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TURKISH ECONOMY IN 2002 SUMMARY Turkish economy has been influenced by the financial crises of November 2000 and February 2001. The financial crises turned out economic crises in 2001 with a negative 9.5 percent growth rate in the economy. The economy recovered in 2002 with 7.8 percent growth rate. Acceleration of stock buildings contributed significantly to growth performance. Export and private consumption contribution were also positive while that of investment and import were negative. In 2002, prevailing economic reform program supported by IMF has been redesigned and a new stand-by agreement was signed for the period of 2002-2004. The essence of the program is to reduce public sector deficit by implementing tight fiscal policies, reduce inflation rate with tight monetary policies and conduct structural reform program to achieve an efficient market mechanism. At the beginning of 2002, the program was implemented decisively. However, in the middle of the year certain political uncertainties created difficulties in conducting economic policies. After the election in November, the single-party majority government improved market sentiment significantly. Public sector primary surplus was below its targeted level. On the other hand public sector debt stock to GNP reduced from 99.2 percent in 2001 to 88.8 percent in 2002. Monetary policy performed well in 2002. With restrictions on certain monetary aggregates inflation rate declined significantly. The CPI inflation declined to 29.7 percent in 2002 from 68.5 percent in 2001. With 35 billion dollar, export reached its highest level in the Turkish history. Import demand jumped especially in December mainly due to precautionary motives of importers before facing negative impact of imminent war. Current account deficit was 0.3 billion dollar in January-November period but became 1.8 billion dollar in December due to sudden shift in import demand. Tourism revenues was 8.5 billion as expected. On the other hand net foreign investment was significantly low with 410 million dollar compared to the potentials of the economy. REAL
ECONOMY
From the supply side, growth of industrial value added was 9.4 percent which has a share of 29.4 percent in total GNP. Value added in manufacturing and energy sectors increased 10.4 and 8 percent respectively whereas mining and quarrying decreased by 4.4 percent compared to 2001. Therefore the improvement in the industrial sector production arises mostly from the strong stance of the manufacturing industry. Manufacturing accelerated particularly in textiles, chemical products, basic metals and motor vehicles trailers sectors. Production in the automotive and durable sectors in 2002 increased mainly because of strong external demand. Also, value added rose by 7.1 percent in agriculture, 8.2 percent in service sector in 2002 compared to the same period of 2001. While the contribution of construction and financial institutions to GNP growth stood negative; trade, transportation and communication had a positive contribution to GNP in 2002. On the demand side of the economy, the private consumption expenditures consisting of 63 percent of domestic demand have always been driving force in fuelling economic growth. However, in 2002 private consumption increased at a moderate rate of 2 percent after a contraction of 9.2 percent in 2001. Furthermore, private investment expenditures decreased by 7.2 percent in 2002. The fall in private investment expenditures was largely stemmed from building construction investments. Capacity utilization rates have shown an increasing pattern in 2002 recording a level of 76.2 percent on average compared with the 71.6 percent in 2001. The economic contraction contributed a sharp rise in unemployment in 2001. The overall unemployment increased to 8.5 percent in 2001. Despite the growth performance in 2002 the unemployment deepened to a rate of 10.7 percent. BALANCE OF PAYMENTS
Foreign Trade
In December 2002, exports increased by
5.8 percent, as compared to December 2001, and realized as USD 2.8 billion
which is slightly lower than the expectations. Concerns regarding the war in
Imports realized as USD 50.8 billion in 2002 with an increase of 22.8 percent as compared to previous year. It should be noted that this figure is the highest imports value following the USD 54.5 billion imports of 2000 in which the pegged exchange rate regime was adopted and therefore the appreciation of the exchange rate was under control. In the year of 2000, one of the most remarkable trade deficits, which was USD 26.7 billion, was experienced because of the existing exchange rate regime and, in line with this, a boom in imports. In 2001, after the depreciation of TL trade deficit decreased to USD 10.1 billion. In 2002, trade deficit increased again by 56.5 percent and reached USD 15.7 billion. The deterioration in foreign trade balance was primarily because of the increase in imports. The import coverage ratio, which was realized at 75.7 percent in 2001, plunged to 69 percent in 2002. According to 12-month average figures, exports and imports price indexes declined by 1.8 and 1.2 percent respectively. Exports and imports quantity indexes, on the other hand, increased by 15.8 and 20.8 respectively. Following the two major financial crises in November 2000 and February 2001, the economy experienced a rapid contraction. The crawling peg regime had been given up and with the significant depreciation of the TL a surplus in current account occurred. Coming to 2002, it can be said that due to weak domestic demand the current account remained close to balance but closed the year as deficit in the amount of USD 1.8 billion. Deterioration in the foreign trade balance was the main factor behind the weakening in current account balance. In 2002, tourism revenues increased by 4.7 percent and
stood at USD 8.5 billion as targeted. The average expenditures of tourists,
however, declined by 8.6 percent. The number of visitors coming to
Consequently, current account balance, which registered a surplus of USD 3.4 billion in 2001 due to the significant real depreciation of Turkish Lira, showed a deficit of USD 1.8 billion in 2002. Capital Account
In 2002, the capital account showed an inflow of USD 1.9 billion, compared to an outflow of USD 14.1 billion in 2001. Foreign direct investment remained negligible and realized as USD 410 million in net terms. Portfolio investments, on the other hand, recorded a net outflow of US 694 million. Borrowings through bond issues in international capital markets were USD 96 million in 2001 and realized as USD 590 million in 2002. Long-term capital movements which registered a net outflow of USD 1.1 billion in 2001, turned into an inflow of USD 2.6 billion in 2002. In 2002, short-term capital movements recorded an outflow in the amount of USD 370 million. The official reserves which had decreased by USD 2.6 billion in 2001, increased by USD 6.1 billion in 2002. PRICES Almost over the last two decades, Turkish economy has struggled with persistent and high inflation rates. At the end of the year 1999, an economic program was launched to reduce inflation by adapting a crawling peg exchange rate regime. The program was successful in decreasing inflation rates and weakening the inflationary inertia. However, the Turkish economy was hit by financial crisis in November 2000 and February 2001 subsequently. The crises forced authorities to abandon crawling peg exchange rate regime and switch to free floating system, after a significant devaluation of the Turkish Lira in February. This devaluation of the TL and subsequent economic contraction became major determinants of price developments throughout the year 2001.
In 2002, year-end consumer price inflation (CPI) was 29.7 percent, much below 35 percent targeted rate and the wholesale price inflation (WPI) was recorded as 30.8 percent, again below the targeted 31 percent. It is worth noting that inflation registered an impressive decline in 2002, considering that CPI and WPI inflation rates were 68.5 percent and 88.6 percent respectively at the end of 2001. Tight monetary and fiscal policy, and proper pricing policy of administered product contributed to the decrease in prices in 2002. Since cost oriented factors were influential over inflation than the demand factors CPI stayed slightly behind the WPI in 2002. Annual price increases were 38.4 percent in mining sector, 35.2 percent in agriculture sector, 29.7 percent in manufacturing sector and 24.3 percent in electricity, gas and water sector. Annual private sector prices rose by 27.7 percent while the change in annual public sector prices was recorded as 34.3 percent. Contraction of domestic demand, stability of the exchange rate and appropriate public pricing policy were main reasons of the decline in manufacturing prices. Regarding to the components of the WPI, the highest annual price changes were in education group with 53.8 percent. Annual price increases were 40.1 percent in clothing and 36.8 percent in transportation sectors. In the year 2002, in the process of decreasing inflation great efforts have been spent. As a result ambitious targets have been achieved via continuation of fiscal discipline, completion of banking sector restructuring, improvement in public sector reforms and sound coordination in fiscal and monetary policy implementations in the year 2002. Inflation target for the year 2003 was
assigned as 20 percent for CPI. The achievement of these targets depends on
implementation of the tight monetary and fiscal policy. The war in FINANCIAL
MARKET Monetary
Policy and Analytical Balance Sheet of Central Bank: Central Bank of Turkey (CBT), whose law was revised in May 2001, has become more independent in conducting the monetary policy since then. After this change, CBT has focused their policies on fighting against inflation. Short-term interest rate using in disinflation policies has become main policy tool in the monetary program that has been implemented in 2002. To achieve disinflation, inflationary expectations and the inflation trend have been taken into account in determining the level of short-term interest rates. Following the developments in the price level, CBT reduced short-term interest rates six times in 2002. In addition to this, performance of monetary policy has been monitored through operational targets settled on net domestic assets (NDA) on base money and on net international reserves (NIR).
In 2002, the most important factor influenced the analytical balance sheet of CBT has been determined by these operational targets. In this period, base money was well below the upper limits, which were set in consistent with inflation and the growth rate. On the other hand, combination of base money has changed in favor of net foreign assets (NFA) as a result of using IMF credit as a budget facility. In 2002, open market operation (OMO) portfolio of CBT is one of the major factors contributing to the limitation of base money. As stated above, as a result of using IMF credit as a budget facility, a big amount of liquidity has been put in circulation. In 2002, CBT, therefore, remained net debtor in its OMO and the amount of its net debt position has increased about 7 quadrillion TL in order to mop-up this excess liquidity. On the other hand, the short average maturity of OMO portfolio has created some risks on the financial sector. CBT purchased TL with four-week standard maturity since April 2002 by deposit auctions in order to overcome these risks. Monetary
Aggregates: Foreign exchange deposits rose by 8.7 percent in dollar terms in 2002, while total TL deposits decreased 4.2 percent in real terms. M1, M2 and M2Y expanded by 28.8 percent, 30.2 percent and 28.2 percent in nominal terms, respectively. Consequently, these expansions were mostly in line with inflation rates. Credit
Markets: The most crucial effect observed in banking sector in the post-crisis period is the shrinkage in domestic credit volume. This trend also continued throughout 2002. In this period, credit to private sector by depository institutions has decreased about 25 percent in real terms despite high economic growth. This shrinkage is resulted mostly from ongoing political uncertainty and prudential regulations regarding tight credit provisioning requirements imposed by Banking Regulation and Supervision Agency. On the other hand, designed as an integrated part of the bank-restructuring program, debt-restructuring implementation namely “Istanbul Approach” was put into practice successfully in midyear. As a framework of Istanbul Approach, 41 small-scale and a total of 128 large-scale companies have been taken under the scope of restructuring as of October 2002. Amount of debt belonging to small-scale companies brought under the scope of restructuring has been about USD299 million, while the amount for large-scale companies have been about USD 2.5 billion. Bond
and Exchange Markets: After the floating exchange rate regime the fluctuations in exchange rates and bond interest rates have been quite interrelated. Expectations, mainly shaped by the political situation, were the main determinant of the fluctuations in the interest rate and exchange rate in 2002. Primary and Secondary Bond Markets: In the primary bond market, Treasury’s average auction interest rates decreased sharply from 74.8 percent in December 2001 to 55.3 percent in May 2002. On the other hand, the average maturity of the bills supplied in auctions, which was 176 day in January, has also extended to 216 day in May. But political developments starting from May 2002 reversed this trend. As a result of this, average auction rate reached its highest level of the year by 72.5 percent, while average maturity reached its lowest level by 159 days in July 2002. In the remaining period of 2002, average interest rates started to decrease. But this decrease has been gradual between August 2002 and November 2002 relative to decrease in November and December. As a result of the changes in entire year, decrease in interest rates reached 24.3 points on year on year basis, while average maturity increased about 65 days.
Secondary bond market has also been
subject to fluctuations associated with the changes in domestic political
environment. As of Foreign
Exchange Markets: Foreign exchange markets were also affected by the political developments in 2002. As end of 2002, TL depreciated against USD and Euro, by 14.9 and 34.9 percent respectively in nominal terms on annual basis. It has been observed that USD and Euro reached their minimum levels on April 10, 2002 realizing as TL 1.298 million and TL 1.142 million respectively, while these two currencies reached their maximum levels on July 16, 2002 by 1.693 million and TRL 1.7 million respectively. CONSOLIDATED
BUDGET Consolidated budget primary surplus over GNP was 4.4 percent in 2002. The budget deficit over GNP declined from 16 percent in 2001 to 14.6 percent in 2002. Decrease in interest payments contributed to the lower deficit.
Consolidated
Budget Expenditures Non-interest expenditures was above the targeted level due to unexpected rise in transfer payments to Social Security Institutions (SSI) and tax rebates, which increased by 29.4 percent in real terms compared to 2001. The ongoing structural problems of the SSI’s deepened in 2001 after the financial crises in 2000 and 2001. In 2002, although some precautionary measures were taken, their financial position was not improved as expected. Therefore, in 2002 budget transfer to the SSI reached 4.1 percent of GNP. Still no recovery signs were seen in their financial positions. Tax rebates increased in 2002, mainly due to significant rise in export and acceleration of tax rebate payments. While capital transfers to the state owned enterprises (SOE) declined in real terms, transfers due to duty losses increased in 2002 compared to 2001. In general, SOE’s pricing policies on goods and services were in line with the market prices and more rational personnel policy was implemented. Therefore, the SOE’s became more profitable in 2002 compared to 2001. Personnel expenditures remained almost stable in real terms due to tight income policy. Because of the economic crises Consolidated
Budget Revenues Tax revenues did not change in real terms in 2002. While direct taxes decreased in real terms, the increase of indirect taxes had set off this negative impact. The rate of indirect taxes in total taxes was 66.3 percent in 2002, showing a 6.8 point increase compared to the previous year. Revenues from domestic VAT increased by 5.5 percent in real terms. Since the private consumption contribution to the GNP was not significant, the rise in VAT remained tight. The VAT on imports rose 14.6 percent in real terms over the previous year thanks to import growth. In mid 2002, some taxes (additional VAT, motor vehicle purchasing tax, petroleum consumption tax and some part of the domestic VAT) were combined into one single tax, namely “special consumption tax” (SCT) for efficiency purposes. The petroleum consumption tax revenue (including the relevant SCT) increased by 31 percent in real terms with respect to 2001. In 2002, there was also a 5-6 percent increase in petroleum consumption. Withholding tax revenues, approximately 90 percent of the income tax, declined mainly due to increase in unemployment rate and decrease in interest rates. As a result, income tax revenues fell from 6.5 percent of GNP in 2001 to 5.0 percent of GNP in 2002, while corporation tax revenues did not change in real terms. The construction of the banking sector and the decline in banking sector’s transactions had also a cynical effect on banking and insurance transaction tax revenue. Non-tax revenues decreased by 18 percent in real terms in 2002 with respect to previous year. In 2001, revenues were collected from GSM sales, and there was a huge increase in revenues coming from revaluation differences too. In 2002, approximately 4.4 quadrillion TL revenues came from CBT profits and interest revenues. The target on non-tax revenues was met mainly because of the rise in transfers from the state banks. DOMESTIC
DEBT One of the most important targets of the economic program is to reduce the debt stock over GNP level. In this regard, 2002 was a quite successful year. The domestic debt stock was 149.9 quadrillion TL in 2002. Its share in GNP declined from 64.1 percent in 2001 to 54.8 percent in 2002. In the same period, consolidated budget total debt stock diminished from 99.2 percent to 88.8 percent. While 48 percent of the domestic debt stock was in cash bases in 2001, in 2002 it rose to 60 percent. This is mainly because of the decline in Treasury’s debt to the Central Bank/IMF and SDIF banks. There is a notably difference in the composition of the domestic debt stock. The share of the fixed rated debt stock in the cash based stock rose from 30 percent to 42 percent, while FX linked and denominated debt stock declined from 50 percent to 38 percent in 2002 compared to 2001. Public Finance and Debt Management Law was enacted in 2002. According to the law a more efficient debt management system will be implemented via establishment of a new debt management office and, restrictions and limitations have been brought to the contingent liabilities. EXTERNAL DEBT External debt stock increased from 113.9 billion USD in 2001 to 131.6 billion US Dollar in 2002. But its share in GNP dropped from 91.4 percent to 78.6 percent thanks to economic growth rate and real appreciation of the TL against dollar. In 2002, approximately 3.4 billion USD Treasury Bond was issued in foreign markets. Meanwhile, Treasury received 12.9 billion USD credit from the IMF Stand-By agreement. (Prepared by the
Undersecreteriat of Treasury) |
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