Economic Outlook

Since the Second World War the Turkish economy has been transformed by the steady growth of industry and services and the consequent decline in the share of agriculture in national income. Turkey's economic growth rate has been one of the highest in the OECD.

In the early 1980s, Turkey launched a program of structural change and liberalization to prevent the recession of the late 1970s. The program proved to be quite successful in terms of restoring economic growth, improving exports and reducing the inflation rate. Within this context, Turkey's economy grew by 7.5% between 1981 and 1985. However, since 1986, the achievements of the stabilisation program in question have been overshadowed by high inflation rising from gradually increasing public sector deficit.

Nevertheless, Turkey was able to realise an average growth rate of 6% during the period of 1985-1992. 1992 was the year in which economic activity recovered strongly from its stagnant position in the previous years, which was largely the result of the Gulf crisis. Uncertainties and unfavourable external conditions related to the Gulf War led to a sharp contraction in economic activity. Its adverse effects on Turkish exports to the Gulf region are still a major problem. Expansionary policies pursued in 1992 and 1993 kept the growth rate relatively high, but created expensive macro economic imbalances. Briefly, the fluctuation in the economy till 1992 can be summarised as stop-and-go cycles, which were mainly initiated by domestic factors.

High inflation and the devaluation of the Turkish Lira resulted in difficult economic conditions for the year 1994. A series of negative developments such as rising interest rates, stagnation in credit markets, volatility in foreign exchange, an unanticipated inventory build-up and a resulting contraction in domestic demand led the Turkish Government to introduce a Stabilisation and Structural Adjustment Package on April 5, 1994.

The Government's main policy objectives for 1995 focused on public sector deficit reduction, which would subsequently alleviate inflationary pressures. Economic growth as opposed to the significant contraction in 1994, resumed much faster than anticipated, experiencing an unexpected growth of 8 % in 1995. This growth stemmed mainly from the revival of domestic demand.

The Turkish economy grew far more than expected in 1996. The rate of growth almost doubled the official target of 4.5 % and equalled 7.1 %. The expected rate of growth was relatively lower mainly due to two factors. First, it was supposed that the introduction of the Customs Union with the EU would slow down the rate of growth by means of increasing competitive imports. Second and most importantly, general elections at the end of 1995 increased the possibility of putting the long-awaited stabilisation policies into effect via a new government. Imports especially those of consumer goods increased remarkably driven by a live domestic demand supported with expansionary policies, and the real growth rate remained high.

In 1997, GNP increased by 8.3 %. Regarding the sub-sectors, industry was the best performing sector with a growth rate of 10.2%. This sector was followed by the services sector, which had a growth rate of 9.0%. While the construction sector growth rate reached 5.0% the agricultural sector recorded a narrowing down of 2.2%.

The macroeconomic performance of the Turkish economy in the period of 1995-97 can be best described as strong output growth backed with fiscal expansion and an accommodating monetary policy. Strong domestic demand driven by a number of factors including the role played by the large unrecorded economy, high interest rates on government securities held by the private sector and contributed to the high growth performance.

In 1998 growth appeared to be slowing significantly mainly due to a contraction in private consumption and investment resulting from the economic crises in the Russian Federation. GNP growth rate was realised as 3.9%.

Despite the positive signs to overcome the effects of the Russian crises in the beginning of 1999, the earthquakes of August 17 and November 12, continuing high interest rates and increasing domestic taxes deepened the declining trend in GNP. Thus, the growth rate was realised as –6.4% in 1999, which is the greatest decline observed in GNP since the years of the Second World War.

Services, with its share of 66% in total remains to be the most important sector in the Turkish economy followed by industry, which has a 19% share in GDP. Agricultural production on the other hand constituted 16 % of GDP in 1999.

IMF Stand-By Program

Taking into consideration the effects of high inflation and interest rates on Turkey’s economic performance over the last 25 years, the government focused on an economic program which aims to free the country from inflation and enhance the prospects for growth and for a better standard of living for all parts of society. Thus, a disinflation and fiscal adjustment program was initiated on December 22, 1999 supported by a stand-by arrangement (SBA) with the International Monetary Fund.

In view the arrangement, the inflation target for the year 2000 is, lowering the 12-month current price index (CPI) inflation rate to 25 percent and wholesale price index (WPI) inflation to 20 percent by end-December 2000. These inflation targets for 2000 also provide a good starting point for lowering both WPI and CPI inflation to 10–12 percent by end-2001, and finally to move to lower single digits (about 5–7 percent) by end-2002.

The program rests on three pillars: Up-front fiscal adjustment, structural reform, a firm exchange rate commitment supported by consistent incomes policies. Up-front fiscal adjustment is necessary because the weakness of public accounts is the ultimate factor behind high inflation. Structural reform is needed to make the fiscal adjustment sustainable, improve economic efficiency, and, through increased privatization receipts, facilitate the decline of public debt. A firm exchange rate commitment and consistent income policies are needed to lead inflation and interest rates down more rapidly, particularly in the first phase of disinflation.

The strength of the program enhances the credibility of disinflation goals, and will in this way make it possible to achieve disinflation and growth at the same time. Thus, while the primary fiscal position of the public sector will be tightened, growth will be spurred by increased confidence related to the; decline in inflation, the expected fall in real interest rates, the revitalisation of the private credit market, sizeable interest payments that will continue to accrue to the private sector on the stock of public debt in circulation, the improvement in the external economic environment, as economic recovery is expected to strengthen in Europe and tourism receipts return to more normal levels.

In line with the measures, GNP growth in the range of 5–5½ percent in 2000, partly reflecting the rebound from the negative growth in 1999 is projected. GNP growth is expected to remain in the range of 5.6 percent in 2001–02. As economic activity picks up, the external current account deficit is projected to increase from ½ percent of GNP in 1999, to 1½-2 percent of GNP in 2000, with deficits of the same order of magnitude expected in 2001 and 2002.

The performance of the program is measured through reviews made every three months in the first year and twice in the following years.

Significant progress has been made towards achieving the program’s goals. Following the second review, progress in the implementation of the undertakings have become more apparent:

• inflation in the first five months of 2000 fell to the lowest level since 1986,
• the public debt-to-GNP ratio is falling,
• interest rates have declined rapidly,
• output growth is resuming,
• industrial production accelerated sharply in the first four months of 2000,
• in the first 5 months of 2000, production has increased by 3.3% in manufacturing, 9.2% in the electricity, gas and water sectors and decreased by 2.9 % in the mining sector compared to the 5 month averages of the previous year.
• fiscal performance in the first quarter of 2000 has been strong. The floor on the primary surplus of the consolidated government sector was met by a good margin
• due to rigorous implementation of monetary and exchange rate policies in the first few months of 2000, the end-March performance criteria for net domestic assets and net international reserves of the central bank were met.
• a protocol for consolidation of the debts and receivables of State Economic Enterprises in the energy sector has been put in effect.
• progress is made in the improvement the public finance administration and ensuring its transparency.
• there has been successful progress in efforts to reach the privatization target of USD 7,6 billion in 2000.

These results have been achieved through the strict implementation of the policies, which have garnered credibility in both domestic and international financial markets, as also reflected in upgrades by major credit rating agencies. The Credit Rating Agency Moody’s, has announced that the credit note of Turkey will be reviewed with a possible upgrade.

Main Economic Indicators

GDP BY SECTORS (at current prices, %)