Turkey - Money

Inflation remains Turkey's principal economic problem. During the 1970s, inflation averaged about 20 percent, rising to 40 percent during 1981-87, 65 percent during 1989-93 and 85 percent during 1994-95. In late 1997, inflation reached 100 percent before the government launched another attempt at deflating the economy in mid-1998.

The extensive role of the government in the Turkish economy, coupled with weak political leadership, is the primary reason behind the country's chronic inflation. While the program of structural change and liberalization in the 1980s proved successful in promoting

economic growth, the government remained hesitant in relinquishing the economic power it held through the strong public sector. However, inefficiencies in the public sector—primarily the expenditure on state economic enterprises—resulted in large, ever-increasing budget deficits. The situation was made worse by political uncertainty as the lack of a stable majority government led to frequent elections. Prior to each election, governments have tended to boost spending in an effort to gain short-term popularity, a ploy that results in even larger national debt . Such serious deficits naturally lead to very high rates of inflation.

In 1994, high inflation, coupled with government attempts to manipulate interest rates and an overvalued currency, brought financial crisis and economic recession. Things picked up in 1995, and financial expansion continued until 1998, when the economic difficulties of Russia impacted Turkey. This led to an 18-month program of deflationary measures, which was followed up by an IMF-backed 3-year program initiated in December 1999. This aggressive program rested on 3 pillars: an up-front fiscal adjustment to decrease the public deficit in the short-term, structural reforms to ensure long-term stability and a balanced fiscal budget, and a firm exchange rate commitment to control external factors. Based on the first 6 months' performance, it seems that the budget deficits have largely been brought under control. Several steps have been taken, and the rate of inflation has been visibly declining. However, more structural reforms need to be completed if this long-term problem is to find a permanent solution.

The Turkish lira (TL) has been a fully convertible currency since 1990. With the major economic reforms of the early 1980s, the financial policies were also revamped. For the first 5 years following these reforms, the Central Bank determined the foreign exchange rates on a daily basis, targeting a 5-10 percent per year real depreciation of the Turkish lira as an incentive to exports. After the first 5 years, the foreign exchange rates were completely freed. In 1994, the financial crisis led to a major depreciation of the lira against the U.S. dollar. From 1994 until the end of 1999, the Central Bank allowed the lira to depreciate against a trade-weighted dollar/Euro basket. In 1995, 1 U.S. dollar was worth 45,845 Turkish liras. In January 2000, the same U.S. dollar was worth 545,584 liras. Since the end of 1999, with the initiation of the 3-year deflationary program, the TL is allowed to depreciate based on a targeted inflation rate . By 2003, it is expected that the currency will be allowed to float freely, assuming that the deflationary goals are met. However, the uncertainty caused by the high inflation rate has led to the "dollarization" of the economy, where most business transactions and major consumer transactions are usually denominated in U.S. dollars or German marks. This limits the Central Bank's ability to maintain price stability and control inflation.

The Istanbul Stock Exchange (ISE) is the only securities exchange in Turkey. It allow the trading of a wide variety of instruments including stocks, depository receipts, government bonds, treasury bills , and real estate certificates. The exchange only began its operations in 1986, but it grew quickly to become one of the top emerging market exchanges of the world. In 1993, the ISE was the best performing stock market in the world, and foreign investment accounted for 25 percent of daily trading volume. By mid-1999 there were 268 companies listed on the exchange. In comparison, the New York Stock Exchange has 3,025 companies listed. The main indicator of the market is the ISE National-100 Index, comprising 100 companies with high market capitalization that are also representative of the major economic sectors.