Turkey - Economy

Since the end of World War II, the agricultural share of the economy has declined, while that of the industrial sector (including construction) has expanded. This shift in economic activity is in part the result of deliberate government policy. Mechanization of agriculture has produced a significant shift in population from farms to cities, necessitating substantial urban and industrial development and, hence, a high rate of investment. However, this heavy investment, plus an explosion of consumer demand, has also contributed to severe inflation and balance-ofpayments problems.

During the late 1960s and early 1970s, Turkey enjoyed a high economic growth rate, averaging about 7% annually. This growth was financed largely by foreign borrowing, increased exports, and remittances from Turkish workers in Western Europe. As a result of the large increases in oil import costs during 1973–74, however, Turkey's economic growth declined in real terms during 1974–80, and the country suffered a severe financial crisis. Stabilization programs implemented in 1978 and 1979 under a standby agreement with the IMF proved inadequate, but in January 1980, as a condition of further IMF aid, Turkey imposed a more stringent economic reform program, involving currency devaluation, labor productivity improvements, and restructuring of the nation's inefficient state enterprises.

In response to the reforms, the GNP grew on average by 4.8% from 1980 to 1994, the highest rate of any OECD economy. In 1994, structural problems, including inflation rates of between 60–90% and budget deficits of between 6–12%, eventually took their toll, plunging the economy into its worst recession since WWII. Real GNP declined by 6% and the inflation rate exceeded 130%. The underlying strength of the economy, together with a government austerity program designed to rein in spending, led to a turnaround in 1996, and in 1997 GNP grew by 8%. In 1998, real GNP growth slowed and then turned negative as the economy was effected by the Russian financial crisis and domestic political turmoil. Conditions worsened in 1999 as on 17 August 1999 Turkey was hit by the Kocaeli Earthquake (between Bursa and Izmik), the worst ever to hit the country, killing over 15,000, seriously injuring over 28,000, leaving about 500,000 homeless, and causing an estimated $5 billion worth of damage. In 1999, nominal GNP growth was 46.3%, but inflation, as measured by the consumer price index (CPI), was 68.8% and real GNP declined 6.1%.

At the end of 1999, Turkey entered into a three-year standby arrangement with the IMF with a approved credit line of SDR 15.038 billion (1560% of its quota, well in excess of the 300% of quota that is IMF's normal limit), with a stringent set of conditions designed to bring Turkey's chronic inflation under control. The World Bank followed in 2000 with a Country Assistance Strategy (CAS) that provided external program lending, technical assistance, analytical and policy advice. In 1999, the government took over ten insolvent private banks and then began criminal investigations into their operations. Several arrests were made of key bankers, including the nephew of a former president, accused of siphoning off funds in various ways. During 2000 real GNP grew at 6.3% and CPI inflation decreased to 39%. However, in late November the economy was suddenly beset with a banking crisis as foreign investors, apparently more concerned about what further investigations might reveal than convinced that banking was being cleansed, began to rapidly sell their Turkish assets and cut lending. An estimated $6 billion left Turkey in 10 days, $2.5 billion on 22 November 2000 alone. Overnight interbank interest rates climbed to an annualized 1700%, at one point reaching 1950%. Domestic interest rates rose to 60%, almost double the precrisis level.

By early 2001, Turkey's stock market had lost nearly half of its value. A break in the precipitous divestment was achieved when the IMF announced an agreement to supply an additional $7.5 billion credit in a one-year program under its Supplemental Reserve Facility (SRF) to run from 21 December 2000 to 20 December 2001. The reversal of the outflow proved only temporary, however. By late February 2001 the economy was plunged into a full-blown financial crisis, precipitated by the president's criticism of the prime minister's handling of the banking investigations during a meeting on 19 February 2001. The interbank overnight rate reached an annualized 7500% and the stock market lost nearly 18% of is value within a day. The central bank reportedly sold $5 billion of its $28 billion of reserves trying to defend the lira's exchange rate, but on 22 February 2001 it announced its decision to allow the lira to float. Its value dropped 36% in two days, as the exchange rate for the lira moved to 1,223,140 per 1 US dollar. For the year, real GNP fell 9.4% and inflation, measured by twelve-month end-of-period CPI, increased nearly 30% to 68.5%. Net public debt rose to 93.4% of GNP, up from 57.7% the year before. Net external debt doubled as a percent of GNP from 18.5% to 37.1%. In a step designed to restore investor confidence, Kemal Dervish, former vice president of the World Bank, was appointed head of the Turkish central bank. In July 2001 the World Bank revised its 2000 CAS program to include an additional $1.2 billion on Special Structural Adjustment Loan (SSAL) terms, for a total possible lending of $6.2 billion in the period 2001 to 2003. On 4 February 2001, the day Turkey's three-year stand-by arrangement with the IMF expired, the government entered into a new two- year stand-by arrangement with a SDR 8.194 billion ($11.3 billion) line of credit.

As of 30 April 2002, Turkey had outstanding with the IMF over SDR 14 billion ($19.3 billion). Turkey's economic prospects seem balanced between the confidence that can be engendered by its strict adherence to anticorruption, fiscal, monetary, and privatization reform programs and the political resistance and instability such strict adherence might provoke. Real GNP growth for 2002 was projected to be 3% with inflation held to the official target of 35%. To date Turkey remains far from its long-held objective of qualifying for membership in the EU. In December 2002 it was not among the 10 countries invited to join in the next EU expansion.

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