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The Economy Returns To Normal

We cannot say that no Turkish government ever managed to run the economy effectively. But there was probably no time when there was such a travesty of economic logic as in the 1990s. It was in this...

Son Güncelleme: 01.05.2005

We cannot say that no Turkish government ever managed to run the economy effectively. But there was probably no time when there was such a travesty of economic logic as in the 1990s. It was in this period that we witnessed things such as enabling people to retire at 38, the setting of agricultural support prices at open auction and treasury auctions being held as if they were a game of trial and error.

hedThe results of such ‘short-sightedness in the management of the economy became apparent towards the end of the 1990s. Indeed it was in this period that the already ‘dislocated’ public sector financial indicators really began to go break down. These indicators really went haywire at the beginning of this decade. We saw the budget deficit rise to more than 15 percent of national income, the Treasury was borrowing at real interest rates of nearly 40 percent, 80 percent of budgetary income going on interest payments, and the rate of public sector debt rising to more than 100 percent of national income. This breakdown in public financing brought the economy to the edge of collapse. We all paid the bill for this in a contraction in the economy, an increase in unemployment and a rise in inflation.

However, as a result of the successful implementation of a stabilization program from 2001 onwards, within a few years the trend has shifted in the opposite direction. The financial indicators which had gone haywire in the late 1990s slowly returned to normal. As a result, inflation fell and the economy underwent rapid growth. If things go on like this, it looks as if we shall be able to the economy normalizing within a few years.

How did the indicators go haywire?

Ever since 1970 the Turkish budget has always posted a deficit. But until the 1990s the rate of the budget deficit to national income rarely rose above the Maastricht criterion of 3 percent, which has today assumed importance in international comparisons. But it rose rapidly through the 1990s and in 2001 reached a record level of 16.9 percent.

The Treasury began holding regular domestic debt auctions in the 1980s. Until the mid-1990s the real interest rates in these auctions were not that high. As the budget deficits were relatively low, during these years the Treasury did not look as if it was desperate for funds. This prevented the lending community from seeking in the auctions an interest rate a long way above the rate of inflation. In some years, high inflation meant that there were even negative real interest rates.

But the situation changed following the crisis of 1994. In 1994 the domestic borrowing interest rate rose to 164.4 percent and, until 2000, it never again fell below three figures. In the same year the real interest rate stood at 39.8 percent, and even if one leaves 2000 to one side, it was around 20-30 percent level even last year. As a result of the increase in the interest burden on the budget, when the debt matured the only way to pay it was by taking new debt. In this situation, the lending community demanded a very high risk premium and this resulted in the Treasury having to borrow at usurious interest rates for fully 10 years.

The repercussions of usurious interest rates

At the beginning of the 1990s, interest payments accounted for around 25 percent of budgetary income. During the era of usurious interest rates on domestic borrowing, this proportion began to rise. The high real interest rates increased the interest burden on the budget, and the high interest burden resulted in the lenders raising the risk premium which in turn produced a rise in real interest rates. This vicious circle meant that in 2001 interest payments were equivalent to 80 percent of budget revenue.

Public borrowing, which is today acknowledged to be our most serious problem, has been inherited from the 1990s. In fact, up until 2001 the rate of public borrowing to national income was not very high. But it was understood that the crisis of 2001 was the result of sweeping the dirt under the carpet. One of the reasons that Turkey was dragged into crisis that year was that, in order to make daily payments, the state banks were forced to borrow from the overnight market at record interest rates. People understood that this was the result of the state being unable to cover the duty losses with which the state banks had been burdened, but it was by now too late. The Treasury was forced to issue special disposition bonds in order to cover these duty losses. At the same time, it was necessary to resort to the same method to balance the balance sheets of the privately-owned banks which had run into difficulties and been taken over by the Savings Deposit Insurance Fund (SDIF). This operation resulted in the ratio of the public debt stock to national income almost doubling from 59.3 percent in 2000 to 117.7 percent in 2001.

The normalization process

It is possible to summarize as follows the current situation of the four financial indicators which we have given above during the period when everything went haywire:

Over the last three years there has been a decline in the rate of the budget deficit to national income. Last year this rate fell to 7.1 percent. This year the government is targeting pulling the rate of the budget deficit to national income down to 6.1 percent. When one examines the performance of the budget over the first three months of the year it looks as though it may be possible to reduce this rate even further. If the stabilization program continues to be rigorously implemented, we believe that within a few years it will be possible for us to reach the 3 percent Maastricht criterion.

We were freed from usurious interest rates on domestic borrowing last year. The historic fall in the rate of inflation also pulled down nominal interest rates, and real interest rates fell from 31.1 percent the previous year to 14.7 percent last year. At the moment, the Treasury is borrowing at a nominal interest rate of around 18 percent. We forecast that this year it will be possible to borrow at single figure real interest rates.

The interest burden is falling

The fall in the real interest rate is slowly reducing the interest burden on the budget. Last year interest payments fell by YTL 1.6 billion compared with the previous year and at the beginning of the year the amount set aside for payments was less than YTL 9.6 billion. The rate of interest payments to budgetary income declined to 51.4 percent. The government’s target is to reduce this to 44.6 percent this year. During the first quarter of the year interest payments declined by 19.7 percent compared with the same period the previous year and were equivalent to 42.1 percent of revenue, which gives the impression that it will be easy to achieve this target.

Over the last three years there has been a decline in the rate of public borrowing to national income. According to the figures which the Treasury began publishing at the end of 2001, the total public sector net debt stock fell to 63.4 percent of national income last year, down from 90.5 percent in 2001. This is very close to the Maastricht criterion of 60 percent. We can achieve this criterion this year. As these figure are not available historically, we produced a series bringing together the rate of the public debt stock to national income and the domestic debt stock to national income. According to the figures we produced, the rate of public debt to national income which rose to 117.7 percent in 2001 fell to 82.8 percent last year. We forecast that the rate will dip under 80 percent this year.

We can see the process of the normalization of the economy not only in these financial indicators but also in inflation. It was not only in the 1990s that inflation went haywire. From 1971 until last year inflation in Turkey was always in double digits. Last year, after a gap of 33 years, we saw single digit inflation for the first time.

The benefits of normalization

It is still too early to say that the Turkish economy has become normalized. In order for this to happen, the budget deficit must fall to 3 percent of national income, real interest rates must decline to 5 percent, the rate of the public debt to national income must drop under 60 percent and interest payments must return to around 25 percent of budget revenue and annual inflation must decline to under 5 percent. But even if the economy has not yet returned to normal, we can say that it has come very close. Maybe we shall see these happen a few years later.

The normalization of the Turkish economy will produce an acceleration in development. The state’s hands are currently tied and a reduction in interest payments will free them, allowing it to allocate resources for the necessary investments in infrastructure. Low interest rates will make it easier for private sector entrepreneurs to find financial resources and open the way for investments. The opening up of new areas for business will both ease the burden of unemployment hand and result in an increase in income. A decline in concerns about the future will mean consumers will no longer postpone of expenditure. When Turkey enters a process of normalization, even when it moves in that direction, we shall see that foreign capital will take greater interest in the country. All of these things will make it possible to ensure a sustained period of rapid growth and enable us to approach the welfare levels of developed countries.


In terms of the Gross National Product (GNP), the Turkish economy grew by 9.9 percent in 2004. In terms of Gross Domestic Product (GDP), which is the criterion more frequently used in international comparisons, it grew by 8.9 percent in 2004.

hedThe rate of GNP growth in 2004 was the highest since 1966. In 1996 GNP increased by 12 percent.

At the same time, 2004 was the third of three years of rapid economic growth. As a result, it was the third time in the history of the republic that the economy grew by three years in succession. The previous period in which the economic recorded high growth for three years in succession was in 1995-97. There was a similar period in 1924-26. The only period in which the economy has recorded high growth for more than three years in succession was in 1951-53 when it grew rapidly for four years in succession.

Postponed demand drove the economy

When we look at why the economy grew so rapidly in 2004 we see postponed consumption and investment demand. Investment decisions and the consumption of durable goods which was postponed as a result of the 2002 crisis, together with an increase in confidence in the future of the economy, came into play last year and drove economic growth.

Private consumer expenditure, which accounts for the lion’s share of expenditure, rose by 10.1 percent last year. A large proportion of this increase was the result of a rise of 29.7 percent in expenditure on consumer durable goods. While expenditure on semi-durable consumer goods grew by 18.8 percent and contributed to the rise in domestic demand.

Expenditure on investments increased by 32.4 percent last year. All of this increase was the result of a rise in expenditure on private sector investments. Private sector investment expenditure grew by 45.5 percent. Expenditure on public sector investments declined by 4.7 percent.

A large proportion of the private sector investment expenditure was on upgrading and expanding the capacity of existing plants. There was an increase of 60.3 percent in the purchase of machinery and equipment. While expenditure on the construction of buildings rose by 15.3 percent.


One of the main indicators of the 2001 crisis was the size of the public sector debt burden. The liquidation of the public sector banks’ duty losses and the rectification of the balance sheets of the private sector banks that were taken into the Savings Deposit Insurance Fund (SDIF) through the issuing of special disposition bonds resulted in a rapid rise in the public sector debt stock.

The improvement in the economy over the last three years has ensured that the debt has continually declined. According to the statistics released last month by the Treasury Undersecretariat, the ration of total net public debt stock to Gross National Product (GNP) fell to 63.4 percent in 2004. In 2003 this rate was 70.4 percent. In 2001 and 2020 it had been 90.5 percent and 78.6 percent respectively.

The total net public debt stock is calculated by deducting the financial assets from the gross public debt. If we ignore these financial assets then the rate of the public sector debt stock to GNP is 77.4 percent. This rate has also been falling for the last three years but it is, inevitably, higher than the net debt stock.

When the EU took the decision to establish a euro zone in 1992, it also adopted as one of the Maastricht criteria the principle that the public sector debt should not exceed 60 percent of national income. In recent years this figure has become a globally accepted criterion for public debt.

When one looks at Turkey’s net debt stock as a proportion of GNP, we see that it moved very close to this criterion last year. But this Maastricht criteria is for the gross rather than net debt stock. Yet the method that is used to calculate the public sector debt in Turkey is not the same as the one used in the EU. Mahfi Eğilmez, who at one time served as Treasury Undersecretary, says that the calculation of Turkey’s net borrowing stock is closer to the EU’s gross calculation of gross debt stock. He adds that measures will soon be implemented to harmonize the calculations. Based on this, we can say that Turkey’s debt burden has come close to the Maastricht criterion.