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World > Middle East > Turkey > Economy (Notes)

Turkey - Economy (Notes)


ECONOMY
Turkey is a large, middle-income country with relatively few natural resources. Its economy is currently in transition from a high degree of reliance on agriculture and heavy industrial economy to a more diversified economy with an increasingly large and globalized services sector. Coming out of a tradition of a state-directed economy that was relatively closed to the outside world, Prime Minister and then President Turgut Ozal began to open up the economy in the 1980s, leading to the signing of a Customs Union with the European Union in 1995. In the 1990s, Turkey's economy suffered from a series of coalition governments with weak economic policies, leading to high-inflation boom-and-bust cycles that culminated in a severe banking and economic crisis in 2001 and a deep economic downturn (GNP fell 9.5% in 2001) and increase in unemployment.


Turkey's economy has recovered strongly from the 2001 thanks to good monetary and fiscal policies and structural economic reforms made with the support of the International Monetary Fund and the World Bank. The independence of the Central Bank has been firmly established, a floating exchange rate system has been put in place, and the government's overall budget deficit has been substantially reduced. In addition, there have been substantial reforms in the financial, energy, and telecommunications sectors that have included the privatization of several large state-owned institutions.


Turkey's economy grew an average of 7.5% per year from 2002 through 2006--one of the highest sustained rates of growth in the world. It is expected to grow about 6.1% in 2007. Inflation and interest rates have fallen significantly, the currency has stabilized, government debt has declined to more supportable levels, and business and consumer confidence have returned. At the same time, booming economic growth has contributed to a growing current account deficit. Though Turkey's vulnerabilities have been greatly reduced, the economy could still face problems in the event there is a sudden change in investor sentiment that leads to a sharp fall in the exchange rate. Continued implementation of reforms, including tight fiscal policy, is essential to sustain growth and stability.


After years of low levels of foreign direct investment (FDI), in 2006, Turkey succeeded in attracting $18.9 billion in foreign direct investment (FDI) and is expected to attract a similar level in 2007. A series of large privatizations, the stability fostered by the start of Turkey's EU accession negotiations, strong and stable growth, and structural changes in the banking, retail, and telecommunications sectors have all contributed to the rise in foreign investment. Turkey 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 and continuing gaps in the intellectual property regime, inhibit investment. Turkey has a number of bilateral investment and tax treaties, including with the United States, which guarantee free repatriation of capital in convertible currencies and eliminate double taxation.


EU Accession. Turkey's principal ongoing economic challenge is providing for the needs of a fast-growing, young population. Raising living standards to those prevalent in Europe will require high rates of GDP growth sustained over many years. This will entail continued structural reforms that encourage both domestic and foreign investment. Principal areas for reform identified by international financial intuitions include increasing flexibility in the labor market, making the educational sector more responsive to the needs of the economy and ensuring faster and more predictable operation of the judicial system. As an aspirant to membership in the European Union, Turkey aims to adopt the EU's basic system of national law and regulation (the acquis communautaire) by 2014. While implementing some elements of the acquis will be costly and difficult (for example in the areas of environmental protection and agriculture), its adoption will make a significant contribution to modernizing the economy.


Energy. Installed electricity generation capacity in Turkey reached 35,600 megawatts (MW) as of 2004. Fossil fuels account for 71% of the total installed capacity and hydro, geothermal, and wind account for the remaining 28%. The growth in electricity generation has remained below electricity demand until recently, which has 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 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 moved slowly 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 liberalized consumer prices and would lead to the privatization of the state refining company TUPRAS. TUPRAS was privatized in 2005, but this has been held up by court cases still in process. Turkey has a refining capacity of 802,275 barrels per day (b/d).


Turkey acts as an important link in the East-West Southern Energy Corridor bringing Caspian, Central Asian, and Middle Eastern energy to Europe and world markets. The Baku-Tbilisi-Ceyhan pipeline, which came online in July 2006, delivers 1 million b/d of petroleum, and in 2007, the South Caucasus Pipeline (from Shah Deniz) is expected to bring natural gas from Azerbaijan to Turkey. Turkey is building an interconnector pipeline to Greece, 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, and the regulator is slowly gaining competence and independence. The long-expected privatization of the state-owned telecommunications company was accomplished by the sale of 55% of Turk Telekom to the Saudi-owned Oger Group in November 2005. With liberalization and growth in the economy, there is growing competition for Internet provision, but Turk Telekom remains the sole provider of ADSL wide band Internet.


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


In 2003, the Ministry of Environment was merged with the Forestry Ministry. With its goal to join the EU, Turkey has made commendable progress in updating and modernizing its environmental legislation. However, environmental concerns are not fully integrated into public decision-making and enforcement can be weak. 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. The discovery of a number of chemical waste sites in 2006 has highlighted weakness in environmental law and oversight.


Transport. The Turkish Government gives a special priority to major infrastructure projects, especially in the transport sector. The government is in the process of building new airports and highways, thanks to an increased public investment budget. The government will realize many of these projects by utilizing the build-operate-transfer (BOT) model.


Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Turkish Lira Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.



Facts at a Glance
Geography
People
Government
Economy
Communications
Transportation
Military
Climate
Current Time
Ranking Positions
Turkish Lira Exchange Rates


Notes and Commentary
People
Economy
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.





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