turkish economic developments in the context of the lisbon strategy “recent developments in t he ...

EP-EK; EU-Turkey:ESC July 2006 1

Turkish Economic Developments in the Context of the Lisbon Strategy

“Recent Developments in The Turkish Economy”

Eve Paarendson & Ekrem Keskin

Kayseri, July 2006


Economic Policy FrameworkEconomic Policy Framework

•Turkey is an open economyTurkey is an open economy

•Capital flows are free, nCapital flows are free, no exchange rate restrictions for investorso exchange rate restrictions for investors

•No discretionary regulation for international investorsNo discretionary regulation for international investors

•The public sector has played a dominant role in the economyThe public sector has played a dominant role in the economy

•Inflation is still high for implementing of free market economy efficientlyInflation is still high for implementing of free market economy efficiently

•Despite the positive changes recently, long term stability is still concerned Despite the positive changes recently, long term stability is still concerned

•Unemployment rate is Unemployment rate is notablynotably high high

•Financial sector is small and has low degree of deepening;Financial sector is small and has low degree of deepening; the state-owned banks he state-owned banks account one-third of the market.account one-third of the market.


Main features of the economyMain features of the economy

•Population is 73 million, second largest in the EUPopulation is 73 million, second largest in the EU

•GNP is Euro 298 billion, seventh biggest in the EUGNP is Euro 298 billion, seventh biggest in the EU

•Income per capital is Euro 4,103, the lowest before Romania and BulgariaIncome per capital is Euro 4,103, the lowest before Romania and Bulgaria

•Foreign trade volume to GNP is Foreign trade volume to GNP is 5252

•Trade with the EU accounts for Trade with the EU accounts for 5050 of the total of the total

•Trained young and dynamic population, skilled entrepreneurs using high Trained young and dynamic population, skilled entrepreneurs using high technologytechnology

•Strong ties and easy access with in the region which may be called “sleeping Strong ties and easy access with in the region which may be called “sleeping beauty”beauty”

•Since 2001, developments have sustained confidence gradually, and led to better Since 2001, developments have sustained confidence gradually, and led to better expectations expectations


Main targets of the economic policyMain targets of the economic policy

•Setting stable rules and institutions; eliminating discretionary Setting stable rules and institutions; eliminating discretionary measures for well functioning market economymeasures for well functioning market economy

•Undertaking fiscal responsibility, focusing to reduce debt to GNP Undertaking fiscal responsibility, focusing to reduce debt to GNP ratio through primary surplus ratio through primary surplus

•Curbing inflation, sustaining price stability and financial sector Curbing inflation, sustaining price stability and financial sector stability for channelling sources to private sector, to reach stability for channelling sources to private sector, to reach an an annual growthannual growth rate of 5 percent, rate of 5 percent,

•Improving fImproving fiscal transparency and ensuring better managementiscal transparency and ensuring better management in in the public sector, ithe public sector, increasing role of private sector and foreign capital ncreasing role of private sector and foreign capital inflowsinflows


Main targets of economic policyMain targets of economic policy

•StrengtheningStrengthening ffinancial sector inancial sector

•Reaching sustainable stability through structural reforms; Reaching sustainable stability through structural reforms; shrinking theshrinking the size of the public sector, size of the public sector, social security, widening tax social security, widening tax base, bankruptcy law.base, bankruptcy law.

• Meeting the EU main economic criteria by 2008Meeting the EU main economic criteria by 2008

•Improving sovereign credit ratings, currently BB- Improving sovereign credit ratings, currently BB-

•Stronger institutions and rules for market economyStronger institutions and rules for market economy..


Recent developmentsRecent developments

• Macro economic policies in conjunction with a positive international environment led to economic performance to improve considerably since 2002.

• Disinflationary monetary and tight fiscal policies supported by some the structural reforms created an environment for higher growth led by the private sector.

• Capital inflow and foreign direct investment increased. • The start of accession negotiations further reinforces the

dynamism of Turkey to complete economic reforms enhancing Turkey’s integration with the EU.


Selected macro economic outcomes of the recent developments


Inflation has came down historically, the lowest during the free market economy although declining trend halted recently and reversed slightly.

Inflation (yoy,%)

05

101520253035

02 03 04 05 06 prg 07 08

Wholesale Consumer


One of the main reasons behind these positive outcomes was the tight fiscal policy which led to a substantial decline in PSBR and budget deficit

Public sector balance and budget balance (as % of GNP)

-15

-10

-5

0

5

02 03 04 05 06 prg

Public sector balance Budget balance


Public sector debt stock to GNP has declined steadily

Public sector debt as % of GNP

60

65

70

75

80

85

90

02 03 04 05 06 Prg 07 08


Banking sector also expanded loans to private sector as government reduced its borrowing

Public sector borrowing requirement and banking sector loans (As % of GNP)

-2

3

8

13

18

99 00 01 02 03 04 05 15

17

19

21

23

25

27

29

31

33

Public sector borrowing requirement Loans


Eased pressures on domestic sources and increased capital flows led to better environment for private sector investments

Fixed capital investment (as % of GNP)

10

12

14

16

18

20

22

02 03 04 05 exp 06 prg

Total Private


Sustainable growth; over the long term average

GNP growth (%)

0

5

10

15

20

25

30

35

02 03 04 05 exp 06 prg 07 08

in TL terms in USD terms


Income per capita in USD terms almost doubled in 2005 from 2002

Income per capita (USD)

2000

2500

3000

3500

4000

4500

5000

5500

6000

02 03 04 05 exp 06 prg 07 08


Despite higher level of income, savings in the private sector fell dramatically.

Savings (As % of GNP)

16

18

20

22

24

26

02 03 04 05 thm 06 prg

Total Private sector


Private sector gave savings gap since 1986, while public sector’s gap narrowed further; total savings gap widened sharply.

Savings gap (as % of GNP)

-15

-10

-5

0

5

10

15

02 03 04 05 exp 06 prg

Savings balance Public Private


As a result, current account deficit widened rapidly; mainly due to strong domestic demand fuelling for imports.

Current account (as % of GNP)

-7

-6

-5

-4

-3

-2

-1

002 03 04 05 06


CB fx reserves recovered substantially

CB fx reserves and ratio to short term external debt

253035404550556065

02 03 04 05 06 May100

120

140

160

180%

Fx reserves (USD bn) CB reserves/st debt (%)


Although better economic performance created new jobs, unemployment rate has remained high due to labour force saving investment and rising participation rate.

Unemployment rate and Real wage index in private sector

8

9

10

11

12

02 03 04 05

%

85

90

95Index (99=100)

Index Unemployment rate


Turkey; labour force status by non-institutional civilian population2005 Unit Total Urban Rural

Non-institutional civillian population thosand person 71.611 44.811 27.274Population over 15 years thosand person 51.202 32.085 19.117Labour force thosand person 24.034 14.624 9.411Employed thosand person 21.332 12.691 8.641Labour force participation rate % 47 46 49Unemployment rate % 11 13 8Non-agriculture unemployment rate % 14 14 16

Source: Turkish Statistical Institute (Türkstat)


Turkey; employment by activity15+ age, % share in total Total Urban Rural2005Total 100 100 100Agriculture 26 4 58Industry 21 28 11Construction 5 6 3Services 48 62 29


Turkey; labour force status by educational level2005 Labour Labour force UnemploymentTotal force particip. rate (%) rate (%)

Illeterate thosand person 1.178 19 6Less than high school thosand person 14.656 46 11High and vocational high school thosand person 5.220 57 14Higher education thosand person 2.981 80 10


Challenges for the near futureChallenges for the near future

•Quick preparation for internal and external shock, elimination imbalances, Quick preparation for internal and external shock, elimination imbalances, keeping reform on track, stability seeking macro economic policies for growth, keeping reform on track, stability seeking macro economic policies for growth, savings, investments and higher employment.savings, investments and higher employment.

•Confidence of households and investors depends solely on the success of Confidence of households and investors depends solely on the success of disinflation. disinflation.

•Fiscal policies must target discipline in public financeFiscal policies must target discipline in public finance

•Wage increase should be forward looking and follow productivity.Wage increase should be forward looking and follow productivity.

•Education and training of young generationEducation and training of young generation

•Higher spending on research and human resources. Higher spending on research and human resources.

•Encourage investments in financial sectorEncourage investments in financial sector


Challenges for the near futureChallenges for the near future

• Competitive taxation policy and fighting for unrecorded economy.Competitive taxation policy and fighting for unrecorded economy.

• Regulation and implementation in line with international best practice, to Regulation and implementation in line with international best practice, to sustain confidence, to encourage investment based on knowledge-based sustain confidence, to encourage investment based on knowledge-based innovation, high technology, education innovation, high technology, education

• Increased competition in all areas of activitiesIncreased competition in all areas of activities

• Rules of law and better implementation of rulesRules of law and better implementation of rules

• Improve investment environment for domestic and foreign direct investorsImprove investment environment for domestic and foreign direct investors

• Infrastructure investments in all regions to curb regional disparitiesInfrastructure investments in all regions to curb regional disparities

Thank you.


According to the Government programme public sector deficit targeted to reduce to 3% of GDP by 2008

Government deficitAs % of GDP

95 . . . . '00 . . . . '05 . . '08

0-1-2-3-4-5-6-7-8-9

-10-11-12-13-14-15-16-17-18-19-20

Turkey EU-15


Inflation is down 4 percent in 2008Inflation

95 . . . . '00 . . . . '05 . . '080

25

50

75

100

Turkey EU-15


Government debt is likely to meet EU level in 2008

Government debtAs % of GDP

95 . . . . '00 . . . . '05 . . '0840

50

60

70

80

90

100

110

120

Turkey EU-15


Selected banking sector inditacorsEU-25 Turkey*2004 2005

Income per capita Euro 22.508 4.225Total assets per capita Euro 63.027 3.468

Total assets to GDP % 280 81Loans to GDP % 118 32Housing loans to GDP % 40 3Consumer credits to GDP % 8 6Loans to deposits % 123 65

Number of credit institutions per inhabitants 54.965 1.538.298Number of branches per inhabitants 2.306 11.574Number of employment per inhabitants 151 547* Figures for deposit and invest&developmen banks

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