Economy and Trade
Turkey has a dynamic economy, combining modern industry and commerce with a traditional agriculture sector that still accounts for around 9% of GDP and 27% of employment. The state still plays a major role in areas such as basic industry, banking, transport, and communication, but the private sector is strong and also growing rapidly.
A major economic crisis in 2001 led the economy to contract by 9.5%. Since then, however, the Turkish economy has grown strongly—on average by around 6% per year from 2002 to 2007. More recently, the turmoil in the financial markets and the resulting global recession has caused GDP growth to fall sharply to 1.1% in 2008.
Moderate economic growth and high levels of foreign direct investment in recent years indicate that economic fundamentals are sound. Further economic and judicial reforms, as well as the prospect of EU membership, may also boost foreign direct investment. However, the ongoing global slowdown is likely to lead to more negative figures for the Turkish economy. Unemployment—currently around 10%—and large income disparities across society as well as different regions are also still major problems.
Economic Policy over 12 Months
The government ended its formal IMF program in May 2008, following significant falls in inflation and public-debt ratios, strong, sustained economic growth, and record levels of foreign direct investment (estimated at US$22.3 billion in the year to May 2008). However, this has also left the government with the important question of how to strike an appropriate future balance between preserving the rigorous fiscal policy stance—anchored by the IMF previously, and decisive in restoring macroeconomic stability—while still managing sustained growth in a difficult environment.
A series of large privatizations, the start of Turkey’s EU membership negotiations, strong sustained growth, and structural changes in the private sector, have all contributed to the rise in foreign investment. Turkey has also taken steps to improve its investment climate further through no longer requiring foreign investments to be screened, streamlining bureaucratic processes, implementing bilateral investment and tax treaties, and strengthening intellectual property legislation. However, problems still exist, as evidenced by recent disputes involving foreign investors in Turkey. High taxation and the need to build further on the reforms already implemented, particularly with regard to intellectual property, are also potential deterrents.
Internally, the government also passed a revised social security law in early 2008, which restructures the pension system, and will be a major step forward in strengthening the long-term sustainability of Turkey’s public finances. Furthermore, the decision to publish fully fledged general government accounts, according to international accounting standards, from 2009 onwards will be an important step in enhancing fiscal transparency, and government accountability,
To reverse surges in inflation in early 2008, the central bank had moved to a tightening bias, but monetary policy subsequently eased significantly as the global crisis worsened. Policymakers slashed Turkey’s benchmark borrowing rate by 6.25% between November 2008 and March 2009, taking it to a record low of 10.5%.
Worryingly, negotiations with the IMF with a view to signing a new standby loan had not been concluded by March 2009. In particular, differences remain unresolved over the parameters for fiscal discipline, and the IMF’s calls for continued structural fiscal reforms, including the adoption of a more rules-based fiscal framework, and strengthened tax administration. The picture is complicated by the OECD’s assertion that Turkey also needs to support investor confidence, especially given the large current account deficit, and the increased volatility of the exchange rate. According to the IMF, greater fiscal transparency and the implementation of credible spending rules would facilitate the operation of automatic stabilizers without undermining confidence.
Economic Performance over 12 Months
By the conclusion of the last Stand-By Arrangement (SBA) with the IMF in May 2008, Turkey’s economy had developed significantly: inflation had dropped from perennial double-digit numbers to its lowest levels for 35 years, public-debt ratios had declined sharply, the banking system had been restructured, and the country was enjoying a prolonged economic expansion.
Since then, the economy has slowed sharply, as weakness in domestic demand was compounded by the turbulence in financial markets, and the resulting global slowdown, which hit exports hard. Furthermore, the current-account deficit had widened considerably over the course of the economic expansion, thanks to strong capital inflows and rising commodity prices, which stoked inflationary pressures. Together, these factors weigh heavily on Turkey’s economic outlook, and have heightened risks, due to the private sector’s significant reliance on external financing.
The Ministry of Finance budget data up to January 2009 confirms the deterioration in the country’s economic prospects. GDP growth has slowed sharply, falling by 6.2 percentage points in the final quarter of 2008, while inflation has now crept back into double figures. The rate of unemployment also rose to a record 12.3% in November 2008. The currency has also not been immune—the Turkish lira slid around 25% against the dollar in 2008, mostly in the final months of the year.
Political developments have also distracted attention from an ambitious economic agenda. In 2008, Turkish financial markets weathered significant domestic political turmoil, including the attempted closure of the ruling Justice and Development Party (AKP) over accusations of having an Islamist agenda. More recently, in local elections in March 2009, the AKP saw its vote share decline for the first time since it came to power in 2002. The move has been widely interpreted by market analysts as reflecting growing discontent over the economic downturn, which has led to calls for the government to speed up negotiations with the IMF to finalize a deal, and reinstate investor confidence.
The Economist Intelligence Unit expects the Central Bank of Turkey to cut interest rates further in 2009, as concerns over liquidity and the weakening economy mount. According to the OECD, growth is expected to decline to below 2% in 2009 before recovering to 4.25% in 2010, in line with their projected global recovery.
Support for Inward Investment and Imports
The Republic of Turkey Prime Ministry Investment Support and Promotion Agency (ISPAT) is the official organization for encouraging and promoting investment in Turkey. Particular support is given to the manufacturing and energy sectors, and for investment in “priority development regions.”
There are significant tax incentives in Turkey, including those for R&D and industrial businesses. In particular, there are 20 free trade zones in Turkey, with advantages including corporate tax, income tax, and VAT exemptions.
GDP growth: 1.1% (2008, Statistics Office)
GDP per capita: US$12,900 (2008, est.)
CPI: 10.2% (2008, est.)
Key interest rate: 10.5% (March 2009, Central Bank)
Exchange rate versus dollar: Turkish liras per US dollar—1.3179 (2008, est.)
Unemployment: 7.9%, plus underemployment of 4% (2008, est.)
FDI: US$124.8 billion (2008, est.)
Current account deficit/surplus: −US$51.68 billion (2008, est.)
Population: 76,805,524 (July 2009, est.)
Source: CIA World Factbook except where stated