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Turkey has significantly improved the functioning of its market economy, although macroeconomic imbalances remain. Foreign Direct Investment, while it has increased sharply in 2004, remains low for an economy the size of Turkey’s. One major positive development is that inflation has been significantly reduced, having come down from 65% in 1999 to single digit rates by the middle of 2004. Turkey recently has also enjoyed healthy growth rates, with GDP growth climbing to 12% in the first half of 2004, resulting in estimated growth of 8% over the year as a whole. This is due particularly to the economic policies pursued after the economic crisis of 2001.
Despite a strong budget performance resulting in a surplus of 6% of GNP, Turkey still has a burgeoning current account deficit and a large government debt (about 75% of GDP at end of 2004). However, important progress has been achieved in increasing the transparency and efficiency of public administration.
The combination of healthy growth, falling inflation and a tight fiscal policy has made the Turkish economy more robust and resilient to shocks. However, bouts of financial instability in May and September 2004 and in March 2005 show that it is still vulnerable to volatility and sharp changes in investor sentiment.
With regard to the labour market, economic expansion has started to finally result in the recovery of some of the estimated 1 million jobs lost in the immediate wake of the 2001 economic crisis. Employment grew by 2% in 2004, allowing the official unemployment rate to drop to just 10% in the final quarter of the year. Economic recovery has also prompted a growth in wages, with both private and public sector wages increasing (by about 3% in real terms) for the first time since 2000.
State interference in the economy has been reduced in recent years. Political influence on state banks has declined and important markets, such as electricity, telecommunication, sugar, tobacco and petroleum, have been liberalised. Turkey is still undergoing a transition from an agriculture based economy to a service oriented economy, although the share of employment in agriculture is still high.
Turkey has been a member of a customs union with the EU since 1995, which has increased the volume of trade between Turkey and EU member states. However, Turkey continues to have a large trade deficit. The EU is now by far Turkey’s biggest trading partner, although certain obligations under the customs union agreement are not fully implemented on the Turkish side. The scope of this customs union covers trade in manufactured products between Turkey and the EU, and also entails alignment by Turkey with certain EU policies. Trade between the EU and Turkey in agriculture and steel products are regulated by separate preferential agreements. There is of yet no bilateral agreement on services and public procurements.
In terms of product groupings, Turkey’s main industrial imports from the EU continue to be machinery, automotive products, chemicals, iron and steel. Its main agricultural imports from the EU are cereals. Major EU imports from Turkey include textiles and cloth, machinery, and transport equipment.
Thanks in part to the reduction of inflation to single digit figures, Turkey has been able to introduce the “New Lira”, which has been used alongside the Turksh lira since 1 January 2005. The Turkish lira is converted to the New Turkish lira as 1,000,000 = 1. Both currencies will remain in circulation at least until the end of 2005.
Relations with International Financial Institutions
Turkey has benefited from a stand-by credit facilities from the IMF. The previous three year stand-by accord expired in February 2005. However, there has been agreement on a new accord for 2005-07.
| GDP per capita |
US$ 6,390 (€4,952)(Sources: UN Human Development Index, 2004. Economist Intelligence Unit, Country Report April 2005. ECFIN- CCEQ Candidate Countries Economic Quarterly.) per capita (in purchasing power standards), or 27% of the EU average |
| Economic (GDP) growth |
7.4% (2002), -7.5% (2001), 7.9% (2002), 5.8 (2003), 8.0% (2004) |
| Inflation rate |
12% (2004) |
| Unemployment rate |
10% (2004) |
| Currency |
New Lira, introduced 1 January 2005. 1 New Lira = 1,000,000 Turkish Lira. 1 New Lira = €0.56 (April 2005) |
| Government budget balance |
-7.3% of GDP (2004) |
| Current account balance |
€11.9 billion -4.7% |
| Foreign debt |
75% of GDP (2004) |
| Trade with EU (2004) |
Exports to the EU: 54% of the total
Imports from the EU: 46.7 % of the total |
*Source: European Union |