Turkey - Economic profile

 

Turkey has been recognized as a functioning market economy in 2005, although macroeconomic imbalances remain. Foreign Direct Investment (FDI), increased significantly in 2005 and 2006, in particular due to large scale privatisations and acquisitions in the financial sector. However, FDI stock still remains low for an economy the size of Turkey’s and investments are not at the desired level. Inflation has been drastically reduced, having come down from 65% in 1999 to single digit rates in 2005. In September 2007 inflation rates amounted to 7.1%. Turkey has also enjoyed healthy growth rates, with Growth Domestic Products (GDP) totalled 6.1% in 2006. This is due particularly to the economic policies pursued after the economic crisis of 2001.

A strong budget performance resulted in a 0.8% deficit of GDP in 2005 (from -33% in 2001). However Turkey still has a burgeoning current account deficit and a large government debt (60.7% of GDP in 2006). Bouts of financial instability in May and September 2004 and in March 2005 and then finally during May-June 2006 show that it is still vulnerable to volatility and sharp changes in global investor sentiment, but at the same time the combination of healthy growth, falling inflation and a tight fiscal policy has made the Turkish economy more robust and resilient to shocks.

With regard to the labour market employment creation remained low despite the strong economic growth. Unemployment rate was 8.4% just after the financial crisis in 2001. In the previous years, unemployment rate has remained stable between 8% and 10%. Moreover, the employment rate remained at relatively low level (44-45%), in particular due to low female labour force participation rate (22-23%in 2006-2007). Economic recovery has prompted a growth in wages, with both private and public sector wages increasing (by about 3% in real terms in 2004 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, such as technical regulation of products, competition, and Intellectual Property Law. 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”, (YTL) which has been used alongside the Turkish lira since 1 January 2005. The Turkish lira is converted to the New Turkish lira as 1,000,000 = 1. Both currencies remained in circulation until the end of 2005 and the New Turkish Lira has become the only legal tender since January 1, 2006. More details on the economic situation can be found in the Candidate Countries' Economies Quarterly (CCEQ) published by the European Commission.

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 capita4.245 € (2006)
Economic (GDP) growth7.4% (2002), -7.5% (2001), 7.9% (2002), 5.8 (2003), 8.9% (2004) , 7.4% (2005), 6.1% (2006)
Inflation rate7.1% (2007 July)
Unemployment rate9.1% (2006 August)
CurrencyNew Lira, introduced 1 January 2005. 1 New Lira = 1,000,000 Turkish Lira. 1 New Lira = €0.53 (September 2006)
Government budget balance0.8% of GDP (2006)
Current account balance-8% (2006)
Foreign debt67.3% of GDP (2006) 68% (2006Q2)
Trade with EU (2005)Exports to the EU: 51.6% % of the total
Imports from the EU: 39.3% of the total

 

Sources: EUROSTAT, Turkish Statistics Institution, Central Bank of Turkey