Snapshot of the Turkish Economy

The performance of the Turkish economy has been strong in the recent few years on the back of the sound economic policies and structural reforms. Strong disinflation policy was backed by fiscal discipline, while EU-convergence and stand-by program with the IMF have been strong anchors.

The progress under the economic program was multi-dimentional and strong. Turkey has managed to deliver outstanding primary surpluses of around 6.5% of GNP, compared to an average of 3.5% over the last decade. With declining interest expenditures and strong primary surplus, budget deficit reached 2% of GNP, down from 16% in 2001 economic crisis. The success on the inflation front has been even more impressive. The inflation declined to single digits and pricing behaviours have been re-shaped partially with forward looking perspective, easing the inflationary inertia.

But the recent global turmoil fueled by the global liqudity squueze put Turkey’s inflation progress under pressure both through the pass-through effect stemming from the depreciation of the TRY as well as high global commodity prices. High current account deficit/GDP ratio has been a concern and a leading reason which made Turkey shaken stronger in the recent global turbulence. Turkish economy is growing fast, and the strong import of the intermediate goods has been driving C/A deficit higher. But the financing side is bright. An increasing portion of the CA deficit is being financed via non-debt creating financing resources and international reserves accumulated on the back of the strong capital inflows. As the stabilization has been achieved the FDI flow to Turkey increased. Privatization revenues in the first 4 months of 2006 roughly reached to the FY2005 level. Annual foreign direct investment inflow that reached some $9.6 bn as of April finances some 36% of the current account deficit. The recent depreciation of the TRY will help to the export front and positively affect the C/A balance in the period ahead. Meanwhile the improving economic activity in the Euro-Zone which is an important trade partner of Turkey will also help the exports. The global economic scenario has changed and the macro equilibriums might change in the period ahead. As Turkey preserves its EU and IMF anchors and as the Central Bank sustains its committed stance to its inflation target through determined monetary reactions, Turkey will stand stronger against the global turbulences.