## Turkey's Economy: A Future Full of Promise, Speech by Anne O. Krueger, First Deputy Managing Director, IMF

_IMF News, May 5, 2005_

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## Bibliographic details
- Published: May 5, 2005

---

### Overview and context
- Speech delivered at the Istanbul Forum, Istanbul, Turkey on Thursday, May 5, 2005.
- Main objective: review recent accomplishments in Turkey’s economy and outline opportunities and reform priorities to raise potential growth and living standards.
- Emphasis: macroeconomic stability achieved to date as foundation; necessity of continued structural reforms to raise potential growth and secure long-term gains.

### Recent achievements
- Economic turnaround since the crisis years of 1999-2001 after a banking crisis and chronic inflation.
- Key performance indicators cited:
  - Average real GNP growth over the past three years: close to 8%.
  - Real GNP growth last year: just short of 10%.
  - Inflation rate three years ago: 70%.
  - Current inflation rate: close to 8%; lowest level in 35 years.
  - Primary surplus last year: almost 7%, ahead of the government's 6.5% target.
  - Ratio of public debt to GNP: has fallen by 30 percentage points of GNP since its 2001 peak.
- Observations:
  - Macro- and structural reforms in monetary, fiscal, exchange rate policies, banking system, and public finances have transformed policymaking and strengthened credibility.
  - Reforms have cumulative beneficial impact; each reform increases returns to other reforms.

### Inflation
- Historical problem: chronic inflation averaged over 60% a year from the 1980s onwards.
- Recent progress:
  - Spectacular decline in inflation alongside fiscal consolidation and healthy growth.
  - Central Bank has outperformed its end-year target for three consecutive years.
- Policy objective:
  - Further reduction of inflation desirable; suggested target range: 2% - 4%.
  - Planned introduction of inflation targeting next year expected to facilitate further declines.
- Rationale:
  - Low inflation improves resource allocation, decision-making by businesses, convergence with industrial economies, and reduces costs borne disproportionately by the poor.
- Notable textual item to preserve as stated: the global downturn of 2001-2202 is referenced in the speech.

### Fiscal policy
- Root cause of past inflation: fiscal imbalances.
- Achievements and current status:
  - Large fiscal adjustment undertaken over a relatively short period enabled significant reduction in public debt burden and risk premium.
  - External debt is still more than 50% of GNP.
  - Gross public debt is over 75% of GNP.
  - Large part of public debt indexed to foreign currencies or linked to short-term interest rates.
- Policy priorities:
  - Maintain the primary surplus target to enable further reductions in the debt burden.
  - Further reduce debt-to-GDP ratio and smooth the debt profile to lower vulnerability to rising worldwide interest rates and exchange rate volatility.
- Observation:
  - High primary surplus and declining inflation have not inhibited growth; rather, macroeconomic stability enabled rapid growth.

### Structural reforms — priorities and specific areas
- General objective: raise potential growth without fueling inflation; make economy more flexible and market-oriented; enable rapid responses to incentives.
- Financial sector:
  - Banking crisis prompted significant reforms: regulatory framework aligned closer to international standards; state banks restructured and recapitalized; banks shifting portfolios away from government paper to expand commercial and consumer lending.
  - Government submitted a new Banking Law to Parliament to address weaknesses identified by the Imar Commission Report and to tackle bank intervention and resolution problems observed during the crisis.
  - Continued evolution of the financial system is necessary to avoid its acting as a brake on growth.
- Tax and budgetary transparency:
  - Reforms to improve budgetary transparency and tax system underway; more envisaged.
  - High tax rates and complexity encourage participation in the informal sector.
  - Policy tools recommended: streamline and simplify the income tax system, lower tax rates, broaden corporate tax base, improve compliance to reduce distortions and increase revenues.
- Expenditure and social security:
  - Pension deficit widened from 2.5% of GNP in 2000 to 3.5% in 2004; on current trends could grow to 7% of GNP over the longer term without further reforms.
  - Overall social security deficit (including health expenditures) could be more than double the current 4.5% of GNP in the long run.
  - Legislation already submitted to Parliament expected to reduce the annual pension deficit by nearly 1% of GNP over a ten-year period and bring the deficit to below 1% of GNP over the longer term.
  - Additional expenditure reforms needed in civil service pay and employment, health and education spending, the judiciary, and government subsidies for farmers to free resources for infrastructure, education, and growth-enhancing spending.
- Privatization and competition:
  - Privatization of government assets to improve competition and reduce burden on state sector.
  - 2003 Foreign Direct Investment Law noted for leveling the playing field for foreign and domestic investors.
  - Investment Advisory Council established in 2004.
- Business climate and regulatory reform:
  - Reforms aimed at cutting red tape, improving court system efficiency, aligning business standards with the EU.
  - Administrative improvements achieved:
    - Opening a business now takes 3 procedures instead of 13.
    - Average time to register a business recently cut to less than a week.
    - Plans to create a one-stop-shop for business permits.
- Labor market reform:
  - Labor market rigidities and high minimum wages discourage hiring and encourage informal sector participation.
  - Compliance costs: firms in Turkey must pay 112 weeks wages to lay someone off, compared with 40 for the OECD average.
  - Turkey scores poorly on measures such as difficulty of hiring workers and rigidity of working hours.
  - Evidence cited: when employers are freer to fire workers, they start hiring; increased flexibility in labor markets seen in countries like the United States, the United Kingdom, Australia and Chile associated with employment gains.
  - Policy recommendation: labor market reform to increase wage and price flexibility, encourage hiring, reduce unemployment, raise real incomes, and reduce poverty.

### Conclusion and policy implications
- Macroeconomic stability is necessary but not sufficient; ongoing structural reform is essential to maintain competitiveness amid globalization and technological change.
- Timing: favorable—prospects for sustained growth are better than in decades; economic upturns provide an opportune backdrop for reforms because benefits materialize more rapidly and adjustment costs are lower.
- Central message:
  - Continue and deepen structural reforms across multiple fronts simultaneously to make past achievements irreversible.
  - The payoff: higher growth potential and a more rapid rise in real incomes—benefits within Turkey’s grasp.
- Final exhortation: maintain reform momentum to secure cumulative benefits and broader convergence with industrial economies.

*Anne O. Krueger, First Deputy Managing Director, International Monetary Fund — Speech delivered at the Istanbul Forum, Istanbul, Turkey, Thursday, May 5, 2005.*

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## References

- [Republic of Türkiye and the IMF](http://www.imf.org/external/country/TUR/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Anne O. Krueger](https://www.imf.org/external/np/omd/bios/ak.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp050505_