Turkey's economy is a complex mix of modern industry and commerce along with a traditional agriculture sector that in 2001 still accounted for 40% of employment. It is estimated that 50% of the population lives under the international standards of poverty, especially in the war torn south-east areas.
Turkey has a strong and rapidly growing private sector, yet the state still plays a major role in basic industry, banking, transport, and communication. The most important industry - and largest export - is textiles and clothing, which is almost entirely in private hands. In recent years the economic situation has been marked by erratic economic growth and serious imbalances. Real GNP growth has exceeded 6% in many years, but this strong expansion has been interrupted by sharp declines in output in 1994, 1999, and 2001. Meanwhile the public sector fiscal deficit has regularly exceeded 10% of GDP - due in large part to the huge burden of interest payments, which in 2001 accounted for more than 50% of central government spending - while inflation has remained in the high double digit range.
Perhaps because of these problems, foreign direct investment in Turkey remains low - less than USD 1 billion annually. In late 2000 and early 2001 a growing trade deficit and serious weaknesses in the banking sector plunged the economy into crisis - forcing Ankara to float the lira and pushing the country into recession. Results in 2002 were much better, because of strong financial support from the IMF and tighter fiscal policy. Continued slow global growth and serious political tensions in the Middle East cast a shadow over growth prospects in the future. Turkey has recently adopted a new currency, slashing away many "zeros" from the old currency after years of double digit inflation. For example, a taxi ride would cost a few million liras. Overnight, many "millionaires" were gone. In addition, Turkey is a member country of OECD.
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 growth, but growth was 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 remains very fragile, and continued implementation of reforms is essential to sustain growth and stability. On July 29, 2004 the IMF cleared a further disbursement totalling 661 million dollars, as part of an economic aid package approved two years earlier.
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 $15.7 billion as of November 2002, 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 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 and tobacco company and the oil refining parastatal. In 2004, the Privatization Board privatized the telephone company and some of the state-owned banks. The government also committed in the World Trade Organization to liberalize the telecommunications sector at the beginning of 2004.
On January 1st 2005 the Turkish Lira was replaced by the New Turkish Lira, at an exchange rate of 1 new lira to 1,000,000 old. This was to demonstrate the stablisation achieved by the currency in recent years, and to help promote exchange, investment and trade.
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