) (–1.5)

Imports fob –39,768 –11,363 –13,957 –14,186 –14,535 –54,041 –10,254 –9,424 –10,190(–12.5) (44.1) (37.6) (35.7) (27.0) (35.9) (–9.8) (–32.5) (–28.2)

Merchandise trade balance –10,443 –3,783 –5,981 –6,411 –6,202 –22,377 –2,080 –587 –1,443(–26.6) (355.2) (83.3) (105.4) (91.9) (114.3) (–45.0) (–90.2) (–77.5)

Services, income & other goods: credit 18,748 4,020 5,432 7,245 5,623 22,320 4,019 4,770 5,565

(–27.3) (–7.0) (12.2) (36.9) (31.1) (19.1) (0.0) (–12.2) (–23.2) of which: travel 5,203 735 1,833 3,317 1,751 7,636 738 2,341 3,569

(–27.5) (21.3) (54.7) (52.4) (41.9) (46.8) (0.4) (27.7) (7.6) interest income 2,350 722 498 739 877 2,836 849 695 570

(–5.3) (24.3) (–19.3) (32.4) (47.6) (20.7) (17.6) (39.6) (–22.9)

Services, income & other goods: debits –14,840 –3,709 –4,068 –3,443 –3,767 –14,987 –3,594 –3,873 –3,130

(–3.2) (6.5) (–4.4) (–1.1) (4.1) (1.0) (–3.1) (–4.8) (–9.1) of which: interest income –5,450 –1,366 –1,539 –1,456 –1,938 –6,299 –1,817 –1,871 –1,513

(13.0) (13.1) (1.7) (15.0) (32.6) (15.6) (33.0) (21.6) (3.9)

Current transfers balance 5,175 1,201 1,353 1,250 1,421 5,225 1,118 849 899(–9.6) (–5.1) (4.2) (–13.2) (21.3) (1.0) (–6.9) (–37.3) (–28.1)

of which: workers’ remittances 4,529 1,073 1,159 1,123 1,205 4,560 914 612 610

Invisibles balance 9,083 1,512 2,717 5,052 3,277 12,558 1,543 1,746 3,334(–43.9) (–28.2) (44.1) (55.5) (77.8) (38.3) (2.1) (–35.7) (–34.0)

Current-account balance (incl “suitcase” trade) –1,360 –2,271 –3,264 –1,359 –2,925 –9,819 –537 1,159 1,892

(–168.8) (-278.0) (136.7) (–1,061.7) (110.6) (622.0) (–76.4) (–135.5) (–239.2)


The large net outflow of capital triggered by the February 2001 financial crisisdiminished during the third quarter of 2001. Net capital flows amounted to justUS$1.1bn in the July-September period, compared with US$9.5bn in the first halfof 2001. In September there was even a small (US$381m) net inflow. There were anumber of salient influences on the capital account in the third quarter.

• Net flows of portfolio capital into and out of Turkey as a result of financialinvestments by residents and non-residents in Turkish and foreign stock andbond markets were negative to the tune of US$736m. These flows were extremelyunfavourable in July (US$–762m), but improved slightly in September (US$131m).

• Net direct investment inflows picked up slightly to US$427m, of whichUS$229m arrived in September.

• Even though banks repaid over US$400m in long-term debt, net long-termcapital inflows amounted to US$742m, thanks to net government borrowing,especially from the World Bank.

Capital outflows come to ahalt in September

44 Turkey


• The short-term capital item still showed a net outflow of US$1.6bn,compared with a net inflow of US$348m a year earlier, but it was well down onthe outflow recorded in the second quarter of 2001.

Capital account(US$ m)

2000 20011 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr

Direct investment (net) –20 190 –427 369 112 1,574 109 427Portfolio investment (net) 2,091 1,608 2,333 –5,010 1,022 –2,867 –347 –736Other long-term capital (net) 247 1,955 712 1,362 4,276 –508 –1,119 742Other short-term capital (net) 1,117 782 348 1,788 4,035 –1,337 –5,012 –1,562Capital-account balance (excl reserves) 3,435 4,535 2,966 –1,491 9,445 –3,138 –6,369 –1,129

Current-account balance –2,271 –3,264 –1,359 –2,925 –9,819 –537 1,159 1,892

Net errors & omissions –609 128 –1,164 –978 –2,623 –878 –155 –2,109

Overall balance 555 1,399 443 –5,394 –2,997 –4,553 –5,365 –1,346

Change in reserves (– indicates increase) –555 –1,399 –443 5,394 2,997 4,533 5,365 1,346

Reserve position in Fund 0 0 0 0 0 0 0 0

IMF –38 254 283 2,852 3,351 1,415 3,809 3,034

Change in official reserves (– indicates increase) –517 –1,653 –726 2,542 –354 3,138 1,556 –1,688


In the third quarter of 2001 the net outflow of US$1.1bn on the capital account(plus substantial negative net errors and omissions of US$2.1bn) was offset bythe US$1.9bn current-account surplus and by a total of US$3bn in IMF lending.As a result, official reserves increased by US$1.7bn. Central Bank of Turkey dataindicate that official foreign-exchange reserves stood at US$18.9bn at the end ofSeptember, slipped to US$17.3bn two months later, but then rose to US$19.6bnon December 7th after the disbursement of a US$3bn tranche of IMF credit.

Foreign-exchange and gold reserves(US$ m; end-period)

1999 2000 2001Dec Mar Jun Sep Dec Mar Jun Sep Oct Nov Deca

Central Bank gold 1,011 1,011 1,011 1,010 1,009 1,005 1,005 1,004 1,004 1,004 1,004

Central Bank forex 23,177 22,926 24,547 24,222 19,635 18,445 16,482 18,925 18,323 17,262 19,627

Commercial banks’ forex 14,342 14,140 13,239 15,986 16,717 12,482 13,055 12,744 11,458 n/a n/a

Total gross reserves 38,530 38,076 38,797 41,218 37,362 31,932 30,542 32,673 30,78.5 n/a n/a

a December 7th.


IMF credits help tomaintain official reserves

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