Turkey began a series of reforms in the 1980s designed to shift the economy from a statist, insulated system to a more private-sector, market-based model. The reforms spurred solid growth, but growth that has been punctuated by sharp recessions and financial crises in 1994, 1999, and 2001. Turkey’s failure to pursue additional reforms, combined with large and growing public sector deficits, resulted in high inflation, increasing macroeconomic volatility, and a weak banking sector.

The Ecevit government, in power from 1999 through 2002, restarted structural reforms in line with ongoing economic programs under the standby agreements signed with the International Monetary Fund (IMF), including passage of social security reform, public finance reform, state banks reform, banking sector reform, increasing transparency in public sector, and also introduction of related legislation to liberalize telecom, and energy markets. Under the IMF program, the government also sought to use exchange rate policies to curb inflation.

By late 2000, a growing current account deficit, the weak banking system, and growing concern over the failure to implement needed structural reforms resulted in a liquidity crisis that led to a revised IMF program. In February 2001, a public dispute between the president and prime minister triggered a run on the lira and a dramatic increase in interest rates. The result was rapid inflation, a severe banking crisis, a massive rise in domestic public debt, and a deep economic downturn (GNP fell 9.5% in 2001). The government was forced to float the lira and adopt a more ambitious economic reform program, including a very tight fiscal policy, enhanced structural reforms, and unprecedented levels of IMF lending.

Large IMF loans–tied to implementation of ambitious economic reforms–enabled Turkey to stabilize interest rates and the currency and to meet its debt obligations. In 2002 and 2003, the reforms began to show results. With the exception of a period of market jitters in the run-up to the Iraq war, inflation and interest rates have fallen significantly, the currency has stabilized, and confidence has begun to return. Nonetheless, the economy still remains fragile, and continued implementation of reforms is essential to sustain growth and stability.

Turkey has a number of bilateral investment and tax treaties, including with the United States, that guarantee free repatriation of capital in convertible currencies and eliminate double taxation. Nonetheless, foreign direct investment has totaled only $16,4 billion as of June 30, 2003, a modest sum reflecting investor concerns about political and macroeconomic uncertainty, burdensome regulation, and a large state role in the economy.

Turkey seeks to improve its investment climate and has taken steps to improve its investment climate through administrative streamlining, an end to foreign investment screening, and strengthened intellectual property legislation. However, a number of disputes involving foreign investors in Turkey and certain policies, such as high taxation of cola products and continuing gaps in the intellectual property regime, inhibit investment. The Turkish privatization board is in the process of privatizing a series of state-owned companies, including the state alcohol company and the oil refining parastatal. In 2004, the Privatization Board is scheduled to privatize the state tobacco company and the telephone company. Under its commitments to the World Trade Organization, the Government is liberalizing the telecommunications sector.

Inflation and Monetary Policy. Turkey’s principal economic problems remains inflation and public sector indebtedness. Annual consumer price inflation averaged around 80% in the 1990s and nearly 50% in 2000 through 2003 . Wholesale price inflation has been at comparable levels. In 2003, however, Turkey’s Central Bank finally succeeded in controlling inflationary pressures: as of February 29, 2004 the previous 12-month increase in the CPI had fallen to 27.01%.

Turkey’s current economic reform program has had two main goals–conquering the persistent high inflation of 1990s and the associated macroeconomic instability, and reducing public debt to sustainable levels. Following the 2000-01 crisis, which saw the collapse of the crawling peg under the previous International Monetary Fund (IMF) program, a new 3-year standby agreement was approved by the IMF in February 2002. It focused on combating inflation through a floating foreign exchange regime and tight monetary policy conducted by the newly independent Central Bank. The program also requires fiscal discipline leading to a 6.5% primary surplus target in 2003 and 2004 and continued structural reforms. The program began to show its results with lower inflation, resurgent growth and, at least, partial success in maintaining fiscal discipline. GDP growth reached 7.8% in 2002 and 5.8% in 2003, while the government final 2003 fiscal data are expected to come close to its full-year primary surplus target of 6.5% of GDP. The public debt-to-GNP (Net Public Debt to GNP) ratio, after shooting up to 92 in the crisis year of 2001, fell to 79.0% in 2002 and became 72.5% as of 2nd quarter of 2003.

Principal Growth Sectors Energy. Installed energy generation capacity in Turkey reached 28,332.4 MW as of the end of 2001. Fossil fuels account for 59% of the total installed capacity (16,623 MW) and hydro, geothermal, and wind account for the remaining 41% (11,7093 MW). Total electricity consumption reached 126.9 billion kWh at the end of 2001. The growth in electricity generation has remained below electricity demand until recently, which made Turkey a net importer of electricity since 1997. The growth of energy demand slowed somewhat as a result of the 2001 economic crisis, but has picked up again. Turkish authorities expect a significant electricity shortfall by 2008 unless new facilities become operational. The Government of Turkey took some important steps in 2001 to liberalize its energy sector, including passage of the Electricity Market Law and establishment of the Energy Market Regulatory Authority (EMRA). However, the government has done little to follow through on plans to liberalize and privatize the electricity and natural gas sectors. In 2004, the High Planning Council approved the Electricity Sector Reform Strategy to renew the reform process.

Oil provides about 43% of Turkey’s total energy requirements; around 90% is imported. Domestic production is mostly from small fields in the southeast. New exploration is taking place in the eastern Black Sea. In 2004, the Parliament approved a petroleum market reform bill that will liberalize consumer prices and lead to the privatization of the state refining company TUPRAS. Turkey has a refining capacity of 719,275 barrels/day.

Turkey acts as an important link in the East-West Energy Corridor bringing the Caspian energy to Europe and world markets. The Baku-Tbilisi-Ceyhan pipeline to be begin operation in 2005 will deliver 1 million b/d of petroleum, and in 2006, the Shah Deniz pipeline will bring natural gas from Azerbaijan to Turkey. Turkey recently reached agreement with Greece to build an interconnector pipeline, an important step in bringing Caspian natural gas to Europe via Turkey.

Telecommunications. Parliament enacted legislation separating telecommunications policy and regulatory functions in January 2000, by establishing an independent regulatory body, the Telecommunication Authority. The Authority is responsible for issuing licenses, supervising operators, and taking necessary technical measures against violations of the rules. Most regulatory functions of the Transport Ministry were transferred to the Authority. The government also decided to give Turk Telekom commercial status and to end its monopoly in fixed telephone lines by December 2003. It changed this plan in May 2001 and announced full privatization of Turk Telekom, with the exception of a “golden share” for the government to protect security and public interest concerns. The new law allows up to 45% foreign ownership in Turk Telekom and allowing foreign ownership of a majority share is under consideration. Under the government’s privatization strategy for Turk Telekom, the Privatization Authority will issue a tender by May 31, 2004; however, problems relating to the privatization process are likely to prolong the process at least through the end of 2004.

Environment. With the establishment of the Environment Ministry in 1991, Turkey began to make significant progress addressing some of its most pressing environmental problems. The most dramatic improvements were significant reductions of air pollution in Istanbul and Ankara. However, progress on the remaining – and serious – environmental challenges facing Turkey have been slow.

In 2003, the Ministry of Environment was merged with the Forestry Ministry, reducing the influence of environmental officials in government decision-making. With its goal to join the EU, Turkey has made commendable progress in updating and modernizing its environmental legislation. However, environmental concerns are not adequately integrated into public decision-making and enforcement is lacking. Turkey faces a backlog of environmental problems, requiring enormous outlays for infrastructure. The most pressing needs are for water treatment plants, wastewater treatment facilities, solid waste management and conservation of biodiversity. On average, the environmental performance of private firms is much better than the large number of state owned enterprises.

Transport. The Turkish Government gives a special priority to major infrastructure projects, especially in the transport sector. The government is planning the construction of new airports, ports, and highways. The government will realize the majority of these projects by utilizing the build-operate-transfer (BOT) model.

Textiles. The textile sector is Turkey’s largest manufacturing industry and its largest export sector. The removal of EU quotas on textile and apparel imports–part of the customs union–has improved growth prospects. The global phase-out of textile quotas in 2005 will provide increased opportunities, albeit with increased competition from other suppliers, in the U.S. and other markets. Other principal growth sectors are defense equipment, tourism infrastructure, building products, automobiles and automotive parts, and electronics.