Turkey · Interior Abdulkadir Aksu Justice Cemil Cicek Tourism & culture Erkan Mumcu Transport Binali Yildirim Sureyya Serdengecti Official name Central Bank governor Main political

Country Report October 2003

Turkey

October 2003

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

Turkey at a glance: 2004-05

OVERVIEWThe Economist Intelligence Unit believes that the huge parliamentary majorityof the Justice and Development Party (AKP) and the absence of alternativesshould enable it to stay in power during the forecast period. However, achange of government or an early election should not be ruled out, given therisk in the medium term of another financial crisis, the secular establishment’sdeep distrust of the AKP because of its Islamist roots, the AKP’s inexperience ingovernment, and the existence of factions in the party. GDP growth will slowto about 4.5% in 2003, mainly because of a higher baseline. In 2004 acontraction is forecast, triggered by a sharp devaluation of the lira that willhelp to push the current account back into surplus. Economic growth willrebound in 2005. Inflation will ease to end 2003 close to the IMF-agreed targetof 20%, but further reductions will be hard to achieve. A sharp devaluation ofthe lira will cause inflation to surge in 2004, before easing again in 2005.

Key changes from last month

Political outlook• At the end of September Turkey’s highest court of appeal upheld charges of

electoral fraud against the pro-Kurdish Democratic People s Party (Dehap).This has sparked speculation that the Supreme Electoral Board might cancelthe election result, forcing a rerun. We believe that this is unlikely because ofthe authorities’ concerns that political instability could trigger financialturmoil.

Economic policy outlook• An IMF agreement to postpone repayments scheduled for 2004 and US

loans worth US$8.5bn have eased concern about the government’s ability tomeet its financing requirement in 2004. Although our assessment of the riskof a debt default is now below 50%, the sheer size of Turkey’s governmentdebt burden means the country will remain vulnerable in the medium term.A burgeoning current-account deficit and real exchange-rate appreciationmake a sharp fall in the lira likely. Our forecast assumes this occurs in 2004.

Economic forecast• We still expect GDP to contract and inflation to rise in 2004 as a result of

the lira devaluation. GDP is forecast to decline by 4% and the year-end rateof inflation to rise to about 60%.

The Economist Intelligence Unit

The Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where thelatest analysis is updated daily; through printed subscription products ranging from newsletters to annualreference works; through research reports; and by organising seminars and presentations. The firm is amember of The Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1007Fax: (44.20) 7830 1023E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 0248E-mail: [email protected]

Hong KongThe Economist Intelligence Unit60/F, Central Plaza18 Harbour RoadWanchaiHong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

Website: www.eiu.com

Electronic deliveryThis publication can be viewed by subscribing online at www.store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databasesand as direct feeds to corporate intranets. For further information, please contact your nearest EconomistIntelligence Unit office

Copyright© 2003 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However, theEconomist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-5464

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

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Turkey 1

Country Report October 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2004-057 Political outlook9 Economic policy outlook12 Economic forecast

15 The political scene

23 Economic policy

32 The domestic economy32 Output and demand33 Sectoral trends36 Employment, wages and prices39 Financial indicators

42 Foreign trade and payments

List of tables12 International assumptions summary13 Gross domestic product by expenditure15 Forecast summary24 Revised schedule for IMF reviews24 Turkey’s repayment schedules25 Consolidated central government budget29 Central government debt30 Domestic debt32 Yields on Treasury bills and government bonds at auction32 Gross domestic product33 National accounts by sector34 Industrial production, quarterly index36 Tourist arrivals37 Workforce and unemployment38 Real hourly wages of production workers in manufacturing39 Inflation: consumer and wholesale prices40 Exchange rates41 Selected financial indicators42 Foreign trade

2 Turkey


43 Current account44 Capital account45 Foreign-exchange and gold reserves46 External debt stock

List of figures15 Gross domestic product15 Consumer price inflation25 Consolidated central government finances31 Treasury-bill yields and consumer price inflation33 Real gross domestic product40 ISE general index42 Trade balance

Turkey 3


Summary October 2003

The Economist Intelligence Unit believes that the huge parliamentary majorityof the Justice and Development Party (AKP) and the absence of alternativesshould enable it to stay in power during the forecast period. However, a changeof government or an early election should not be ruled out, given the risk inthe medium term of another financial crisis in Turkey, the secularestablishment’s deep distrust of the AKP because of its Islamist roots, the AKP’sinexperience in government, and the existence of factions in the party. GDPgrowth will slow to about 4.5% in 2003, mainly because of a higher baseline. In2004 a contraction is forecast, triggered by a sharp devaluation of the lira thatwill help to push the current account back into surplus. Economic growth willrebound in 2005. Inflation will ease to end 2003 close to the IMF-agreed targetof 20%, but further reductions will be hard to achieve. A sharp devaluation ofthe lira will cause inflation to surge again in 2004, before easing in 2005.

Turkish-US ties have improved since the incident at Suleimaniyah in northern Iraqin early July. The US has requested Turkish troops to help in Iraq, but the proposalfaces obstacles. A law approved at end-July has failed to persuade militants of theKurdistan Workers’ Party (PKK) to give themselves up. Changes at the top of thearmed forces should reduce military opposition to government policies. Tension,however, has continued between the president, Ahmet Necdet Sezer, and thegovernment. At end-September the highest appeal court upheld charges ofelectoral fraud against a pro-Kurdish party, increasing political uncertainty.

Following a delay, the IMF released a credit tranche of US$476m in August.Postponement of some IMF repayments from 2004-05 to 2005-06, and US loansworth US$8.5bn have eased concerns about the government’s ability to meet itsfinancing requirements next year. However, domestic government debt hascontinued to rise, pushing up total government debt to US$185.4bn in July, fromUS$148.5bn at end-2002. The Central Bank of Turkey cut interest rates four timesin July-September, helping to lower domestic government borrowing rates.

GDP rose by 5.8% year on year in the first half of 2003, but growth slowedsharply in the second quarter. Industry, particularly the automotive sector, andservices have grown rapidly. Agriculture and construction remained depressed.Tourist arrivals rose in June-August, after falling by 19% year on year in March-May. The economic recovery has failed to boost employment so far. Annualconsumer price inflation fell to 24.9% in August with the help of the strong lira.

The trade deficit on a balance-of-payments basis was US$5.5bn in the first halfof 2003, compared with a deficit of US$3.2bn in the same period of 2002. Thiscontributed to a widening of the current-account deficit to US$4bn in January-June 2003, compared with a deficit of US$1.4bn a year earlier.

Editors: Robert O Daly (editor); Merli Baroudi (consulting editor)Editorial closing date: September 30th 2003

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

Outlook for 2004-05

The political scene

Economic policy

The domestic economy

Foreign trade and payments

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

November 3rd 2002; next election due by November 2007

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

The government coalition led by Bulent Ecevit, comprising the Democratic Left Party, theNationalist Action Party and Motherland Party, was heavily defeated in the November 3rdelection. The new government was formed by the Justice and Development Party

Islamist: Justice and Development Party (AKP) and Prosperity Party (Saadet, SP), 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), New TurkeyParty (YTP); Republican People’s Party (CHP); nationalist right: Nationalist Action Party(MHP); independent pro-Kurdish: Democratic People’s Party (Dehap, formerly Hadep).AKP and CHP were the only parties to enter parliament in the November election. Adeputy elected as an independent joined DYP, giving it one seat

Prime minister Recep Tayyip ErdoganDeputy prime minister & foreign affairs minister Abdullah GulDeputy prime minister & minister of state Abdullatif SenerDeputy prime minister & minister of state Mehmet Ali Sahin

Ministers of state Mehmet AydinAli BabacanBesir AtalayGuldal Aksit

Agriculture Sami GucluDefence Vecdi GonulEducation Huseyin CelikEmployment & social security Murat BasesgiogluEnergy & natural resources Hilmi GulerEnvironment Kursat TuzmenFinance Kemal UnakitanForestry Osman PepeHealth Recep AkdagHousing & public works Zeki ErgezenIndustry & trade Ali CoskunInterior Abdulkadir AksuJustice Cemil CicekTourism & culture Erkan MumcuTransport Binali Yildirim

Sureyya Serdengecti

Official name

Central Bank governor

Main political parties

Form of state

Legal system

National legislature

Electoral system

National elections

Head of state

National government

The Council of Ministers

Key ministers

Turkey 5


Economic structure

Annual indicators1999 a 2000 a 2001a 2002 a 2003 b

GDP at market prices TL trn 77,415 124,583 178,412 276,003 357,455GDP US$ bn 184.9 199.3 145.6 183.1 235.8

Real GDP growth (%) -4.7 7.4 -7.5 7.8 4.6Consumer price inflation (av; %) 64.9 54.9 54.4 45.0 26.0Population (m) 67.2 68.3 69.3 70.3 71.3

Exports of goods fob (US$ m) 28,842 30,721 34,379 39,827 45,209Imports of goods fob (US$ m) -39,326 -53,131 -38,916 -48,194 -64,356

Current-account balance (US$ m) -1,360 -9,819 3,396 -1,540 -7,410Foreign-exchange reserves excl gold (US$ m) 23,346 22,488 18,879 27,069 28,378Total external debt (US$ bn) 102.2 118.3 115.1 131.6 141.3

Debt-service ratio, paid (%) 35.4 35.4 40.0 38.4 b 26.5Exchange rate (av) TL:US$ 418,782.9 625,218.5 1,225,587.0 1,507,226.7 1,516,184.7

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002 % of total Components of gross domestic product 2002a % of totalAgriculture, forestry & fishing 11.9 Private consumption 66.7Industry (excl construction) 25.4 Government consumption 14

Construction 4.2 Gross fixed investment 16.7Services 58.5 Stockbuilding 4.7

Statistical discrepancy -2.7 Exports of goods & services 28.8Imports of goods & services -30.5

Principal exports 2001b US$ m Principal imports 2001b US$ mTextiles & clothing 10,344 Chemicals & products 6,770

Metals 2,921 Crude oil & gas 6,076Motor vehicles & parts 2,659 Machinery & equipment 5,140Agricultural products 2,225 Metals 3,612

Food & beverages 1,789 Motor vehicles & parts 2,213

Main destinations of exports 2002b % of total Main origins of imports 2002b % of totalGermany 16.6 Germany 13.7US 9.2 Italy 8.1

Italy 6.4 Russia 7.6UK 8.5 US 6

France 6.0 France 5.9Russia 3.3 UK 4.8EU 51.5 EU 45.5

a Including statistical discrepancy. b Excluding “suitcase” trade.

6 Turkey


Quarterly indicators2001 2002 20033 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Consolidated central government finance (TL trn)a

Revenue & grants 36,373 51,813 15,028 35,821 55,404 76,401 20,364 44,689Expenditure 54,807 80,379 27,663 53,696 79,982 115,486 31,253 69,448Balance -18,434 -28,567 -12,636 -17,875 -24,579 -39,085 -10,889 -24,759OutputGDP at constant 1987 buyers' prices (TL bn) 35,187 26,512 23,226 27,711 37,975 29,528 25,100 28,790GDP at constant 1987 buyers' prices (% change, year

on year) -7.5 -10.3 2.1 8.9 7.9 11.4 8.1 3.9Industrial production index (1995=100)b 110.5 108.7 118.6 121.4 120.7 121.5 128.4 129.5Industrial production index (% change, year on year) -9.8 -12.7 4.4 11.0 9.2 11.8 8.3 6.7Manufacturing production index (1995=100)b 107.0 106.5 117.7 120.1 120.0 120.6 129.5 129.1Mining production index (1995=100) 103 90 87 85 92 84 76 n/a

Employment, wages & pricesEmployment, manufacturing (‘000) 737.5 717.8 760.9 799.9 819.4 819.1 807.9 n/aEmployment, manufacturing (% change, year on year) -6.6 -6.8 0.6 7.8 11.1 14.1 6.2 n/aUnemployment rate (% of the labour force) 7.8 10.4 11.5 9.3 9.6 11.0 12.3 10.0Hourly earnings, manufacturing (1995=100)c 2,486 2,656 2,897 2,946 3,198 3,362 3,079 n/aConsumer prices (1994=100) 4,812 5,561 6,158 6,407 6,710 7,319 7,858 8,329Consumer prices (% change, year on year) 58.6 67.5 70.3 47.0 39.5 31.6 27.6 30.0Wholesale prices (1994=100) 4,086 4,758 5,278 5,522 5,863 6,335 7,059 7,332Wholesale prices (% change, year on year) 70.0 84.9 86.7 51.2 43.5 33.2 33.7 32.8

Financial indicatorsExchange rate TL'000:US$ (av) 1,398 1,524 1,358 1,412 1,666 1,614 1,649 1,425Exchange rate TL'000:US$ (end-period) 1,552 1,450 1,341 1,573 1,662 1,644 1,704 1,415Deposit rate (av; %) 67.8 62.6 57.4 48.7 49.5 46.4 45.9 42.1Interbank money market rate (av; %) 62.3 59.0 57.3 49.1 46.7 44.8 44.0 40.9M1 (end-period; TL trn) 10,105.8 10,839.6 10,552.1 12,135.4 12,988.5 14,814.3 13,888.6 n/aM1 (% change, year on year) 65 46.3 35 30.8 28.5 36.7 31.6 n/aM2 (end-period; TL trn) 102,604 107,296 109,318 124,264 131,947 138,543 138,931 n/aM2 (% change, year on year) 92.5 86.2 49.5 45 28.6 29.1 27.1 n/aStockmarket index (end-period; 1986=1)d 7,626 13,782 11,809 9,380 8,842 10,370 9,475 10,884Stockmarket index (% change, year on year) -32.8 46.0 45.6 -16.3 15.9 -24.8 -19.8 16.0

Sectoral trendsCrude steel production ('000 tonnes) 3,829 3,670 3,582 4,087 4,381 4,423 4,496 4,471Cement production ('000 tonnes) 8,854 6,046 5,436 9,922 9,814 7,405 4,901 n/aCar production (‘000) 54.3 48.3 56.1 68.1 58.8 76.8 69.3 n/aForeign trade (US$ m)Exports fob 7,663 8,176 7,913 8,511 9,166 9,687 10,271 11,160Imports cif -10,086 -10,103 -10,359 -12,437 -13,480 -14,756 -14,146 -16,280Trade balance -2,423 -1,926 -2,446 -3,926 -4,314 -5,070 -3,874 -5,118Balance of payments (US$ m)Merchandise trade balance fob-fobe -1,310 -641 -905 -2,245 -2,295 -2,867 -2,301 -3,225Services & income balanceef 2,415 354 -523 682 2,498 678 -708 537Net transfer paymentse 863 927 846 772 864 1,014 777 840Current-account balancee 1,968 640 -582 -791 1,067 -1,175 -2,232 -1,848Reserves excl gold (end-period) 18,987 18,879 20,496 22,426 25,195 27,069 26,935 28,890

a Cumulative from the beginning of year. b Seasonally adjusted. c Gross earnings per production worker. d ISE National-100. e Central Bank ofTurkey. f 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 2004-05

Political outlook

Thanks to its parliamentary majority of two-thirds of the total number of seats,the present Justice and Development Party (AKP) government under RecepTayyip Erdogan appears likely to stay in power beyond the outlook period. Inthe medium term the most serious threat to its popularity is the lingering riskof another financial crisis. The risk of a debt default in 2004 appears to havediminished thanks to IMF agreement to postpone some repayments scheduledfor 2004 and US agreement to provide loans worth US$8.5bn. However, theburgeoning current-account deficit fuelled by recovering domestic demand andreal exchange rate appreciation makes a sharp depreciation of the lira a likelycause of financial instability in the short term.

In recent months the main opposition to government policies has come fromthe president, Ahmet Necdet Sezer, who has returned several bills toparliament, including changes to a constitutional amendment that would haveallowed the state to sell off degraded “forest” land (see The political scene). Thismay well be put to a referendum, but it does not seem to be treated by thegovernment as a make-or-break issue. Hence, if a referendum is held and thegovernment loses the vote, it will almost certainly survive with no more than atarnished image.

The other main challenge to the government has come from the military chiefs, asthe ardent guardians of Kemalist secularism. Nonetheless, recent changes to thepowers and composition of the military-dominated National Security Council(MGK), as well as changes in personnel at the top of the armed forces, seem tohave reduced the risk of a clash between the government and the military (seeThe political scene). So far, the government has avoided policies seen as flagrantlypro-Islamist and seems likely to continue this, although government plans toreform Turkey’s inadequate education system could be a source of contention. Inmid-August Mr Sezer returned a law to parliament for reconsideration on thegrounds that the approved amendments to the education law allowing up to10,000 pupils from poorer families to attend private schools at state expense mightundermine the democratic and secular nature of the state. The AKP also favourslifting the ban on female students wearing Islamic headscarves, arguing that it is ahuman right. The military and secularists strongly oppose this, deeming it to bepart of an Islamist political agenda.

Local elections, to be held by May 2004 (the exact date has yet to be set), couldwell see the AKP’s share of the vote rise above the 35% it scored in the generalelection of November 2002. The government benefits from the fact that theRepublican People’s Party (CHP), the sole opposition party effectivelyrepresented in parliament, is failing to capture more public support. A challengeto the government could also come from the maverick Youth Party (GP) and itsleader, the controversial media magnate, Cem Uzan, but the collapse of theUzan family’s Imar Bank and the indictment of leading members of the familyhave greatly reduced this threat. There remains the slight chance that the

Domestic politics

Election watch

8 Turkey


decision at the end of September of Turkey s highest court of appeal to upholdcharges of fraud against the pro-Kurdish Democratic People s Party (Dehap) atthe November 2002 general election could lead to an election rerun or an earlyelection called by the government. However, the Economist Intelligence Unitbelieves that this is unlikely because of the authorities’ concerns that politicalinstability could trigger financial turmoil. Even in the unlikely event that theSupreme Electoral Board (YSK) should decide to declare the November 2002election result invalid, it is however probable that the AKP would win adecisive victory in the election rerun.

The government faces major foreign policy challenges during the outlookperiod. The most immediate is repairing Turkey’s damaged relations with the USfollowing the parliament’s decision, by the narrowest of margins, on March 1stnot to allow US forces on Turkish soil during the Iraq war (April 2003, pages 15-16). Efforts have been made by both sides to heal the rift, but the risk of furthertensions will remain high as long as Iraq is unstable and Turkey is concernedabout the possibility of an independent Kurdistan emerging in northern Iraqand fuelling separatist sentiment among Turkey’s Kurds in the south-east. Turkeyis currently under pressure from the US to contribute troops to an international“stabilisation force” in Iraq. The government appears ready to accept the idea inprinciple, since it is anxious to restore its strategic partnership with the US, andwants to have some influence over the future shape of Iraq. There is, however,opposition to this among the public and a group of AKP deputies will almostcertainly oppose the proposal when it is put to parliament, probably in October.Nevertheless, it appears that they will not be numerous enough to vote it down.It is therefore possible that around 10,000 Turkish troops will be sent to Iraqbefore the end of 2003. However, the Turkish government insists that the USmust first eliminate the remaining elements of the militant Kurdish organisation,the Kurdistan Workers’ Party (PKK, now renamed the Kurdistan Freedom andDemocracy Congress KADEK) from Iraqi territory, and the US now seemsprepared to conduct a joint operation to achieve this. Much will also depend onreactions from within Iraq. These are uncertain, given the deep divisions in Iraqisociety and the lack of a credible national government.

Recent constitutional and legal changes, which the government claims havebrought Turkey into line with the EU’s Copenhagen criteria of democraticnorms, have been welcomed by representatives of the European Commissionand the governments of leading EU countries. However, they have made it clearthat they must be assured that these reforms are actually being implemented,especially in areas such as the elimination of torture by the police and allowingthe use of the Kurdish language in broadcasting and education. Without this,they will be reluctant to allow accession negotiations with Turkey to begin bythe provisionally established date of December 2004, or soon thereafter. Webelieve that the government will have done enough for the EU to agree to startnegotiations in early 2005. However, a further delay cannot be completelyruled out given the persistence of conservative attitudes in parts of thejudiciary and state bureaucracy, the lack of effective control over the police inmany instances, and the re-emergence of tensions between the state and pro-Kurdish groups.

International relations

Turkey 9


Currently, the Cyprus problem persists as the main political sticking pointbetween Turkey and the EU, with the Turkish Cypriot leader, Rauf Denktash,firmly opposing settlement proposals put forward by the UN Secretary-General,Kofi Annan. However, the three opposition parties in the self-proclaimedTurkish Republic of Northern Cyprus (TRNC) have strongly favoured startingnegotiations with the Greek Cypriot government, on the basis of the Annanplan, and have formed an alliance to achieve this. According to opinion polls,they are likely to win a majority in the parliamentary elections to be held inthe TRNC on December 14th 2003. This would force Mr Denktash to appointan agreed substitute to serve as negotiator with the Greek Cypriots. Althoughstatements by Mr Erdogan and his minister of foreign affairs, Abdullah Gul,have been cautious ahead of the election in northern Cyprus, we believe thatthey would fully support a resumption of negotiations on the basis of theAnnan plan in the event of a victory for the opposition parties in the TRNC.We continue to believe that there is a better than 50% chance of a settlementbeing reached on the island by end-2004.

Economic policy outlook

After a series of delays and slippages on IMF-agreed targets and reforms in thesecond quarter of the year, the government has taken positive steps to put theeconomic stabilisation programme back on track. These measures, combinedwith some fortuitously benign factors such as exceptionally low short-terminternational interest rates, have helped to improve Turkey’s short-termeconomic outlook. In addition, at the request of the government the IMF hasagreed to ease Turkey s repayment schedule in 2004 by moving some of therepurchases from 2004-05 to 2005-06. In addition, in late September Turkeysuccessfully concluded negotiations with the US regarding loans worthUS$8.5bn that the US promised in April in return for partial Turkish support inthe war against Iraq. As result, concerns about the government’s ability to meetits financing requirements next year have eased. However, because of theburgeoning current-account deficit fuelled by continued real appreciation of thelira and recovering domestic demand growth, a substantial correction of thelira-dollar exchange rate is likely in the short term.

In focus

The risk of a debt crisis remains high in the medium term

The sheer size of Turkey’s public debt (about 85% of GDP at end-2002), anovervalued lira and a widening current-account deficit leave Turkey vulnerable tosudden shifts in investor sentiment, keeping the risk of a financial crisis high duringthe outlook period. Although the Economist Intelligence Unit’s assessment of the riskof a government debt default in 2004 is now below 50%, Turkey will remainvulnerable to a default in the medium term because we believe that withoutcontinued external support the fiscal retrenchment required to reduce Turkey’sgovernment debt burden to a more sustainable level in the next few years will bepolitically unacceptable (regardless of the government in power). With the stand-byloan agreed with the IMF in February 2003 already 17 times Turkey’s quota in the

Policy trends

10 Turkey


Fund (compared with five times for Argentina and six times for Brazil), it will beextremely difficult for the IMF to lend Turkey additional funds. Apart from theUS$8.5bn loan already agreed by the US in connection with the Iraq war, we believethat the US administration is unlikely to act as “lender of last resort”, in part becauseof the recent deterioration in relations with Turkey, but also because a crisis in Turkeywould be unlikely to trigger wider turmoil in international financial markets.

The assumptions required to conclude that the public debt burden will stabilise overthe next five to ten years are still, in our opinion, overoptimistic. These includesteady annual GDP growth of around 4-5%, stable real interest rates substantiallybelow the current level of about 20% on domestic debt, only modest depreciation ofthe real exchange rate, and unprecedented, large primary budget surpluses. Even theIMF has admitted that a combination of poor fiscal performance, low growth, highinterest rates and a weaker exchange rate all assumptions that are at least asplausible, if not more so, than the baseline assumptions would produce anunsustainable path for public debt over the medium term. Turkey is also vulnerableto external shocks, given its large (and growing) external financing requirement.

The exact timing and extent of a crisis are extremely difficult to predict. We havetentatively pinpointed 2004 as the year in which we think a crisis will occur.Towards the end of 2003 we believe that it will become apparent that this year’sfiscal targets are unlikely to be achieved and that the government will be unable totighten fiscal policy sufficiently ahead of the 2004 local elections. This could result ina decline in investor confidence, making it more difficult for the government to rollover its domestic debt, most of which is short-term.

Apart from the IMF’s continued support, its agreement to reschedule some ofTurkey’s repayments, and the loans worth US$8.5bn agreed by the US, several factorsare currently acting to reduce the risk of a crisis in the short term. In particular, thebulk of Turkish government debt is held by Turkish investors, with the public sector,mainly state-owned banks, accounting for 30% of the total. These investors appearfor the moment willing to give the government the benefit of the doubt, but thiscould change quite quickly if the government becomes over-complacent, as it hassometimes appeared to be. Also, the lira has remained strong against the US dollar,reducing the cost of servicing the government’s dollar-denominated domestic debt(just over 25% of total domestic debt in July). However, with the lira widelyconsidered to be overvalued, a sharp correction in the exchange rate could soonreverse this trend. International short-term interest rates also remain exceptionallylow, which has driven a search for higher yields and helped Turkey to tap theinternational capital markets. However, once rates start to rise again, this may not bequite so easy.

The fiscal targets that the government has agreed with the IMF particularly thepublic-sector primary surplus (the public-sector balance less interest paymentson government debt) of 6.5% of GNP a year in 2003-04 are highly ambitiousand unlikely to be achieved in full. Nevertheless, we are still forecasting quite asubstantial primary surplus in 2003, helped by the additional measures alreadytaken since the introduction of the 2003 budget and a supplementary budget tobe introduced in October. The consolidated central government primary

Fiscal policy

Turkey 11


surplus is expected to be about 4.5% of GDP in 2003 (5.7% of GNP is thegovernment’s IMF-agreed target for this part of the public-sector primarybalance, which is to be supplemented by a surplus on off-budget parts of thepublic sector, particularly state enterprises, in order to achieve the broaderpublic-sector primary surplus of 6.5% of GNP). A further improvement is alsoexpected in the overall consolidated central government budget deficit/GDPratio, compared with 19.6% of GDP in 2001 and 14.2% in 2002.

However, in 2003 the deficit will remain high at about 13.5% as a result of thehigh cost of servicing Turkey’s burgeoning debt stock. Interest payments,estimated to amount to almost 19% of GDP in 2002, are forecast to be around18% of GDP in 2003. The government’s ambitious target for privatisation dealsworth US$4bn in 2003 and receipts of just over US$2bn is also unlikely to beachieved as a result of repeated delays of the tenders for the state refiner,Tupras, and the alcohol and tobacco company, Tekel. Privatisation receipts areearmarked for debt reduction, but indirectly this would reduce interestpayments. In 2004 we expect the deficit to remain more or less stable,benefiting from lower interest rates in 2003. However, another rise in interestrates in 2004 will prevent an improvement in the budget balance in 2005.

The Central Bank of Turkey is likely to continue its generally cautious monetarypolicy stance in 2003. However, pressure to adopt a more accommodatingstance is likely to continue from various sources, including exporters hurt bythe current strength of the lira and members of the government who wantinterest rates on Treasury bills to fall to reduce government borrowing costs. Sofar the Central Bank appears to have resisted pressure, and rate reductions (thelatest, on September 18th, brought the Bank’s overnight borrowing rate down to29%) have followed improvements in Turkey’s inflation outlook and otherpositive developments. Failure to maintain this stance would seriously damagethe credibility of the Central Bank’s recently established independence andcontribute to an erosion of investor confidence.

The Central Bank still plans to move from “implicit inflation targeting” to afully-fledged policy of inflation targeting. This was initially scheduled to start atthe beginning of 2003, but has been delayed and is now unlikely to beintroduced this year.

Monetary policy

12 Turkey


Economic forecast

International assumptions summary(% unless otherwise indicated)

2002 2003 2004 2005Real GDP growthWorld 2.9 3.3 3.9 4.1OECD 1.8 1.9 2.4 2.6EU 1.0 0.6 1.9 2.3Exchange rates¥100:US$ 1.25 1.18 1.17 1.16US$:€ 0.945 1.115 1.165 1.135SDR:€ 0.729 0.804 0.823 0.810Financial indicators€ 3-month interbank rate 3.33 2.27 2.25 3.83US$ 3-month Libor 1.80 1.17 1.47 3.66Commodity pricesOil (Brent; US$/b) 25.0 27.6 19.6 18.9Gold (US$/troy oz) 310.3 343.3 317.5 307.5Food, feedstuffs & beverages (% change in US$

terms) 12.7 5.6 1.7 5.8Industrial raw materials (% change in US$ terms) 2.2 8.0 3.5 6.0

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

The performance of the global economy has begun to improve, suggesting thata recovery is under way, although there are still massive downside risks. USGDP growth in mid-2003 is strengthening, primarily boosted by tax cutsfeeding through to consumer demand. Although the impact will fade quickly, afurther strengthening is expected for 2004. A recovery in the EU, Turkey’s mainexport market, driven by improving business and consumer confidence and therising need for replacement investment, is also expected in 2004, although withGDP growth forecast at 1.9%, it is expected to be moderate, reflecting fiscalconstraints, a renewed appreciation of the euro, and continued concerns aboutglobal economic instability.

Although the downside risks to the global economy have been reduced, theyare still significant, especially taking the year 2005, which now comes into ourforecast horizon together with 2004. The main concern continues to stem fromthe huge imbalances in the US economy, specifically the large current-accountdeficit (more than 5% of GDP) and high levels of private-sector debt. Thefinancing of the current-account deficit would then become problematic, whichcould lead to a depreciation of the dollar to US$1.30: 1 or beyond. Since Asiancurrencies tend to move more with the dollar than the euro, the consequencesfor euro area exports, and consequently euro area growth prospects, would beserious. We put the chances of a sharp fall in US business and consumerconfidence, together with a sharp dollar depreciation, at 15% in 2004 and againat 15% in 2005, given a cumulative risk over the two-year forecast period ofabout 30%.

International assumptions

Turkey 13


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

2002a 2003 b 2004c 2005c

Private consumption 74,847.0 77,300.4 74,200.0 76,925.3(2.0) (3.3) (-4.0) (3.7)

Public consumption 9,940.0 9,890.3 9,791.4 10,085.1(5.4) (-0.5) (-1.0) (3.0)

Gross fixed investment 22,612.0 23,854.6 19,920.8 19,132.2(-0.8) (5.5) (-16.5) (-4.0)

Final domestic demand 107,399.0 111,045.3 103,912.2 106,142.7(1.7) (3.4) (-6.4) (2.1)

Stockbuilding 6,008.0 9,650.0 -500.0 1,025.0(7.0)d (3.1) d (-8.2)d (1.3)d

Total domestic demand 113,407.0 120,695.3 103,412.2 107,167.7(9.2) (6.4) (-14.3) (3.6)

Exports of goods & services 46,723.0 51,630.1 57,555.9 61,742.8(11.0) (10.5) (11.5) (7.3)

Imports of goods & services 41,313.0 48,091.4 41,795.9 44,673.8(15.7) (16.4) (-13.1) (6.9)

Foreign balance 5,410.0 3,538.7 15,760.0 17,069.0(-0.9)d (-1.6) d (9.9)d (1.1)d

GDPe 118,440.0 123,834.0 118,822.2 124,136.7(7.8) (4.6) (-4.0) (4.5)

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.d Contribution to real GDP growth. e The total includes a statistical discrepancy.

Annual GDP growth is expected to slow from 7.8% in 2002 to about 4.5% in2003. In the second quarter of 2003 the GDP growth rate was already downsharply to 3.9% from 8.1% in the first quarter, although this can be explained inpart by the negative impact of the Iraq war, the rapid conclusion of which mayhave a positive effect on growth in the second half of the year. However, thecontinued strength of the Turkish lira since April, the effect of which, althoughnot evident in trade data available for the first seven months of 2003, will be todamage the competitiveness of Turkey’s exports and boost imports, having adampening effect on growth in the second half of 2003 and going into 2004.Over the outlook period as a whole the need to keep fiscal policy tight, highunemployment, limited foreign investment and the ongoing impact ofunwinding problems related to banking and corporate debt will checkeconomic expansion. In 2004 a sharp fall in the value of the lira and a rise ininflation is expected to trigger another recession. We forecast that GDP willcontract by about 4%, with all components of domestic demand likely to recordsharp declines. However, the resulting steep fall in imports of goods andservices, and a surge in exports driven by an expected devaluation of theTurkish lira, should reduce the size of the fall in overall GDP. In 2005 economicgrowth is forecast to rebound, lifted by the boost to exports from a weakerexchange rate and the base effect.

Following month-on-month falls in the index in June-July, the year-on-year rateof inflation declined to 24.9% in August, from 30.7% in May, mainly reflectingthe strength of the lira since April and lower international oil prices duringmost of the second quarter. We now expect the year-end rate to be close to the

Economic growth

Inflation

14 Turkey


IMF-agreed target of 20% for 2003, down from about 30% at end-2002.However, further major reductions in inflation will be hard to achieve duringthe outlook period. With the current-account deficit widening sharply and thelira appreciating in real terms, a correction is expected which, combined withseasonal price rises at the end of the year and higher oil prices since May, islikely to push up prices. The government is also in a dispute with public-sectorand civil service trade unions over the long-overdue wage agreement for2003-04. The government is seeking to tailor its incomes policy to its inflationtargets, but we expect the authorities to make some concessions, given thatlocal elections are scheduled to take place in May 2004. Based on ourprediction that the fall in the value of the lira will be of the order of 15-20% inreal terms, we expect a surge in inflation to a year-end rate of about 60% in2004, driven higher mainly by the inflationary effect of a much weaker lira onimport prices. In 2005 we expect consumer prices to stabilise, but the year-endrate of inflation is still forecast to be over 40%.

Exchange rate volatility, which has been a major source of instability since thedevaluation of the Turkish lira in February 2001, is expected to continue duringthe outlook period. Following a sharp appreciation to about TL1,400,000:US$1since mid-July and a marked deterioration of the current-account balance, weexpect a correction in the exchange rate, pushed down mainly by concernsabout the current-account deficit, recent interest rate cuts and a recovery in USeconomic growth. The timing of the correction is highly uncertain, however,given that Central Bank’s intervention in the foreign-exchange markets, a600 basis point reduction in Central Bank interest rates, and the widespreadbelief that the lira is overvalued have so far failed to prompt a switch out oflira-denominated assets. In 2004 the lira is forecast to depreciate in real termsby 15-20% from an average of TL1,500,000 in 2003 to TL2,400,000:US$1 in2004. In 2005 we expect the lira to stabilise in real terms, falling to aboutTL3,700,000:US$1.

Turkey’s current-account deficit is expected to widen from about 1% of GDP in2002 to about 3% in 2003, causing some concern about Turkey’s ability to meetits external financing requirements (the current-account balance plus principalrepayments on Turkey’s external debt). Imports have risen sharply as a result ofthe recovery of domestic demand, higher non-oil commodity prices and astrengthening lira against the dollar. At the same time, we expect exportrevenue growth to be checked by the appreciation of the lira in the first half of2003 and the continued weakness of demand in the US and the euro area,Turkey’s main export markets. In 2004 the current account will return tosurplus, reflecting a marked improvement in the merchandise trade balance asa result of our forecast that next year the Turkish lira will fall sharply in realterms and domestic demand will collapse again, thereby boosting exportearnings and reducing the import bill. In 2005 the current-account surplus isexpected to decline slightly as the lira stabilises and domestic demand growthrecovers again.

Exchange rates

External sector

Turkey 15


Forecast summary(% unless otherwise indicated)

2002a 2003 b 2004c 2005c

Real GDP growth 7.8 4.6 -4.0 4.5Industrial production growth 9.0b 6.7 -5.5 6.0

Gross fixed investment growth -0.8 5.5 -16.5 -4.0Unemployment rate (av)d 10.7 11.3 13.8 15.7

Consumer price inflation (av) 45.0 26.0 39.4 55.0Consumer price inflation (year-end) 29.7 22.3 60.5 42.8

Short-term interbank rate 49.5 40.0 65.0 66.0Government balance (% of GDP) -14.2e -13.6 -13.2 -13.0Exports of goods fob (US$ bn) 39.8 45.2 50.6 54.5

Imports of goods fob (US$ bn) 48.2 64.4 58.9 63.8Current-account balance (US$ bn) -1.5 -7.4 2.0 1.6

Current-account balance (% of GDP) -0.8 -3.1 0.9 0.7External debt (year-end; US$ bn) 131.6 141.3 141.5 137.6Exchange rate TL '000:US$ (av) 1,507.2 1,516.2 2,420.9 3,688.3

Exchange rate TL '000:¥100 (av) 1,202.4 1,283.8 2,073.6 3,179.6Exchange rate TL '000:€ (av) 1,424.2 1,690.9 2,820.4 4,186.2

Exchange rate TL '000:SDR (year-end) 2,234.6 2,237.7 4,593.2 5,459.4

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Breakin the series from 2000. e Derived from official government figures.

The political scene

The US decision to go to war with Saddam Hussein has strained Turkey’straditionally good relations with the US. In particular, the Turkish authoritiesfear that regime change in Iraq might lead to the creation of an independentKurdistan in northern Iraq, which, in turn, might revive calls for greaterautonomy from the Kurds in south-east Turkey. Since the vote in the Turkishparliament on March 1st, when Turkish deputies rejected a US plan underwhich US forces would have used Turkish territory to invade Iraq from thenorth, with Turkish troops also being sent into Iraq, there have been efforts onboth sides to improve relations (April 2003, pages 14-16).

Turkey-US ties improve afterSuleimaniyah incident in July

16 Turkey


However, a new low point in the relations between the two countries wasreached on July 4th, when US forces arrested 11 soldiers of the Turkish specialforces who were stationed in Suleimaniyah, in Iraqi Kurdistan, originally tomonitor the ceasefire between the Iraqi Kurdish parties, the Patriotic Union ofKurdistan (PUK) and the Kurdistan Democratic Party (KDP), and held them forthree days, on suspicion of having been involved in “disturbing activities” (inthe words of the US State Department), and even of having been involved in aplot to murder the Governor of Kirkuk (according to Jelal Talabani, the leader ofthe PUK). These accusations were hotly denied in Ankara, and the US Secretaryof Defence, Donald Rumsfeld, later expressed his “regret” over the affair.Nevertheless, it increased anti-US sentiment in Turkey, just as the US wasattempting to persuade the Turkish government to take on a bigger post-warrole in Iraq.

A crucial question facing the Turkish government has been whether to acceptnew US proposals for Turkish participation in a widened international“stabilisation force” in Iraq. The US’s request came amid increasing difficultiesthat US and British forces have been facing in restoring law and order in Iraq.The US proposals began before more recent moves by the US government tosecure a UN mandate for its occupation of Iraq, and were independent of them.On July 20th the Turkish prime minister, Recep Tayyip Erdogan, announced thatthe US had made such a request, and this was confirmed by the US Secretaryof State, Colin Powell, on July 24th, during a visit to Washington by the ministerof foreign affairs, Abdullah Gul. Discussions between the two sides establishedthe likely size of the force at around 10,000 troops, although this could beincreased if needed.

In response, government leaders emphasised that, under Article 92 of theTurkish constitution, this step would have to be supported by an overallmajority in the Turkish parliament, as in the case of the earlier plan. However,subsequent statements by government leaders have suggested that they regardit favourably, provided certain conditions can be met. Their motives are first, toreassure the US of the value of its strategic partnership with Turkey, and second,to exercise some leverage over future developments in Iraq (in particular, bypreventing the formation of an independent Kurdish state).

The Turkish president, Ahmet Necdet Sezer, was viewed as the main opponentto the proposal, since it was expected that he would insist that any Turkishmilitary presence in Iraq must have authority from the UN. Following ameeting with Mr Erdogan, Mr Gul, and the Chief of the General Staff, GeneralHilmi Ozkok, on August 12th, the president appeared to have dropped thisobjection, maintaining simply that the proposal must have the approval ofparliament. However, as Mr Erdogan remarked on September 6th, approval bythe UN would certainly “make it easier for us”, and support for the move fromwithin Iraq might also depend on this factor. Reactions from the military werealso more positive than in March, probably facilitated by recent changes inpersonnel at the top of the armed forces (see below). As a sign of this, GeneralOzkok was reported to be of the view that the risks of not sending troops toIraq were greater than those of accepting the US request.

The US requests Turkish troopsto help in Iraq

Turkey 17


In mid-September Mr Gul indicated that a decision on sending Turkish troopsto Iraq would not be taken until mid-October. Once parliament reassembles onOctober 1st, the government will take a decision and a motion will then be putto the parliament. The Turkish government is apparently postponing a decisionto make sure the US agrees to a plan eliminating the surviving elements of theKurdistan Workers’ Party (PKK) now officially renamed the Kurdistan Freedomand Democracy Congress, or KADEK who are currently holed up in north-eastern Iraq, and who carried out a costly campaign of violence in Turkeybetween 1984 and 1999 (see below, and April 2003, page 19). The government isalso awaiting developments in the UN Security Council, although Mr Gulconfirmed that Turkish participation in the stabilisation force would not bedependent on a decision by the UN.

The National Security Council (MGK), which brings together the president,prime minister, government ministers, and the military chiefs, met onSeptember 19th, and considered the situation in detail, but made norecommendation. Mr Erdogan later claimed that there had been nodisagreement in the MGK, but the ball is clearly now in the government’s court.Mr Gul said there would not be another meeting of the MGK meeting beforethe government took a decision, but that Mr Sezer would attend meeting asChair (which constitutionally he is allowed to do).

While keen to improve relations with the US and have some influence overdevelopments in Iraq, the Turkish government is also wary of the risk of gettingbogged down in a lengthy conflict in Iraq, and anxious to avoid a second defeatin parliament. Hence, it has apparently laid down the following conditions.

• To avoid conflict with the Iraqi population, any Turkish force must be ableto differentiate itself from the US presence. Hence, the Turkish contingent mustbe under separate Turkish command (although in co-ordination with the US)and assigned its own discreet geographical area. It is accepted that this must beoutside the Kurdish region of northern Iraq, thanks to fierce opposition from theIraqi Kurdish leaders. However, the security of its supply lines from Turkeythrough northern Iraq must be assured (possibly through joint Turkish-USpatrols).

• As a quid pro quo, the US must agree to eliminate the surviving elementsthe PKK/KADEK.

• Turkish troops would emphasise an humanitarian role, concentrating onthe reconstruction of schools, hospitals, public buildings, mosques, and waterand electricity supplies. To this end, plans have been prepared for theconstruction of a Turkish hospital in Baghdad, and the establishment of fieldhospitals in the designated area, with patients requiring urgent treatment beingtransferred to hospitals in Turkey (a process that has already started).

• Any Turkish deployment should be in agreement with the Iraqis (althoughwhom this refers to is unclear).

Turkey needs US financial support in its efforts to avoid another financial crisis,but the US has stated in an agreement with the Turkish government that thedisbursement of loans worth some US$8.5bn will not depend on Turkey

The government lays downfairly tight conditions

18 Turkey


agreeing to send troops to Iraq (see Economic policy). Instead, Turkey will berequired to implement strong economic policies and co-operate with the US inIraq by providing supplies to US forces, which the Turkish government hasnever put in question.

The first risk facing the government, of which it is evidently well aware, is thatparliament might vote down the proposal, leaving Turkish-US relations inserious disarray, and Turkey without any leverage over the future of Iraq.Understandably, Turkish public opinion is less opposed to a peacekeeping andhumanitarian role in Iraq than to full support for the US-led invasion, whichwas the plan proposed before the Iraq war. It was predicted that around50 AKP backbenchers could vote against the motion to send troops to Iraq, butthis would be far less than the 100-odd who voted against the governmentmotion on March 1st. Hence, given the government’s current majority of 367 ofthe 550 parliamentary seats, a second motion should be successful.

Assessing Iraqi reactions is far more difficult because of the deep divisionswithin Iraqi society and the lack of a proper national government. Predictably,the Iraqi Kurdish leaders have strongly criticised the idea, and it wasimmediately opposed by the PUK leader, Mr Talabani. On August 25th a“Mission of Scholars” sent by the Sunni Muslim community in Iraq to Istanbul,opposed the proposal, as did Muqtada al-Sadr, one of the several Shi’i leadersin southern Iraq. On the other hand, the idea was strongly supported by theleaders of the Ubeidi tribe, the main Sunni Arab tribe in Kirkuk, and by adelegation of the Iraqi Tribal Confederation, said to represent around 2,000tribes in Iraq, both of whom visited Turkey. An official Turkish delegation,which included two AKP deputies, visited Iraq in the last week of August andclaimed that “the people of Iraq” favoured a Turkish presence, provided it wereindependent of the US. The Turkish government had evidently been hopingthat the provisional Governing Council, set up by the US authorities inBaghdad in July, would issue an official invitation, but the Council is badlydivided, and lacks national authority since it is purely nominated by USofficials. On September 4th Hoshiyar Zebari, a former spokesman for the KDP,who is foreign minister in the Council of Ministers nominated by theGoverning Council, stated that no troops from Turkey or any otherneighbouring country should be sent to Iraq. The US State Departmentpromptly denied that Mr Zebari’s views were those of the Governing Councilas a whole. On September 9th Ahmad Chalabi, the rotating chairman of theGoverning Council, stated that Turkish troops would be welcome to take partin the stabilisation force, provided it had UN backing, but he later contradictedhimself, saying that the Council did not want any more foreign forces.Mr Chalabi visited Ankara at the head of a delegation from the GoverningCouncil on September 11th. He admitted that the Council was not in a positionto invite Turkey to send troops to Iraq as “this is a job for the UN”, and morefrankly, that the US was actually the ruling power in Iraq.

Reports suggest that the US military is wary of engaging in detailed bargainingover a possible Turkish military presence in Iraq, prior to the acceptance of theidea in principle by the Turkish parliament. It does not want to repeat itsexperiences of April-March, when detailed plans for a joint invasion of Iraq

The proposal faces obstacles

Turkey 19


were put in place after much hard bargaining, and then narrowly defeated inthe Turkish parliament. Nonetheless, on September 6th Mr Gul stated that thatit was agreed with the US that Turkish forces would have a separate commandand a designated area of operations, for which they could express their ownpreference (probably, this would be in the Sunni Arab area north of Baghdad).The Turkish authorities have estimated that stationing 10,000 Turkish troops inIraq will cost around US$20m per month. For the first six to nine monthsTurkey would meet this cost, but after that would wish to discuss the issue withthe US government.

One of Turkey’s conditions for participating in an international stabilisationforce in Iraq is that the US should eliminate the remaining presence ofPKK/KADEK militants in the north-east of the country, in territory nominallycontrolled by the KDP or PUK, who are believed to number around 5,000. Inprinciple the US seems prepared to take action against them, since it classifiesKADEK as a terrorist organisation. However, the US pressed Turkey to offersome kind of amnesty to the militants. Accordingly, on July 29th parliamentpassed a “Return to Society Law” under which those who had been membersof the PKK or assisted it, but had not participated in violence, would bepardoned, while others, except for the top leaders of the organisation, wouldbenefit from reduced sentences if they turned themselves in. The deal wasabruptly rejected by KADEK leaders, who demanded a full amnesty. Instead, onSeptember 1st they announced that the unilateral ceasefire that they haddeclared in 1999 was officially at an end (sporadic attacks on Turkish securityforces in south-east Turkey have recently been attributed to the PKK). Theannouncement is unlikely to have much effect, unless the situation in IraqiKurdistan deteriorates badly for Turkey, since KADEK now has little strength onthe ground in Turkish territory. However, the attempt to persuade the militantsin Iraq to give themselves up has had little effect so far. By the start ofSeptember around 2,000 people had applied to benefit from the new law, butalmost 90% of these were already in prison in Turkey. Only a handful hadactually come in from Iraq, where the KADEK leadership evidently stillexercises tight control over its followers.

Since coming to power, the AKP has injected a real sense of urgency intoTurkey’s efforts to bring its laws into line with the democratic standardsdemanded by the EU. On July 19th the “Sixth Harmonisation Package”, whichwas passed by parliament on June 19th, came into effect (July 2003, page 16).Parliament followed this up on July 30th by passing a “Seventh HarmonisationPackage”. The most crucial amendments were those affecting the MGK. TheMGK has been strongly criticised for giving the military wide political power,affecting issues other than national security (July 2003, pages 14-15). The mainprovisions of the reform package were as follows.

• The laws governing the powers and functions of the MGK and itsSecretariat Council were amended to restrict the decisions that the Councilcould take to those regarding the “national security policy of the state”, andstated that these decisions could only be “advisory” for the government. Thefrequency of regular meetings of the MGK was reduced from once a month to

New law fails to persuade PKKmilitants to give themselves up

Parliament enacts anotherpolitical reform package

20 Turkey


once every two months. The secretary-general of the MGK, who plays a pivotalrole, would be appointed by the president on the recommendation of the primeminister, and could be a civilian, rather than a military officer, as previouslyprovided.

• Article 159 of the Penal Code, which governs supposed “insults” to stateauthorities, was amended to provide that those who “express ideas purely forthe purposes of criticism, without indulging in insult, derision or vituperation”would not be punished.

• An article was added to the Law on Criminal Procedures, to provide thatcomplaints of torture or malpractice by the police must be followed up byjudicial hearings within 30 days.

Soon after the Seventh Harmonisation Package was passed by parliament,Günter Verheugen, the EU Commissioner in charge of enlargement, calledMr Gul personally with his congratulations, while reminding him that the EUwould need to see that the reforms are properly implemented before decidingwhether accession negotiations could begin in December 2004 (July 2003,pages 19-20). Praise for the reforms also came from Greece, Britain and Italy,which holds the six-month rotating presidency of the EU until December 2003.

A crucial encounter for Mr Erdogan was his visit to Berlin on September 3rd,when the German chancellor, Gerhard Schroeder, characterised the reforms as“a very important contribution on the road to the EU”, and expressed fullsupport for Turkey’s bid for EU membership. A very different note was,however, struck by Angela Merkel, the leader of the opposition ChristianDemocratic Union/Christian Social Union group in parliament, which hasopposed Turkish accession to the EU, on the grounds that a Muslim countrycannot be classified as “European”. On this occasion, Ms Merkel claimed thatthe reason for this attitude was actually the economic costs to the EU ofaccepting Turkish accession. Meanwhile, the government has set up a specialReform Monitoring Group, composed of the ministers of foreign affairs, justiceand the interior, to ensure the implementation of the new legislation, withMr Gul claiming that Turkey will have met the EU’s Copenhagen criteria by theend of 2004, and aims for accession by 2010.

The apparent reduction of the political power of the military was a crucial(and, for some, contentious) issue since many senior commanders have beensuspicious of the AKP government, which they see as opposed to secularist andmodernist principles (July 2003, pages 14-15). On August 4th a meeting was heldof the High Military Council, which in August of each year makes newappointments at the top of the armed forces to replace those retiring. Thegovernment made one concession to the military viewpoint, when it forewentits power to appoint a civilian as secretary-general of the MGK, by nominatingGeneral Sukru Sariisik to the post for one year, in place of General TuncerKilinc, with effect from August 30th. Simultaneously, General Cetin Dogan wasreplaced as Commander of the 1st Army by General Yasar Buyukanit. Thechanges were significant, since General Kilinc had strongly criticised politicalliberalisation reforms, especially on the Kurdish issue (July 2003, page 16) and

Important changes are made atthe top of the armed forces

The reforms are generallywelcomed by EU leaders

Turkey 21


used the final days of his period in office to attack the reduction of the powersof the MGK contained in the latest Harmonisation Package. General Dogan alsoseized the chance of his imminent departure to denounce the idea of sendingTurkish troops to Iraq. It thus appeared that two powerful military opponentsof government policies had been removed. Evidently, General Ozkok, as the topcommander, approved of the change: as he put it on August 28th, “we shouldget rid of those who merely copy the past, and march on the spot”.

On July 24th parliament passed amendments to the constitution, reducing theminimum age at which candidates could be elected to parliament from 30 to25, and allowing the government to sell off land officially classified as forest (allof which is counted as belonging to the state), but which is actually deforestedor unproductive scrub. The government claimed that it could realise as much asUS$25bn for the state coffers from such sales, although critics put the likelyreturns as much less than this. The proposal was strongly attacked byenvironmentalists and the opposition Republican People’s Party (CHP), andreturned to parliament by Mr Sezer. Following some changes, the amendmentswere again passed by parliament on July 29th, this time by 368 votes, or justover the two-thirds majority by which they could take effect without resort to areferendum. However, on August 15th, after parliament had dispersed for itssummer break, the Mr Sezer again exercised his right to return the amendmentto parliament, on the grounds that it would “encourage the total annihilation offorests”. The government immediately promised to re-submit the amendmentto parliament unchanged, after it re-assembles on 1st October.

Under Article 175 of the constitution, the president can return a constitutionalamendment passed by parliament for reconsideration. If it is passed again inexactly the same form by more than two-thirds of the total number of deputies(that is, 367 or more votes) he can either promulgate it, or call a referendum onthe issue. Although no president has done this since the present constitutioncame into force in 1982, it is thought likely that if parliament re-passes theamendment with a two-thirds majority, then Mr Sezer will break withprecedent by demanding a referendum. The outcome is hard to predict. Anopinion poll carried out by the AKP in August found that 54% of the publicapproved of the president’s stand, but this proportion could alter once areferendum campaign (if there is one) builds up.

Another dispute between the president and the government has emerged overeducation policy. Education is an important and contentious issue for thegovernment, partly because Turkey lags well behind other OECD countries ineducational expenditure and the proportion of pupils staying on to high school,and partly because the AKP would like to boost Islamic education. It alsofavours allowing female students to wear Islamic headscarves in class. Thelatter is hotly opposed by the military and secularist opinion in general, but canbe viewed as a human right rather than just as part of the Islamist politicalagenda. Disputes over education came to a head on August 14th when Mr Sezerreturned to parliament a bill that would allow up to 10,000 pupils from poorfamilies to attend private schools at state expense. His reasons were that there isno provision in the constitution to allow this, that it was the duty of the state to

Mr Sezer vetoes constitutionalchange to sell state land

Mr Sezer also objects tochanges to the education law

22 Turkey


provide good education for all pupils in state schools, and that it wouldincrease a “mentality that will not be in line with the characteristics of asecular and democratic Turkish Republic”. On the last score, it was claimed thatmost of the schools that would benefit would be those run by private Islamicfoundations. Parliament can be expected to reconsider the bill after itreassembles on October 1st, and the AKP may use its huge majority to approveit again unchanged. In this case, the president could still submit it foradjudication by the constitutional court. However, the issue is less problematicthan the proposed sale of forest land in the sense that it involves an ordinarystatute rather than a change to the constitution. Hence, it cannot be submittedto a referendum.

At the end of September Turkey s highest court of appeal upheld charges ofelectoral fraud against the Democratic People s Party (Dehap). The rulingimplies that Dehap, which is dominated by Kurdish interests, contested lastNovember s general election illegally, and that its votes should instead havegone to other parties. Dehap attracted more than 2m votes, equivalent to 6.23%of the total. However, it was revealed before voting began that the party hadused fake documents to meet electoral requirements, and last June a local courthanded down jail sentences to four Dehap officials over the affair. The appealscourt upheld that ruling, effectively confirming that Dehap was not eligible tocontest the election. Although Dehap failed to reach the 10% share of the votesrequired to gain parliamentary seats, its participation in the election had asignificant impact on the outcome. Most significantly, it is highly likely that thecentre-right True Path Party (DYP), which polled 9.5% of the vote in November,would have surpassed the 10% threshold. Judging by its showing in November,the DYP would have secured between 40 and 50 seats in the 550-seatparliament had Dehap not taken part, reducing the share of seats of the onlytwo parties to enter parliament, the CHP in opposition and the ruling AKP.

Now if either a political party or a citizen entitled to vote appeals to theSupreme Electoral Board (YSK) to ask that the election results be cancelled, theYSK may decide on one of four courses of action.

• Reject the application altogether, in which case nothing changes.

• Leave it to the parliament to decide whether or not to re-run the elections,which it would almost certainly decide not to do.

• Cancel the votes obtained by Dehap. In this case the remaining voteswould be redistributed: DYP would gain 40-50 seats at the expense of both theAKP and the CHP. If this happened, then the AKP might well decide to call earlyelections anyway (they would merely have to pass a bill through parliament toachieve this).

• Cancel the election results as a whole, in which case new elections wouldbe inevitable (they could be timed for the same day as the local elections nextMarch/April). The AKP and CHP want to avoid this, although the AKP wouldprobably increase majority.

Dehap ruling increasesuncertainty

Turkey 23


The YSK has in the past ordered the re-run of an election in a single province,but not the whole election, so it is hard to know what it will decide. The mostlikely outcome seems to be either the first or second option, but until a decisionis reached the uncertainty surrounding the case will hang over the government.

Economic policy

The IMF Executive Board completed the “fifth review” of the February 2002standby accord on August 1st, when it approved the release of a US$476mcredit tranche. The completion of the fifth review had been delayed by severalweeks and came only after a late-July rush on the part of the government tomeet IMF preconditions. In an attempt to allay concerns over the prospects formeeting the central IMF-agreed fiscal target of a public-sector primary budgetsurplus of 6.5% of GNP, the government agreed to introduce additional fiscalmeasures, including continued blocking of certain budget allocations and priceincreases for the products of the public tobacco and alcoholic drinks enterprise,Tekel. In addition, parliament approved reform laws concerning bankruptcyprocedures and the management of the social security administrations.

The social security laws contain clauses that offer employers and self-employedpeople in arrears with premium payments a fresh opportunity to pay. However,unlike the earlier “tax peace” scheme, this does not amount to an amnesty, aspenalties and a rate of interest linked to Treasury borrowing costs will bepayable. The government has now promised the IMF that it will offer noamnesties for any kind of public receivables. The government has pledged to theIMF that in October it will introduce separate legislation regarding “pre-packagedbankruptcy”, which was excluded from the new bankruptcy code. In themeantime, the IMF has appeared upbeat about Turkey’s economic performanceand the government’s progress with reforms under the agreement.

As a result of the delay in the fifth review, a new timetable has been set forsubsequent reviews and hence for the release of the remaining creditinstalments under the three-year standby accord. The “sixth review”, whichwas due to be completed in August, is now scheduled for October. In parallelwith this, the government has been allowed extra time in which to fulfilvarious pledges. Passage of the long-awaited Public Financial Management andControl law, which has been approved by the Council of Ministers, is due inOctober. Further direct tax reform, expected to address incentives andexemptions, is to be prepared in October and approved by parliament inNovember. Passage of legislation on state enterprise governance is nowscheduled for December.

The government also expects the process of reducing staff numbers at stateenterprises with the help of voluntary retirement to accelerate. As of the end ofJune, the cumulative figure for staff reductions since the end of January wassome 2,500 lower than the target of 9,900. By the end of the year, the figure isto reach 25,000.

The IMF releases credit inAugust, after a delay

Future IMF reviews and policyactions are rescheduled

24 Turkey


Revised schedule for IMF reviewsAmount of credit Earliest possible release

Review no. (SDRs) Previous New6 340.2 Aug 15th 2003 Oct 20th 2003

7 340.2 Nov 5th 2003 Jan 15th 20048 340.2 Feb 5th 2004 Apr 15th 20049 340.2 May 5th 2004 Jul 15th 2004

10 340.2 Aug 5th 2004 Oct 15th 200411 340.2 Nov 5th 2004 Dec 15th 2004

Source: Adapted from Letter of Intent from the Turkish government to the IMF, dated July 25th,2003.

Along with the completion of the fifth review and the release of the credittranche, the IMF granted, at Turkey’s request, what effectively amounts to aone-year extension to some of Turkey’s IMF debt repayments in 2004 bymoving part of the repurchases due under the expectations basis schedule from2004-05 to 2005-06. The rephasing spreads the bulk of Turkey’s repayments tothe IMF more evenly over three years (2004-06) than was envisaged undereither of the existing IMF schedules (see table), thereby easing concerns aboutthe government’s ability to meet its financing requirements in 2004 and 2005.However, IMF debt repayments are still high in 2006, at US$10.7bn.

According to the Treasury the 2006 situation is not as bad as it appears, becauseit can request that repurchases due in 2006 under the earlier “expectations”schedule be made under the “obligations” schedule, effectively pushing themback a year. The same applies to the repayments due in 2007-08. Making theseadjustments in the final part of the schedule would result in the repaymentplan given in the final line of the table.

Turkey’s repayment schedulesUS$ bn

2003 2004 2005 2006 2007 2008 2009Expectations basis a 2.6 9.7 10.1 3.6 1.8 0.8 0.0

Obligations basis b 1.6 2.7 9.2 10.0 3.6 1.8 0.8New “hybrid” schedule approved by IMF board on August 1st 2.6 5.2 7.8 10.7 1.8 0.8 0.0Alternative future repayment plan 2.6 5.2 7.8 7.3 3.6 1.8 0.8

a This schedule presents all scheduled payments to the IMF, including repayment expectations and repayment obligations. The IMF ExecutiveBoard can extend repayment expectations (within predetermined limits) upon request by the debtor country if its external payments position isnot strong enough to meet the expectations without undue hardship or risk. b The obligations basis schedule presents all payments to the IMFunder the assumption that repayment expectations would be extended to their respective obligation dates by the IMF Executive Board uponrequest of the debtor country.

Source: Under-secretariat of the Treasury; IMF.

On September 22nd Turkey and the US finally reached agreement on loansworth US$8.5bn, following protracted negotiations. The US originally offeredTurkey the aid shortly after the start of the Iraq war in March as compensationfor the negative impact of the conflict on the Turkish economy. The loans,which the Turkish government has committed itself to use to service Turkey’sexternal and domestic debts (and not to finance additional governmentspending) are expected to contribute to a much-needed reduction in Turkey’sborrowing costs real interest rates on domestic Turkish lira government

A new timetable is agreed forrepayments of IMF credit

Agreement on US loanis reached

Turkey 25


securities are still over 20% and interest payments in January-August were theequivalent of almost 70% of total revenue in that period. The agreement statesthat the loans will have a ten-year maturity with a four-year grace period forrepayment of principal and will be disbursed in four equal tranches over aperiod of about 18 months. The agreement specifies that disbursement of theloans, the timing of which will be decided by the Turkish Treasury dependingon its financing needs, will be decided on two conditions: first, implementationby the Turkish government of “strong economic policies”; and second,continued Turkish co-operation with the US in Iraq. By this, the agreementexplicitly states that the contribution of troops for peacekeeping and stabilityoperations in Iraq is not a condition.

Consolidated central government budget(TL trn)

2001 % of 2002 % of 2003 % of 2002 2003Outturn GNP Outturn GNP Target GNP Jan-Aug Jan-Aug

Total revenue 51,543 29.2 75,592 27.6 100,782 28.4 48,749 63,648 Tax revenue 39,736 22.5 59,632 21.8 85,955 24.2 36,481 53,292 Direct taxes 16,081 9.1 20,077 7.3 28,444 8.0 12,695 17,998 Indirect taxes 23,655 13.4 39,554 14.5 57,511 16.2 23,785 35,294 Other revenue 11,807 6.7 15,960 5.8 14,827 4.2 12,268 10,356 Income from state property 4,491 2.5 3,514 1.3 5,085 1.4 2,258 2,904 Funds 2,933 1.7 1,961 0.7 3,557 1.0 1,103 1,537

Total expenditure 80,579 45.7 115,682 42.3 145,949 41.2 70,392 92,091 Interest payments 41,062 23.3 51,871 19.0 65,450 18.5 34,559 43,968 On domestic borrowing 37,494 21.2 46,807 17.1 58,050 16.4 31,439 39,772 On foreign borrowing 3,568 2.0 5,064 1.9 7,400 2.1 3,120 4,196Non-interest expenditure 39,517 22.4 63,812 23.3 80,499 22.7 35,833 48,123 Personnel 15,212 8.6 23,089 8.4 28,036 7.9 14,474 19,443 Other current expenditure 5,236 3.0 8,019 2.9 9,280 2.6 3,348 3,485 Investment 4,150 2.4 6,892 2.5 7,999 2.3 2,870 2,598 Tax rebates 2,918 1.7 5,666 2.1 6,762 1.9 3,301 5,529 Social security 5,112 2.9 11,205 4.1 14,923 4.2 7,225 10,986 Agricultural support 1,033 0.6 1,868 0.7 2,545 0.7 1,104 1,918 Funds 1,480 0.8 234 0.1 200 0.1 70 155

Primary budget balance 12,026 6.8 11,781 4.3 20,283 5.7 12,916 15,525Budget balance -29,036 -16.5 -40,090 -14.7 -45,167 -12.7 -21,643 -28,443Memorandum itemGNP 176,484 100.0 273,463 100.0 354,575 100.0

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

The consolidated budget, which covers most public-sector revenue andexpenditure, produced a primary surplus (net of interest payments) ofTL15,525trn (about US$11bn) in the first eight months of 2003, compared with agovernment target of TL20,283trn (or 5.7% of projected GNP) for the year as awhole. Total revenue amounted to TL63,648trn (about 63% of the target for theyear) and non-interest expenditure TL48,123trn (almost 60% of the full-yeartarget). However, since expenditure tends to increase faster than revenuetowards the end of the year, additional corrective measures are deemednecessary. Accordingly, the IMF is expected to call for additional measures (overand above those already taken in July) during the next review of the standbyaccord in October. In September the minister of finance indicated that a

Further action may be neededto achieve 2003 fiscal target

26 Turkey


supplementary budget would be introduced in October when parliamentreconvenes after the summer recess. Meanwhile, preparations have also begunfor the 2004 budget, which is due to be presented to parliament on October17th.

So far in 2003 tax revenue has been relatively robust, aided by the economicrecovery and by revenue of TL1,400trn from the first three instalments of the“tax peace” scheme (July 2003, page 25). Consequently, uncertainty regardingthe government’s ability to meet its year-end targets stems mainly from higherthan expected expenditure in some areas. Personnel costs (see alsoEmployment, wages and prices) rose by 34.3% year on year in the first eightmonths of 2003, compared with an average increase in consumer priceinflation of about 28%. Social security transfers, tax rebates (consisting mainlyof value-added tax rebates to exporters) and agricultural support payments roseby 52%, 67% and 74% respectively in the same period. The government hasadmitted that while its tax amnesty has raised somewhat more revenue thanthe IMF expected, it has also had the effect of increasing applications for taxrebates. Investment spending and “other current expenditure” (which mainlyrelates to the armed forces) continued to be kept to a minimum in the middlemonths of the year, but it is unclear how long these cuts (or delays) can besustained. Interest payments amounted to TL43,968trn in January-August 27.2%higher than in the same period of 2002, and roughly in line with the target. Asa result, the overall budget deficit (including interest payments) wasTL28,443trn, compared with a year-end target of TL45,167trn, or 12.7% ofprojected GNP.

The key fiscal target under the standby accord with the IMF is a primary budgetsurplus for the broader public sector of 6.5% of GNP with a surplus of 0.8% ofGNP expected to come from extra-budgetary institutions primarily stateenterprises. Although only limited information is available, these institutionsappear to be on course to generate more than the required surplus.

Turkey 27


At the beginning of July, just as it appeared that the banking regulator, theBanking Regulation and Supervision Agency (BRSA), had identified all ofTurkey’s weak private-sector banks and placed them under the managementof the Savings Deposit Insurance Fund (SDIF), the BRSA ordered the takeoverof Imar Bank. Imar Bank, owned by the controversial Uzan family, hadreportedly faced a loss of deposits in the wake of the government s decision torevoke the operating licences of the two electricity companies of the Uzangroup in June. Unlike all the other troubled banks seized from their owners inrecent years, the BRSA decided to liquidate Imar Bank straight away. Bona fidedeposit and repo account holders are to be reimbursed in full under the statedeposit insurance guarantee scheme, although interest will be calculated attypical market rates, and not at the notoriously high rates offered by ImarBank. Other savers and creditors may have to await the liquidation processbefore they will know how much, if any, of their money they will recover.

The reimbursement of Imar Bank s customers has been delayed because, theauthorities say, the bank s records are incomplete. The net liabilities of ImarBank are reportedly far higher than initially expected, and may be in thevicinity of TL9,000 trn. This amount would easily exceed the resources of theSDIF, which is expected to seek support from the government. Only a part ofthe reimbursements is likely to be made in cash, with the remainder taking theform of bonds or time deposits. With the help of a special legal amendment,the authorities are pursuing the Uzans and other bank directors and officialsvigorously. The BRSA, which was established in 2000 as part of the overhaul ofTurkey’s banking sector, faces criticism for not taking action earlier.

After stalling in 2002 as a result of poor market conditions and politicalinstability that led to the November general election, privatisation has madeslow progress in 2003. Although in recent months there has been animprovement in market conditions and the government appears to haveadopted a more determined approach because of the need to reduce theburgeoning public debt burden, major obstacles remain. Tenders are due to beheld in the concluding months of this year for four major state enterprises withdominant market positions. However, in late September the governmentannounced that the closing date for bids for the oil refiner, Tupras, was to bepushed back, for a second time, from October 2nd to October 24th. Theprevious closing date was September 18th. The reason given for the latest delaywas to allow parliament time to pass a new petrol market law, which wouldallow Tupras to enter the retail fuel market, thereby boosting its value topotential buyers. The closing date for bids for the Tekel alcohol and cigarettebusinesses has also been postponed, from September 26th until October 24th.According to the minister of finance, Kemal Unakitan, the delay will allow thelarge number of interested parties, including major multinationals, more timeto complete their evaluations. A fresh tender has been announced for thepetrochemicals plant, Petkim, with bids due on November 18th. An earliertender for Petkim was won by a company belonging to the Uzan group with abid of US$605m in June. However, the tender was cancelled when the winningbidder was unable to pay. The government and IMF are targeting cash proceedsof US$2.1bn by the end of the year. This target is unlikely to be reached.

The Imar Bank liquidationmay prove costly

Tenders for sale of major stateenterprises are delayed

28 Turkey


Preparations are also continuing for possible privatisations in other sectors in2004. The government failed to adopt a satisfactory privatisation plan for TurkTelekom by the end of June, but has promised the IMF that it will do so by theend of October. This plan is expected to clarify responsibility for decisions ontiming and method. Legislation approved by parliament in June provides forthe issue of a convertible bond as part of the Turk Telekom privatisationprocess. The same legislation makes various other arrangements to facilitateprivatisation, and provides for the privatisation of the national lottery.Meanwhile, the government formally included a large number of electricitydistribution and generation assets in the privatisation portfolio, and an advisoris reportedly to be appointed by the end of the year to privatise the regionaldistribution networks. In June the government belatedly kept a pledge to theIMF by adopting a privatisation plan for the sugar refineries, which are to besold off in groups. In July a law was approved to facilitate Treasury land sales.

Plans to privatise the third-largest state bank, Vakifbank, are being reconsideredfollowing successive failures. Consultants have been appointed for theprivatisation of Halkbank, the second largest of the three main state banks.Separately, the banking authorities received two bids for Pamukbank onJuly 31st. Pamukbank was seized from its private-sector owner in mid-2002when it became insolvent and has since been run by the Deposit InsuranceGuarantee Fund (TMSF).

Parliament approved amendments to the Public Tenders Act at the end of July.Many features of the system of public procurements that was established in2002 with the support of the international financial institutions in order toensure transparency and fair play have been retained, while clausesdiscriminating in favour of local companies have been softened. At the sametime, however, other restrictions have been eased and a range of exemptionshave been made. Ministers and bureaucrats had frequently complained that thenew procedures, which came into force at the beginning of this year, wereexcessively stringent and cumbersome. July s amendments also reduce theincome of the independent supervisory body, the Public Tenders Authority.State enterprises in the energy, water, transport and telecommunications sectorshave been excluded from the scope of the law altogether, but this provision willonly take effect once new alternative legislation has been adopted.

The central government debt stock, which accounts for almost all of Turkey’spublic-sector debt (the rest amounted to about 2% of GNP at end 2002), hascontinued to rise since 2001 when it surged mainly as a result of the bail-out ofthe banking sector. At the end of July 2003 central government debt wasequivalent to US$185.4bn at the end of July, compared with US$148.5bn at theend of 2002 and US$123.6bn at the end of 2001, although as a percentage ofGDP it declined sharply in 2002 to 85% from about 100% as nominal GDPgrowth outpaced the increase in the debt stock. The sharp rise in the centralgovernment debt stock in dollar terms is mainly the result of an increase indomestic debt, since external government debt (see Foreign trade andpayments) has remained more or less stable, despite IMF credit more thandoubling since the end of 2001. Since last year, the Treasury has generally been

The public procurements lawis amended

Rising domestic debt pushesup government debt stock

Turkey 29


in a position to borrow smaller amounts from the domestic debt market eachmonth than it is due to repay in principal and interest. This situation, whichfacilitates the roll-over of the debt and relieves pressure for higher yields, is theresult of the primary budget surplus and of net foreign borrowing.Nevertheless, in view of the high cost of interest, the domestic debt stockcontinues to increase. As of the end of July, the domestic debt stock stood atTL179,230trn, compared with TL162,558trn at the end of March.

Central government debt(US$ bn; year-end unless otherwise indicated)

2001 2002 2003Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Jul

Debt by lender:Domestic market 28.8 34.8 35.4 38.1 43.3 46.4 62.6 65.4Public sector 46.4 49.4 40.6 41.2 42.5 43.0 54.1 54.1Foreign market 26.0 26.8 28.0 27.9 29.4 29.8 31.6 31.0 Bond issues 20.1 20.9 22.0 21.8 23.1 23.7 25.7 25.1 Other 5.8 5.8 5.9 6.1 6.3 6.1 5.9 5.9International institutions 12.3 12.1 12.8 13.2 13.4 13.4 13.4 13.4IMF credit 10.0 15.3 16.2 19.4 19.9 19.7 21.6 21.5Total central government debt 123.6 138.3 133.0 139.8 148.5 152.3 183.3 185.4 Domestic debt n/a n/a n/a n/a 91.7 95.2 123.3 126.1 External debt n/a n/a n/a n/a 56.8 57.1 60.0 59.3Debt by currency:US$ n/a n/a n/a n/a 22.8 23.7 24.7 24.6¥ n/a n/a n/a n/a 4.4 4.1 3.8 3.8€ n/a n/a n/a n/a 14.9 14.7 15.8 15.2SDR n/a n/a n/a n/a 13.9 14.0 15.0 14.9Other n/a n/a n/a n/a 0.7 0.7 0.7 0.7

Source: Turkish Treasury.

As of the end of July, 67% of the domestic debt was in the form of cash debtthat is, securities issued in the market in return for cash lending. The remainderof the debt was non-cash debt, mainly issued by the Treasury in the past tosupport troubled state and private banks. The share of non-cash debt in thetotal is gradually declining as no new non-cash debt is being issued. Partlyrelated to this, the share of public-sector lenders in the domestic debt is alsofalling. The share of these lenders in the total domestic debt stock fell below50% in May and reached 48% as of the end of July. Public-sector lenders includethe Central Bank of Turkey, state banks, the Savings Deposit Insurance Fund(which is responsible for troubled banks) and other state enterprises. Some ofthese organisations hold normal tradeable Treasury securities purchased atauctions as well as non-cash debt. Private lenders are primarily banks.However, according to Central Bank data, which is based on market value, non-bank lenders have come to hold over TL60,000trn worth of governmentsecurities in recent months, compared with under TL40,000trn at the end oflast year. Individuals account for over half of this amount, institutions for closeto 30%, investment funds for about 15% and non-residents for under 5%. Sincemost fresh borrowing has been conducted through the issue of fixed-rate lira-denominated securities, the share of such instruments in the total domesticdebt stock has increased from about one-quarter to over one-third since the

30 Turkey


beginning of the year. Over 65% of total domestic debt, including all of the non-cash debt, still takes the form of foreign currency-denominated/indexed debt,which has eased debt servicing costs while the lira has been strong, butincreases vulnerability to a sharp exchange-rate correction.

Domestic debt(TL trn unless otherwise indicated)

2000 2001 2002 2003Year Year Year 1 Qtr 2 Qtr Jul

Borrowing 32,469 209,613 125,303 33,461 49,571 13,281

Debt service 37,577 164,361 141,059 34,774 54,438 13,792 Principal 18,968 123,877 97,591 20,973 26,859 9,322 Interest 18,609 40,484 43,469 14,001 17,579 4,471

Total domestic debt stock (end-period) 36,421 122,157 149,870 162,558 175,270 179,230 Average no. of months to maturity 15.5 38.9 32.1 29.0 28.0 27.1Cash debt 29,423 58,354 89,271 101,450 116,664 120,540 Average no. of months to maturity 9.4 20.2 12.8 11.5 13.3 12.9Non-cash debt 6,998 63,804 60,599 61,107 58,606 58,690 Average no. of months to maturity 41.4 55.9 60.4 58.0 57.3 56.2By lender (end-period)Public sectora n/a 80,574 79,107 83,262 86,249 86,284Markets n/a 41,584 70,763 79,296 89,021 92,946By instrument (end-period)Fixed-rate TL n/a 17,745 37,576 44,723 57,265 61,112Floating-rate TL n/a 60,938 64,118 67,940 71,190 71,362Foreign exchange-denominated/indexed n/a 43,474 48,176 49,894 46,814 46,756

a Central bank, state banks, Savings Deposit Insurance Fund (SDIF) and other public institutions.

Source: Under-secretariat of the Treasury.

The average maturity of the domestic debt stock has been declining slightly as aresult of the increasing weight of cash debt, particularly Turkish lira-denominated instruments, which typically have relatively short maturities. Asof the end of July, the average outstanding maturity of the domestic debt was27.1 months, compared with 32.1 months at the end of 2002. For cash debtalone, the average maturity was 12.9 months, little changed from the end of2002. The Treasury provisionally estimated the average real interest rate on thetotal domestic debt stock at 12.87% as of the end of July, up from 10.97% at theend of April, but down from 13.12% at the end of June.

In addition to domestic borrowing and IMF credits, the Treasury has raisedabout US$4bn through the issue of bonds on international capital markets sofar this year. The most recent issue, on June 18th, was a US$750m augmentationof a bond first issued in March 2002 with a maturity of six years. Boosted bythese bond issues, the central government foreign debt stock reachedUS$60.24bn by the end of May, compared with US$56.8bn as of the end of2002. However, the stock declined slightly to US$59.34bn by the end of July.This decline in June and July may reflect cross-rate effects (a stronger dollaragainst the euro since end-May reduces the dollar value of euro-denominateddebt) as well as high debt repayments.

Turkey 31


The Central Bank has cut interest rates six times so far this year, and four timessince the beginning of June. The latest interest rate move came onSeptember 18th when the Central Bank reduced its overnight borrowing rate to29%, compared with 44% at the beginning of 2003. The standard overnightlending rate came down to 35%, compared with 51% at the beginning of thisyear. Justifying the cuts, the Bank has pointed to improving inflationexpectations as measured by its own surveys, the beneficial impact of thestrong lira on cost inflation and to a “controlled” rise in domestic demand,which in its view does not appear to pose a major threat to inflation targets. InSeptember the Bank added that it would continue to monitor demandpressures carefully. It repeatedly emphasised the importance of adherence tothe IMF-agreed economic programme.

No date has yet been fixed for the anticipated switch to a fully fledged systemof inflation targeting. Most recently, the monetary authorities described a trackrecord of fiscal discipline and an incomes policy directed towards meetinginflation objectives as “preconditions” for the switch. Meanwhile, IMF-agreednominal monetary targets were met as of the end of June. Net internationalreserves of the Central Bank and the Treasury were -US$3.9bn, well above theagreed floor of -US$7bn. Base money was US$13bn, only just below the ceilingof US$13.2bn. Mr Unakitan stated on September 9th that the government andCentral Bank were planning to renew the lira at the end of 2004. One new lirawould be worth one million old liras.

Typical secondary market Treasury bond yields have fallen steadily in 2003. InAugust they dipped to under 40%, the lowest level since November 2000. Formost of June and July, yields had fluctuated between 47% and 50%, although theyhad backed up to 55% in early July amid heightened concern over relations withthe IMF and the US. The decline in yields in August reflected the IMF creditrelease and the cuts in Central Bank rates as well as falling inflation. In accordancewith these trends, the average cost of fresh lira-denominated borrowing fell from46-47% in June and July to about 39% in August.

Central Bank cuts interest ratesfour times in July-September

Domestic borrowing ratestumble

32 Turkey


As usual, most Treasury domestic borrowing in June, July and August took theform of Turkish lira-denominated discount bills. About TL700trn was alsoraised through a floating rate note issue in June. The average maturity of lira-denominated borrowing was put at 300 days in June, 262 days in July and 284days in August little different from the preceding months. A small proportionof the Treasury borrowing in each month took the form of US dollar and (inAugust) euro-denominated issues. On July 8th the Treasury sold US$1.4bnworth of 15-month dollar paper at an annual yield of 6.2%, and on August 19thit sold about US$1bn worth of 18-month dollar paper at just 5%.

Yields on Treasury bills and government bonds at auction(%)

2001 2002 2003Dec Nov Dec Jan Feb Mar Apr May Jun Jul Aug

6-month bill ratea 73.6 56.5 49.0 57.0 53.3 55.4 57.0 49.2 46.0 44.5 41.63-month bill rate 71.0 48.2 45.5 50.4 47.0 58.3 46.4 42.0 39.5 36.1 34.3

a Or nearest maturity, excluding three-month.


The domestic economy

Output and demand

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

2000 2001 2002 20034 Qtr Year 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr Jan-Jun

Private consumption 5.6 6.2 -11.3 -9.2 -1.8 3.2 2.5 4.2 2.0 6.5 2.5 4.5Public consumption 5.8 7.1 -8.9 -8.5 2.2 2.6 12.0 4.5 5.4 -3.0 -2.9 -2.9

Gross fixed investment 17.6 16.9 -38.6 -31.5 -28.8 -2.3 5.9 22.2 -0.8 9.3 5.5 7.1 Public sector 19.9 19.6 -18.8 -22.0 -18.1 3.0 29.8 22.7 14.5 -37.8 -11.3 -19.8 Machinery & equipment 18.6 20.3 -32.4 -39.0 -19.3 10.8 71.2 52.8 29.3 -42.3 22.8 -7.8 Building construction 55.4 31.6 -27.3 -20.0 -17.8 27.1 34.1 25.2 23.9 -38.0 -46.3 -44.5 Other construction -2.0 12.2 -0.8 -10.3 -16.8 -13.0 12.7 6.5 1.1 -31.9 -3.5 -11.3 Private sector 16.4 16.0 -50.0 -34.9 -30.9 -4.2 -3.7 21.8 -7.2 20.4 11.9 15.5 Machinery & equipment 33.0 37.2 -69.0 -49.6 -40.8 6.8 15.2 71.0 1.4 53.0 29.9 39.1 Buildings -8.6 -9.7 -8.5 -8.0 -15.1 -16.7 -16.3 -14.7 -15.8 -15.5 -14.4 -14.9

Exports of goods & services 13.7 19.2 6.4 7.4 10.4 5.0 15.8 12.3 11.0 14.5 12.5 13.4Imports of goods & services 19.6 25.4 -26.0 -24.8 2.1 20.3 19.3 22.1 15.7 23.9 20.2 21.9GDP by expenditurea 8.4 7.3 -10.3 -7.5 2.1 8.9 7.9 11.4 7.8 8.1 3.9 5.8GNPb 7.8 6.3 -12.3 -9.5 0.4 10.4 7.9 11.5 7.8 8.1 3.9 5.4

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

Source: State Institute of Statistics.

The recovery in economic activity that began in 2002 continued in the first half of2003. However, real GDP growth slowed from 8.1% year on year in the firstquarter of the year to 3.9% in the second quarter, making for total year-on-yeargrowth of 5.8% in the January-June period. Mainly to a baseline effect, last year,economic activity was noticeably stronger in the second quarter than in the firstquarter. In addition, investment and consumer demand may have been restrained

GDP rises by 5.8% in the firsthalf of 2003

Turkey 33


to some extent in the second quarter by the impact of the Iraq situation oninvestor and consumer confidence. There was a dip in tourist numbers in thesemonths and agricultural output also contracted (see Sectoral trends).

In the first half of 2003 stockbuilding has continued to play a major role,accounting for 11.1% of total expenditure in the first half of 2003. Comparedwith the same period of 2002, there were also significant real increases inprivate investment, which rose by 15.5%, including an increase of 39.1% inpurchases of machinery and equipment, and private consumption, whichincreased by 4.5%, including a 15.8% increase in spending on durable goods andan 8.2% increase in spending on services. However, government consumptionand investment spending declined by 2.9% and 19.8% respectively in real termsin the first six months of the year compared with the same period of 2002,under the impact of tight fiscal policy.

A strong lira and falling interest rates (See Financial indicators) may haveboosted domestic demand in the third quarter of the year. The government istargeting 5% GNP growth for the year as a whole (this would imply a slightlyhigher rate of GDP growth). However, this will be difficult to achieve, especiallyif the stock-building cycle flattens.

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

2000 2001 2002 20034 Qtr Year 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr Jan-Jun

Agriculture 12.2 3.9 -13.2 -6.5 0.1 2.7 6.1 15.3 7.1 7.0 -2.8 0.6

Industry 5.5 6.0 -10.7 -7.5 2.8 12.6 10.5 11.4 9.4 7.8 4.4 6.0Construction 5.9 4.4 -3.3 -5.5 -11.8 -9.6 -3.3 2.7 -4.9 -17.0 -14.5 -15.6

Tradea 12.0 12.0 -14.4 -9.4 4.3 11.7 10.1 16.1 10.7 10.8 6.0 8.1Transport & communications 6.8 5.5 -4.1 -5.3 2.1 8.3 5.4 5.6 5.4 13.7 5.8 9.6

a Consists of wholesale and retail trade, and hotels and catering.


34 Turkey


The breakdown of national accounts data by sector shows that output wasstrongest in industry and services in the first half of 2003, while agriculturaloutput contracted and the construction sector continued its long-term decline.Industrial output increased by 6% year on year in real terms in the January-Juneperiod. For manufacturing industry, the growth rate reached 7% (9.2% in the firstquarter followed by 5.1% in the second). Trade, made up of wholesale and retailtrade and hotel and catering services, grew by 8.1% year on year in the sameperiod. In the case of wholesale and retail trade, including trade in exportproducts and imports, the growth rate was 9.7% (11.5% in the first quarterfollowed by 8.3% in the second). However, hotel and catering services shrank by1.1% compared with the first six months of 2002. This was the result of a 6.2%decline in the second quarter, reflecting in part the dip in foreign visitorsbetween March and May (see below).

More details of the performance of industry are revealed by the quarterlyindustrial production index published by the State Institute of Statistics. Theindex rose by 6.8% year on year in the first half of 2003, but slowed in thesecond quarter compared with the first. For manufacturing industry, which isthe main component of the index, the rise was 7.7%. Among the sub-sectors ofmanufacturing industry, output was particularly strong in the automotiveindustry (+40.3% year on year in the first half), in sectors producing industrialinputs such as miscellaneous machinery and equipment (+19.1%), main metalsprimarily iron and steel (+15.6%), and plastic and rubber goods (+18.1%), and inthe food industry (+12.4%). The output of the clothing industry, fell by 5.5% yearon year, possibly reflecting de-stocking and strong international competition.

The monthly industrial production index, also published by the State Instituteof Statistics, suggests that industrial production continued to rise in July. Themonthly index, which is less comprehensive than the quarterly index, showeda year-on-year increase of 11.9% in July. Manufacturing output was up by 12.8%,utility output rose by 6.4%, and even the long-declining mining sector manageda year-on-year output increase of 4.7%. Among the major manufacturing sub-sectors, automotive output rose by 56.6% year on year, miscellaneousmachinery output by 45% and food output by 34.5%, according to the index.However, textiles production was only 3.4% higher than in the same month oflast year, and clothing output was down by 1.2%.

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

2001 2002 20031 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Total 90.9 93.8 98.2 94.8 93.8 105.0 107.8 106.8 102.2 110.1(-0.9) (-11.1) (-9.7) (-11.9) (3.2) (11.9) (9.8) (12.7) (9.0) (4.9)

Manufacturing 88.5 92.4 96.0 92.7 91.5 105.1 107.1 106.3 100.9 110.8(-0.4) (-12.4) (-10.6) (-12.9) (3.4) (13.7) (11.6) (14.7) (10.3) (5.4)

Mining 83.6 91.8 97.8 85.0 82.4 80.4 86.7 79.1 71.6 68.3(-2.0) (-3.4) (-8.8) (-16.7) (-1.4) (-12.4) (-11.3) (-6.9) (-13.1) (-15.0)

Utilities 120.7 109.6 121.8 123.7 125.0 118.7 128.4 129.5 135 127.3(-3.4) (-22.) (-1.7) (0.0) (3.6) (8.3) (5.4) (4.7) (8.0) (7.2)


Industry and services havegrown rapidly

Industrial output is up by 4.9%in January-June

Turkey 35


Output in the automotive sector has recorded a surge compared with 2002,partly because of the continuing recovery of the domestic market, whichshrank dramatically following the financial crises of 2001-2002, and partly onaccount of strong export growth. Turkish plants, which include subsidiaries andjoint ventures of Renault, Ford and Fiat, exported approximately 117,000 cars,79,000 commercial road vehicles and 7,000 tractors in the first seven months of2003. These figures represent increases of 22%, 87% and 184% respectivelycompared with the same period of 2002. In January-July total domestic sales ofcars and commercial vehicles almost doubled year on year to 152,000. Roadvehicle sales this year are clearly set to outstrip the figures recorded in 2001 and2002 (just under 200,000). However, they will remain modest compared withthe 1997-2000 period when the number of vehicles sold was more than500,000 in 1997, more than 400,000 in each of 1998 and 1999, and nearly660,000 in 2000. Moreover, imports accounted for 53% of total domesticvehicle sales in the January-July period, compared with 45% in thecorresponding months of 2002. The stronger exchange rate may be partlyresponsible for the higher share of imports, which was as high as 66% in thecase of cars.

According to national accounts data, output in the construction sector fell by15.6% year on year in real terms in the first six months of 2003. The sector hasbeen lagging the rest of the economy for many years, taking more time torecover from each crisis than other sectors. However, it recorded a rare positiveyear-on-year growth figure of 2.7% in the final quarter of 2002. The reneweddeterioration so far this year is partly the result of further cuts in publicinvestment spending. In addition, although private investment increased,investments were made in machinery rather than buildings. Confidence infuture economic and political stability does not appear to have been strongenough to encourage long-term investments, with the Iraq crisis possiblyplaying a part in this. Construction statistics compiled by the State Institute ofStatistics from local authority records indicate that the total volume of buildingscompleted in the first half of 2003 was 6.9% lower than in the same period of2002, despite a 5.6% increase in housing completions. The total volume ofplanned new buildings for which construction licences were issued in thisperiod rose, but only by 0.3%.

A strong harvest and a low baseline lifted often-sluggish annual agriculturaloutput growth to 7% in 2002. However, agricultural output is expected to act asa brake on growth this year. According to the national income figures,agricultural output fell by 2.8% year on year in the second quarter after rising by7% in the first. The first official crop estimates for 2003 were announced in thethird week of August. The wheat crop is estimated at 19,000 tonnes the sameas in 2001 and 2.6% lower than in 2002. Estimated output of many other cropsincluding barley, chickpeas, lentils, tobacco, sugar beet, cotton and sunflowerseeds is also lower than last year, albeit higher than in 2001. A poor hazelnutcrop is anticipated, and olive production, which follows a two-year cycle, isthought to be half last year s level. Three successive estimates are made eachyear for the output of most major crops, and the third estimate is taken as the

The automotive industry leadsthe way

The construction sectorremains depressed

Estimates signal a relativelypoor year for agriculture

36 Turkey


final output figure. Agriculture accounts for about 12% of annual GDP, but itscontribution rises to over 20% in the third quarter of the year when most cropsare harvested.

The number of foreign visitors arriving in Turkey in June, July and August 2003was higher than in the same months of 2002. At over 2.1 million, the numberof visitors in July was the highest in any single month on record. In August,foreign visitor arrivals soared further to almost 2.3 million a year-on-yearincrease of 19.1%. The strong performance in the summer months more thanoffset the 19% year-on-year decline in visitor numbers in the March-May period,when bookings were low because of security concerns over the war in Iraq, onTurkey’s south-eastern border. In the first eight months of this year cumulativetourist arrivals were 2.3% higher than last year. While almost 60% of Turkey sforeign visitors continue to come from the wealthier European countries, thenumber of visitors from the former Soviet countries predominantly Russianshas been growing. In July and August, Russia was Turkey s second-largestmarket, accounting for 450,000 visitors, or 10% of the total, compared with 22%for Germany, 9% for the UK and 7% for the Netherlands. Tourist numbers for theyear as a whole are likely to be similar to the record 13.2m recorded in 2002.Concern persists, however, about the low level of spending per tourist.

Tourist arrivals(% of total in brackets)

2001 2002 2002 2003Year Year %change Jan-Aug Jan-Aug % change

OECD countries (Europe) 6,854,504 7,947,397 15.9 5,296,261 5,188,441 -2.0(59.0) (60.0) (59.9) (57.4)

OECD countries (non-Europe) 646,143 443,107 -31.4 276,626 262,006 -5.3(5.6) (3.3) (3.1) (3.9)

Other European countries 1,353,101 1,756,168 29.8 1,155,589 1,168,626 1.1(11.6) (13.3) (13.1) (12.9)

Commonwealth of Independent States (CIS) 1,431,190 1,661,767 16.1 1,147,803 1,392,837 21.3(12.3) (12.5) (13.0) (15.4)

Asia 1,074,877 1,203,394 12.0 803,749 879,438 9.4(9.3) (9.1) (9.1) (9.7)

Total incl others 11,619,909 2,123,678 14.0 8,837,011 9,036,597 2.3


Employment, wages and prices

The number of people in employment rose in all sectors in the second quarterof 2003 compared with the first quarter of the year, according to the householdlabour survey conducted by the State Institute of Statistics. However, thismainly reflects a seasonal increase in jobs in agriculture and construction as theemployment data are not adjusted for seasonal factors. Compared with thesecond quarter of 2002, the number in employment was estimated to havefallen by about 280,000, or 1.3%. The year-on-year decline in employment was2.9% in agriculture, 4.5% in industry and 0.2% in construction, but employmentin services rose by 1.5%.

Economic recovery fails toboost employment

Tourist arrivals rise in June-August, after fall in March-May

Turkey 37


The overall year-on-year decline in employment was primarily the result of asharp decline of about 500,000 in unpaid family labour between the secondquarter of 2002 and the second quarter of 2003. As a result, the proportion ofunpaid family workers to the total number of employed fell from 20.2% to22.2%. Public-sector employment which accounts for about 15% of totalemployment was estimated to have fallen by about 60,000, or 1.8%, betweenthe first quarter of 2002 and the second quarter of 2003. The decline followed asharp year-on-year increase in the first three months of this year.

Workforce and unemployment('000 unless otherwise indicated)

2001 2002 2003Year 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Workforce 23,491 24,233 25,247 24,347 23,818 23,088 24,155Workforce participation rate (%)a 49.8 50.6 52.4 50.3 49.6 47.5 49.4

Total no. in employmentb 21,524 21,975 22,833 21,658 21,354 20,244 21,696 Agriculture 8,089 7,961 8,709 7,618 7,458 6,639 7,731 Industry 3,774 3,976 3,996 3,953 3,954 3,769 3,798 Construction 1,110 1,008 1,118 913 958 676 1,006 Services 8,551 9,029 9,011 9,173 8,984 9,160 9,162Unemployment rate (%)c 8.4 9.3 9.6 11.0 10.3 12.3 10.0

Underemployment rate (%)c 6.0 5.8 5.0 5.1 5.4 5.0 4.6

a Percentage of the population aged 15 or over in the workforce. b Including underemployed. c Percentage of workforce.


The unemployment rate in the second quarter of 2003 was 10%, up from 9.3%in the same period a year earlier. A decline compared with the first quarter of2003 reflects mainly seasonal factors. Indeed, the year-on-year rise in thesecond quarter would have been higher but for a decline in the workforceparticipation rate from 50.6% in the second quarter of 2002 to 49.4% in thesame period of this year. Unemployment among women in the second quarterof 2003 was as high as unemployment among men. Urban unemployment wasput at 13.2%, non-agricultural unemployment at 14.6% and unemploymentamong young educated people in urban areas at 28.1%.

The share of the services sector in total employment rose to 42.2% in the secondquarter of 2003, whereas agriculture and industry fell to 35.6% and 17.5%respectively. Construction was unchanged at 4.6% of total employment. Paidemployment accounted for 49.8% of employment up from 48.5% a yearearlier while employers and the self-employed accounted for 30% up from29.5%. The ratio of those considered “underemployed” (because they are notworking full hours or do not consider themselves properly employed in theircurrent occupations) to the total workforce declined from 5.8% in the secondquarter of 2002 to 4.6% in the same period of 2003, extending a recent trend.

The three-year decline in the real earnings of the formally employed hasdecelerated as inflation has fallen. According to the hourly wages index forproduction workers in manufacturing, real wages fell by 0.5% year on year inthe fourth quarter of 2002 and by 0.9% in the first quarter of 2003. The fall inreal hourly wages in the first quarter was due to a 2.6% decline in real hourlywages in the public sector; in the private sector, real hourly wages rose by about

Real incomes get someprotection from low inflation

38 Turkey


1% year on year for the second quarter in succession. Nevertheless, earnings perperson in the January-March period remained 5.5% lower than a year earlier,indicating that fewer hours are being worked.

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

2000 2001 2002 20032 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Public sector 12.0 10.2 17.2 4.3 -12.5 -15.2 -21.0 -12.6 5.9 4.1 6.9 -2.6Private sector -3.0 -3.8 2.1 -5.9 -15.6 -15.9 -20.1 -15.1 -3.3 -1.1 1.1 0.9

Total -0.7 -1.9 4.7 -4.1 -14.6 -15.8 -20.5 -15.9 -4.3 -2.7 -0.5 -0.9


Wage moderation is a key element of the IMF-backed disinflation programme,but the government has been inconsistent in its adherence to it. In July thegovernment and trades union representatives belatedly agreed a two-year paydeal for some 450,000 public-sector employees of worker status. Basic grosswages are to go up by an initial 5.5-9.2%, bringing the pay of the lowest-paidworkers up to TL455m (US$325) per month. This is to be followed by payincreases of 9%, 5% and 5% at six-monthly intervals. The pay rises envisaged forthe last two six-month periods may be increased if inflation surpasses 5%.Social benefits have also been increased. The pay deal, which was moregenerous than the IMF would have liked, was due at the beginning of 2003, butactual payment of overdue increments has been put off until 2004.

Over two million public servants received a mid-year pay increase averagingabout 9% higher than the 7% previously budgeted for. This follows January srise of 5%, which added up to 6.5-13.7% when increases in various allowancesare included. In its dealings with both public-sector workers and publicservants, the Justice and Development Party government has shown apreference for staggered pay rises, which favour the lowest paid, and forincreases in family-related benefits. The right of public-service trade unions toengage in pay bargaining has been recognised, but they do not have the right tostrike. However, the first pay negotiations produced no agreement on a payincrease for 2004, or on compensation for real loss of earnings in 2003 so thedispute was put to an arbitration committee. The government has offered a riseof 6% at the beginning of 2004 and a mid-year rise of 6%, in line with the 2004inflation target of 12%. It has also proposed an initial increment of TL160m permonth to make up for real loss of earnings in 2003. The arbitration committeehas suggested rises of 10% and 8%, plus TL200m per month. However, itsproposals are not binding on the government.

The downward trend in inflation, which was interrupted in the early monthsof the year, resumed in the middle of the year, assisted by a strengthening liraand a marked seasonal decline in agricultural prices. The wholesale price index(WPI) recorded four consecutive month-on-month falls in May-August,reflecting the impact of the rising lira on the price of imported goods. In June-July, the consumer price index (CPI) also declined month on month. As a result,in August the year-on-year rate of increase was 22.7% for wholesale prices and24.9% for consumer prices. These are the lowest levels since 1982.

Public-sector workers win amodest rise

Inflation dips further with thehelp of the strong lira

Public servants awaitarbitration outcome

Turkey 39


The domestic crude oil price declined by 22.4% between April and July beforerising by 7.8% in August. Wholesale prices of several other heavily imported orinternationally traded commodities such as metals, chemicals andcommunications equipment also declined in this period. These developmentsare directly related to the strong currency. In general, however, wholesale pricesin private manufacturing industry regarded as “core inflation” because they arethe least sensitive to seasonal factors or political decisions continued to rise,albeit by well under 1% a month. Wholesale prices in agriculture declined by14.9% between April and August, but on a year-on-year basis they have risen bya relatively steep 36.8%. Successive price rises, initiated in the public sector,pushed up the price of cigarettes by over 20% over the summer months. Theconsumer price index was also adversely affected by a summer acceleration ofhousing rents and by August s school fee increases. Further seasonal price risesfor education-related expenditures, clothes and food are likely to lead to highermonthly inflation figures from September onwards. Rising consumer demandmay also make inflation more difficult to control. Nevertheless, unless the liradepreciates significantly before November, we expect the rate of consumer priceinflation will be close to the IMF-agreed year-end target of 20%.

Inflation: consumer and wholesale prices(% change, year on year; % change month on month in brackets)

2002 2003Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Consumer prices 37.0 33.4 31.8 29.7 26.4 27.0 29.4 29.5 30.7 29.8 27.3 24.9(3.5) (3.3) (2.9) (1.6) (2.6) (2.3) (3.1) (2.1) (1.6) (-0.2) (-0.4) (0.2)

Wholesale prices 40.9 36.1 32.8 30.8 32.6 33.4 35.2 35.1 33.7 29.6 25.6 22.7(3.1) (3.1) (1.6) (2.6) (5.6) (3.1) (3.2) (0.8) (-0.6) (-1.9) (-0.5) (-0.2)


Financial indicators

After rallying in the wake of the Iraq war, the main Istanbul Stock Exchange(ISE) index fluctuated between 10,000 and 11,000 points in June and July. Theindex broke through the 11,000-point mark at the beginning of August in thewake of the release of the IMF credit tranche and the rescheduling of some ofTurkey s repayments to the IMF. The market then traded mainly in the 11,500-12,000 range, before rising above 12,000 points in the second week ofSeptember, as agreement on a US bilateral loan came closer.

On September 11th the index recorded its highest close of the year at12,507 points. The average daily volume of transactions picked up to US$320min August from the very low level of US$186m recorded in July. Net purchasesof shares by foreign institutions and individuals increased noticeably toUS$174m in the month of August, according to ISE data. In dollar terms, shareprices retreated slightly in June and July after rising sharply in the precedingmonths, when a stock exchange rally coincided with a marked recovery in thelira. In August, however, the ISE dollar-based index rose again. As of the end ofAugust, share prices were higher in dollar terms than at the end of any monthsince December 2002 and 50% higher than at the end of March.

Better IMF and US ties boostshare prices

40 Turkey


Following the remarkable rally of the Turkish lira in April and May, thecurrency has remained stable at around TL1,400,00:US$1 as demand for thecurrency has persisted. The Central Bank of Turkey has continued to holdregular foreign-exchange purchasing auctions and despite the floating exchangerate regime, the Central Bank intervened directly in the currency markets againon July 18th and September 10th, purchasing foreign exchange in order to “curbexcess volatility”. In real terms that is allowing for inflation differentials thevalue of the lira continued to edge upwards in the summer months.

In August the Central Bank s CPI-based real exchange rate index (1995=100)reached 147.1 points. This was its second-highest level ever: in December 2000and January 2001, the two months before the 2001 devaluation, the indexstood at 147.6 and 148.1 points respectively.

Despite the current-account deficit (See Foreign trade and payments), the lira isbeing supported by the decline in inflation, attractive Turkish lira interest ratesand low international interest rates. However, concerns persist about a possiblesharp correction in the lira s value within the next few months, particularly inthe event of any further hesitation in the implementation of IMF-agreedeconomic policies.

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

2000 2001 2002 2003Dec Dec Dec Jan Feb Mar Apr May Jun Jul Aug

US$ 671.8 1446.6 1,639.7 1,635.5 1,588.6 1,700.1 1,567.3 1,419.8 1,407.6 1,411.8 1,392.8

€ 618.6 1281.3 1,718.9 1,769.6 1,712.2 1,850.4 1,743.4 1,680.6 1,609.5 1,598.6 1,519.5Real exchange ratea 147.6 116.3 125.4 119.2 122.7 123.5 127.5 135.4 140.6 145.0 147.1

a Trade-weighted; 1995=100; CPI-based. Provisional data for December 2002-January 2003.

Source: Central Bank of Turkey.

Interest rates have continued to fall in line with Central Bank interest rate cuts(see Economic policy), the fall in inflation and recent financial marketconfidence. One-month and one-year Turkish lira interbank (TRLibor) rates,which hovered at just over 40% and around 50% respectively in June and thefirst half of July, had come down to 33% and 39% by the second week of

Turkish lira strength continues

Credit rises as interest rates fall

Turkey 41


September. Three-month deposit rates offered by major banks ranged between31% and 35% in early September five percentage points lower than in June.Banks have also been cutting their consumer credit rates; in some cases thesehave come down to little over 3% per month.

In these circumstances, bank credit has been expanding. Domestic bank loansrose by 22% in the first eight months of 2003, compared with a cumulative risein consumer price inflation of 11.9% in the same period. Most of the expansioncame in the first quarter and in July-August. Consumer credit led the way. Theoutstanding volume of consumer credit including both bank loans and use ofcredit cards rose by over 50% in the first eight months of the year toTL10,600trn (about US$7.6bn).

The total value of bank deposits in lira terms rose by only about 1% in the firsteight months of 2003 well below the rate of inflation. This was becauseforeign-currency deposits remained stagnant, and therefore declined in localcurrency terms in line with the rising lira. In contrast, there was a 19% increasein lira deposits. As a result, total Turkish lira deposits have exceeded totalforeign-currency deposits since July. Meanwhile, other forms of savings havegrown. Apart from the rise in share prices, the resident non-banking sector(including investment funds) increased its holdings of government debtinstruments by 57% to TL59,000trn at market value, in the year to August.

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

2001 2002 20031 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr July Aug

Money supplyM1 (currency & sight deposits) 8,190 11,073 11,486 12,871 13,707 14,259 14,622 16,869 18,472 18379

(-0.2) (5.9) (3.7) (12.1) (6.5) (4.0) (2.5) (15.4) (9.5) (-0.5)Deposits and reposTL bank deposits 36,813 45,035 47,334 49,691 52,166 56,481 58,850 63,309 66,341 67489

(19.1) (14.7) (5.1) (5.0) (5.0) (8.3) (4.2) (7.6) (4.8) (1.7)Foreign-currency bank deposits 34,705 58,732 54,777 65,865 71,823 74,537 71,770 64,742 64,983 64315

(36.8) (-3.4) (-6.7) (20.2) (9.2) (3.8) (-3.7) (-9.8) (0.4) (-1.0)Customer repos (banks & brokers) 3,868 2,798 3,690 3,707 3,391 2,763 3,925 2,440 2,628 2657

(-35.3) (-30.7) (31.9) (0.5) (-8.5) (-18.5) (42.1) (-37.8) (7.7) (1.1)CreditsBanking system credit volume 34,351 39,049 37,748 38,391 38,546 39,469 45,949 45,711 46,879 47629

(13.1) (-5.6) (-3.3) (1.7) (0.4) (2.4) (16.4) (-0.5) (2.6) (1.6)Domestic loans of deposit money banksa 28,032 31,249 30,911 30,610 30,318 31,845 36,559 37,077 38,242 38975

(9.1) (-3.3) (-1.1) (-1.0) (-1.0) (5.0) (14.8) (1.4) (3.1) (1.9)Consumer credits & credit cards 5,965 4,768 4,627 5,408 5,992 7,001 7,897 9,237 9,656 10599

(-10.9) (-6.2) (-3.0) (16.9) (10.8) (16.8) (12.8) (17.0) (4.5) (9.8)Past due loans (PDL) 4,037 6,421 6,845 8,204 9,639 10,122 9,393 9,342 9,308 9207

(29.3) (-23.5) (6.6) (19.9) (17.5) (5.0) (-7.2) (-0,5) (-0.4) (-1.1)PDL as % of banking system credit volume 11.8 16.4 18.1 21.3 24.8 25.6 20.4 20.4 19.9 19.3

a Excluding loans to the financial sector.


42 Turkey


Foreign trade and payments

In the first half of 2003 the dollar value of exports rose by 32.1% year on yearand imports by 34.4%. Exports totalled US$21.7bn and imports US$30.6bn,resulting in a formal trade deficit of US$8.9bn, some US$2.6bn higher than inthe first six months of 2002.

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

2001 2002 2002 2003Year % change Year % change Jan-Jun Jan-Jun % change

Total exports fob 31,334 12.8 35,753 14.1 16,423 21,698 32.1 Capital goods 2,630 22.9 2,723 3.5 1,264 2,034 60.9 Intermediate goods 13,403 15.8 14,478 8.0 6,970 8,954 28.5 Consumption goods 15,253 8.9 18,402 20.6 8,172 10,589 29.6Total imports cif 41,399 –24.0 51,203 23.7 22,796 30,628 34.4 Capital goods 6,964 –38.6 8,431 21.1 3,498 4,469 27.8 Intermediate goods 29,971 –16.1 37,173 24.0 16,985 22,901 34.8 Consumption goods 4,084 –43.4 4,989 22.2 2,172 3,071 41.4

Trade balance –10,065 –62.3 -15,450 53.5 -6,373 -8,930 40.1


From just US$4.4bn in January and US$4.1bn in February the monthly valueof imports settled at US$5.3bn-5.7bn in March-June. Imports of consumergoods, including cars, increased by 41.4% year on year in the first half of 2003.Even so, consumer goods imports still accounted for only 10% of imports. 75%of merchandise imports were made up of intermediate goods mainly inputsfor Turkish industry and 15% of capital goods. Lower crude oil price in March-May helped to check the rise in the import bill. However, prices have risen forsome non-oil imports, headed by steel, and oil prices have also moved highersince May.

Germany, Italy, Russia, France and the US remained Turkey s leading suppliers,accounting for 39% of the total value of imports. However, imports from the USrose in value by just 9.7% compared with the first half of 2002. In contrast,imports from the UK increased by 68.5% to take a 5.2% market share, importsfrom Switzerland rose by 46.8% to take a 4.5% market share and imports fromChina expanded by 78% to take a 3.4% market share.

Exports have also continued to rise, increasing from an average value of justunder US$3.5bn a month in the first quarter to a monthly average of almostUS$3.8bn in the second quarter. There were significant year-on-year increases inexports of a wide range of industrial products, including textiles and clothing,Turkey s single largest export. However, the most important increases came inautomotive vehicles and parts (up by 69% compared with the first half of 2002,to US$2.4bn), iron and steel (up by 61.4% to US$1.6bn) and boilers, machineryand mechanical equipment (up by 40.4% to US$1.3bn).

In the first half of 2003 the EU accounted for 52.3% of Turkey s exports in dollarterms, compared with 50.6% in the same period of 2003. This increase mayreflect the relative strength of the euro (the appreciation of the lira was more

Trade deficit widens as importgrowth strengthens

Exports continue to rise, butlira strength may curb growth

Turkey 43


marked against the dollar than the euro). Within the EU, sales to Spain andHolland rose faster than sales to the traditional, but depressed, markets ofGermany, Italy, France or to non-euro Britain. Turkey s exports to the USincreased by only 13.3% year on year in the first half of 2003, while exports toRussia fell by 8.8%. Iranian exports to Turkey rose by 91.9% mainly because ofgas sales. Like Spain and Japan, Iran claimed a 2.7% share of the total value ofTurkey’s exports.

The surge in exports appears to have continued in the summer months. Figuresfrom the Exporters Assembly (TIM) suggest that exports rose by 34.2% and29.1% respectively year on year in July and August. There is nevertheless someconcern that the strong lira may have begun to hurt exports, at least in somesectors, particularly textiles and clothing.

Current account(US$m)

2000 2001 2002 2003Year 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Total exports of goods 30,721 8,777 8,431 9,101 34,373 8,831 9,444 10,354 11,189 39,818 11,153 12,257 “Suitcase” trade 2,946 714 772 787 3,039 919 933 1,090 1,123 4,065 757 954Total imports of goods -53,131 -9,303 -9,741 -9,742 -38,916 -9,736 -11,689 -12,649 -14,056 -48,130 -13,418 -15,444

Foreign trade balance -22,410 -526 -1,310 -641 -4,543 -905 -2,245 -2,295 -2,867 -8,132 -2,265 -3,187Services income: credit 20,364 4,158 5,469 3,130 16,030 2,242 3,746 5,393 3,400 14,781 2,501 3,626 Travel income 7,636 2,365 3,555 1,433 8,090 896 2,087 3,813 1,685 8481 803 1,862Services income: debit -8,996 -1,807 -2,014 -1,437 -6,900 -1,539 -2,049 -1,820 -1,489 -6,897 -1,699 -1,837Services balance 11,368 2,351 3,455 1,693 9,130 703 1,697 3,573 1,911 7,884 802 1,789Investments income: credit 2,836 695 570 639 2,753 610 674 515 690 2,489 600 611 Interest 1,168 321 247 247 1,139 248 186 137 213 784 134 238Investments income: debit -6,838 -2,125 -1,610 -1,978 -7,753 -1,836 -1,689 -1,590 -1,923 -7,038 -2,112 -1,861 Interest -4,825 -1,473 -1,307 -1,312 -5,497 -1,059 -1,082 -1,116 -1,160 -4,417 -1,172 -1,108Investments income balance -4,002 -1,430 -1,040 -1,339 -5,000 -1,226 -1,015 -1,075 -1,233 -4,549 -1,512 -1,250Current transfers 5,225 860 863 927 3,803 846 772 864 1,014 3,496 780 842 Workers' remittances 4,560 612 611 649 2,786 477 505 539 415 1,936 440 537Current-account balance -9,819 1,255 1,968 640 3,390 -582 -791 1,067 -1,175 -1,481 -2,195 -1,806


The current-account deficit amounted to US$4bn in the first half of 2003,compared with under US$1.4bn in the same period of 2002, according to thelatest provisional Central Bank of Turkey balance-of-payments data. The deficitwas US$2.2bn in the first quarter of 2003 which is the low season for tourismcredits and US$1.8bn in the second. The deterioration in the current-accountbalance is mainly the result of the widening merchandise trade deficit. Inaddition to the formal trade deficit described above, estimated revenue fromthe informal “suitcase trade” with the countries of the former Soviet Unionwere about US$140m, or 8%, lower than in the first half of 2002. However,these exports consisting of goods ostensibly carried on the persons of privatecitizens returning to their countries after visiting Turkey appeared to bestrengthening again in May and June.

A second factor negatively affecting the current-account balance in the firsthalf of 2003 was a year-on-year decline of US$320m, or 11%, in tourism credits.Tourism receipts fell by as much as 31%, 27% and 16% year on year respectively

The trade gap continues toweaken the current account

44 Turkey


in March, April and May, as a result of low bookings because of the Iraq war,before increasing by 2% in June (See also Sectoral trends). Tourism spending byTurks travelling abroad was little changed, rising in the first quarter of the yearcompared with the same period of 2002, but declining in the second. Despitethe fall in tourism revenue, the surplus on the services balance improved by8% on a year-on-year basis in the first half of 2003, amounting to US$2.6bn.Lower expenditure on financial services and increased net revenue fromtransport services which was related to the growth of foreign trade wereamong the main reasons for this improvement.

The deficit on the investment income balance also increased to US$2.8bn inthe first six months of 2003, compared with a deficit of US$2.2bn a yearearlier. Outflows of earnings from portfolio investments in Turkey, particularlyin February and June, were mainly responsible, along with net interestpayments on Turkey’s debt. Meanwhile, workers remittances, which accountfor the bulk of current transfers credit declined by US$37m year on year in thefirst quarter, but rose by US$32m in the second.

A large trade deficit is also expected in the third quarter of 2003. However, aseasonal increase in tourism revenue is likely to have kept the current-accountbalance close to balance in this period. The current-account balance is expectedto widen again in the final quarter of the year. In July the government furtherincreased its forecast for the 2003 current-account deficit to US$7.4bn.

Capital account(US$ m)

2000 2001 2002 2003Year Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Current-account balance -9,819 3,390 -582 -791 1,067 -1,175 -1,481 -2,195 -1806

Direct investments (net) 112 2,769 95 311 236 220 862 4 22Portfolio investments (net) 1,022 -4,515 -59 -735 -466 670 -590 -75 1087Other investments (net) 11,801 -2,667 3,810 1,350 1,486 853 7,499 3,542 -1356 IMF credits 3,351 10,230 2,979 1,092 2,294 0 6,365 -175 483Reserve assets (- indicates increase) -354 2,694 -1,700 -689 -2,815 -949 -6,153 661 -1194 Reserve position in Fund 0 0 0 0 0 0 0 0 0 Official reserves -354 2,694 -1,700 -689 -2,815 -949 -6,153 661 -1194Capital & financial account 12,581 -1,719 2,146 237 -1,559 794 1,618 4,132 1441Net errors & omissions -2,762 -1,671 -1,564 554 492 381 -137 -1,937 3247


Net inflows of capital through the banking system played an important part infinancing the current-account deficit in the first quarter of 2003 (July, pages 43-44). According to provisional Central Bank data, however, this trend did notcontinue in the second quarter. Net short-term credit usage by the banksdeclined by US$908m year on year in the second quarter after rising byUS$855m in the first. Moreover, banks built up their reserves abroad byUS$825m after reducing them by US$4bn in the January-March period. Instead,the second-quarter current-account deficit was financed with the help ofgovernment borrowing, notably the US$700m IMF credit released in April anda net inflow of US$1.4bn from government bond issues (included under“portfolio investments” in the table below). Direct investment remained

Government borrowing helpsto fund current-account deficit

Turkey 45


minimal. These capital-account figures are likely significantly to be revised,given the high positive figure for net errors and omissions, which may be partlyrelated to unrecorded cash transactions, but which also suggests that estimatesmade for various items may have been too low.

Official foreign-exchange reserves increased by US$1.2bn in the second quarterof 2003 after falling by US$661m in the first quarter. The Central Bank grossforeign-exchange reserves stood at US$28.5bn at the end of June. The Bank isknown to have been able to build up its reserves further in the summermonths through foreign-exchange buying auctions. The reserves reached almostUS$30bn at the end of August and US$31.4bn as of September 12th.

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

2000 2001 2002 2003Dec Dec Dec Feb Mar Apr May Jun Jul Aug

Central Bank gold 1,009 1,004 1,032 1,279 1,279 1,279 1,279 1,279 1,279 1,279

Central Bank forex 19,635 18,741 26,725 27,698 26,663 27,011 28,540 28,841 28,891 29,762Commercial banks' forex 16,717 13,393 11,093 10,505 7,824 8,100 8,995 9,274 10,467 10,932Total gross reserves 37,361 33,138 38,850 39,482 35,767 36,390 38,815 39,394 40,737 41,974


The most recent comprehensive foreign-debt figures, including the debts ofother public-sector institutions and the private sector, date back to the end ofMarch 2003. They put the total foreign-debt figure at US$133.2bn an increase ofUS$1.3bn compared with the end of 2002. Besides a rise in government debtstemming from bond issues, there was a notable increase in short-termcommercial bank loans, which is consistent with a recovery in economicconfidence, activity and trade. However, the greater part of the increase in theforeign debt between December and March was attributable to the weaknessof the dollar against other major currencies. This caused an increase in thedollar value of that part of the foreign debt approximately 53% which isdenominated in other currencies. The same factors are likely to have increasedTurkey s total foreign debt in dollar terms in the second quarter of 2003.

Upward influences on the debt stock in the third quarter include the syndicatedinternational bank loans totalling over US$1.5bn, which leading Turkish banksand conglomerates secured in July and early August, and the US$476m credittranche which the government obtained from the IMF at the beginning ofAugust. Increased borrowing is likely to be offset, at least in part, by arevaluation of the debt stock because of the recovery of the dollar against theeuro since end-May.

The foreign debt stock risesslightly

Foreign exchange reservesexceed US$30bn

46 Turkey


External debt stock(US$ m; end-period)

1997 1998 1999 2000 2001 2002 2003Year Year Year Year Year Year 1 Qtr

Short-term debt 17,691 20,774 22,921 28,301 16,241 15,192 16,708Medium- & long-term debt 66,552 75,644 80,059 90,384 97,565 116,215 116,488Total outstanding debt 84,243 96,418 102,980 118,685 113,806 131,407 133,196By lender:Short-term debt Commercial banks 8,160 9,935 11,540 17,306 7,775 5,187 6,597 Private creditors 9,531 10,839 11,381 10,995 8,466 10,005 10,111Medium- & long-term debt Official creditors 17,036 17,651 16,878 20,054 30,616 40,092 39,961 Bilateral lenders 8,995 9,697 9,128 8,669 8,552 9,193 9,084 Multilateral organisations 8,041 7,954 7,750 11,385 22,064 30,899 30,877 Private creditors 49,516 57,993 63,182 70,331 66,949 76,123 76,527 Private lenders 35,785 43,958 46,444 48,197 45,612 52,280 52,071 Bond issues 13,730 14,034 16,738 22,134 21,337 23,843 24,456By borrower:Short-term debt General government 54 0 0 1,000 0 0 0 Central Bank of Turkey 889 905 686 653 590 451 444 Deposit money banks 8,503 11,159 13,172 16,900 7,997 6,344 7,808 Other sectors 8,245 8,710 9,063 9,748 7,654 8,397 8,456Medium- & long-term debt Public sector 38,873 39,891 42,381 47,803 46,325 63,877 64,069 General governmenta 34,744 35,673 37,635 42,376 41,173 59,093 59,394 Other governmentb 937 686 863 1,192 1,116 988 949 State-owned enterprises 3,191 3,531 3,883 4,234 4,035 3,797 3,726 Central Bank of Turkey 10,868 12,073 10,312 13,429 23,753 21,544 21,971 Private sector 16,812 23,680 27,367 29,153 27,487 30,794 30,448 Financial institutions 5,535 6,879 7,482 7,581 4,788 4,714 4,617 Non-financial institutions 11,277 16,801 19,885 21,571 22,699 26,080 25,831

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


Documents

Turkey · Interior Abdulkadir Aksu Justice Cemil Cicek Tourism & culture Erkan Mumcu Transport Binali Yildirim Sureyya Serdengecti Official name Central Bank governor Main political