TURKEY: TWO YEARS AFTER THE STABILIZATION PROGRAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83-00857R000100020004-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 16
• Document Creation Date: December 20, 2016
• Document Release Date: February 22, 2007
• Sequence Number: 4
• Publication Date: July 1, 1982
• Content Type: REPORT

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Directorate of Confidential
Intelligence
Turkey:
Two Years After the
Stabilization Program
Confidential
EUR 82-10064
July 1982
Copy 3 8 8
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Directorate of Confidenfial
Intelligence 25
Turkey:
Two Years After the
Stabilization Program
Information available as of 14 May 1982
has been used in the preparation of this report.
Thi, ent was prepared b
estern Europe Division, Office of
European Analysis. It was coordinated with the
National Intelligence Council. Comments and queries
are welcome and may be addressed to the Chief,
Iberia-Aegean Branch, EURA
Confidential
EUR 82-10064
July 1982
2'.
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Turkey:
Two Years After the
Stabilization Program
Key Judgments In just two years Turkey has made substantial progress in restoring
economic health-progress that should continue if the government adheres
to present policies and if no major external shocks occur. The economic sta-
bilization program begun in January 1980-and reinforced by the military
after the coup the following September-has moved the Turkish economy
toward an outward looking, free market system. In the process, the
government has achieved major gains against soaring inflation and falling
output and has halted the deterioration in the balance of payments. In
short, last year clearly marked a turning point for the Turkish economy; in-
creases in production, savings, exports, and invisible earnings and reduc-
tions in the trade deficit and inflation rate all exceeded even the usually op-
timistic government targets.
The government's major success on the economic front has been the
dramatic improvement in foreign exchange earnings. As a result of this
improvement, there is a strong chance that Turkey can achieve balance-of-
payments equilibrium in 1982 with little or no new'program aid. Domesti-
cally, real GNP growth this year should match the substantial rise of last
year, while inflation should continue to slow because of fairly stringent
monetary and fiscal policies.
Severe problems nonetheless remain. In particular, unemployment is likely
to remain very high, and the State Economic Enterprises (SEEs) will
continue to be a drain on scarce capital. Ankara will need to maintain
restraints on domestic demand to make further progress in slowing
inflation and reducing the trade deficit. Increased foreign exchange
earnings will be necessary in the next few years to offset the end of IMF
standby loan assistance in 1983 and the rise in interest payments as grace
periods on rescheduled debt expire. In addition, the Turkish economy could
still be sidetracked by developments such as a disruption of oil supplies or
political upheavals in the Middle Eastern countries that recently have
become major export markets for Ankara.)
Over the longer term, Turkey's economic prospects remain uncertain
despite the country's considerable potential. Turkey has faced several
economic crises in past years and responded successfully with stabilization
programs, only to repeat earlier policy mistakes a few years after the
recovery. The major test will come in 1984 after civilian rule is reestab-
lished. The government then will come under increasing pressure from
affected groups to restrict imports, control prices, cut taxes, increase
spending, and so forth-which would reverse the progress made so far.[
Confidential
EUR 82-10064
July 1982
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D
Turkey:
Two Years After the
Stabilization Program
0
From Crisis to Recovery
Turkey's economic problems reached a critical stage
following the 1973/74 oil price hikes, which helped
shift the current account from a $480 million surplus
in 1973 to a $720 million deficit in 1974. Rather than
allow the economy to adapt to the new environment,
Ankara tried to shelter it with price controls, an
overvalued exchange rate, and highly expansionary
monetary and fiscal policies. By 1977 the government
could no longer maintain these artificial conditions.
The current account deficit had deteriorated to $3.4
billion-leading to a tenfold increase in short-term
borrowing from foreign commercial banks. Turkey
found itself unable to repay the loans or borrow
additional funds and was forced to curtail imports
sharply in 1978.
In 1978 and 1979 the left-leaning Ecevit government
implemented halfhearted stabilization programs and
persuaded foreign commercial banks to reschedule
Turkey's debts. It also negotiated a stabilization loan
with the IMF and obtained aid pledges of more than
$900 million from OECD governments. But Ecevit's
approach did little to resolve Turkey's problems. The
benefits from his one-time devaluation, for example,
eroded within months as prices soared. By the end of
1979, the annual inflation rate had risen to 80
percent, shortages were proliferating, a black market
was thriving, many homes were facing a heatless
winter, and output and exports were stagnating.[
It was not until January 1980 that the new and more
conservative Demirel government finally took the
harsh measures necessary to stabilize the economy.
These moves included a major devaluation of the lira
(with a pledge to make additional devaluations as
needed), a drastic reduction in subsidies to state
enterprises, removal of price controls and some import
restrictions, and increased incentives for exports and
foreign investment. In a followup move in July 1980,
Ankara abolished controls on interest rates. The
stabilization program was reinforced by massive for-
eign assistance in 1980-the OECD pledged $1.16
billion in aid and rescheduled official debt, a three-
year $1.6 billion standby agreement was signed with
the IMF, and the World Bank added a $275 million
dollar structural adjustment loan 25
Progress was evident by summer, although the eco-
nomic recovery was being slowed by growing labor
militancy, rising terrorism, and political immobility.
Strikes and assassinations soared, while the deeply
divided parliament was unable to act on important
issues-including badly needed tax reform and the
election of a new president
Reacting to these conditions, the military took control
in September 1980. Among its first moves was a
promise to continue the stabilization program and
retain its author, Turgut Ozal, as Deputy Prime
Minister for Economic Affairs. The military govern-
ment then strengthened the economic recovery pro-
gram by ordering strikers back to work, reforming the
tax system, and imposing needed price hikes for state-
produced goods.
With strikes and shortages of oil and imported indus-
trial goods virtually eliminated, output began to pick
up in the fall of 1980. After having fallen for two
years in a row, real GNP rose an estimated 4.3
percent in 1981, exceeding Ankara's target of 3
percent. While agricultural production rose only 0.4
percent, services were up 6.9 percent and manufactur-
ing output jumped 9.1 percent. Led by a 54-percent
surge in fertilizer production, overall industrial output
came close to its 1978 peak.1
Serious Problems Remain
Despite the increase in industrial output, capacity
utilization is still fairly low, particularly in the auto-
mobile sector. The excess capacity in turn is restrain-
ing fixed investment in manufacturing, which remains
far below its 1977 level. The energy bottleneck-
which included daily power outages-has eased, and
with new power projects coming on line the situation
should continue to improve.
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Construction is still depressed; building permits are
down 16 percent from 1980 and 32 percent below the
1979 level. Turkish firms, however, have won a large
number of building contracts in Middle East countries
which are worth more
than $10 billion. These contracts boost business prof-
its and the balance of payments, but of course they do
not relieve the rapidly growing housing needs of
Turkey's major cities
In the agricultural sector, Ankara is struggling to
reverse past policies. During the 1970s misguided
subsidy and price-support policies led to a poor mix of
crops and inefficient use of fertilizer and mechanical
inputs. Agriculture was particularly hard hit by the
economic crisis as investment in the sector fell more
than 50 percent in real terms between 1977 and 1980
and ambitious irrigation projects went unfinished.
Beginning in 1980, Ankara has given agriculture
higher priority in the investment plan, reduced the
input subsidies, and tried to put the agricultural price-
support system more in line with market forces. While
much remains to be done, there has been some
success, in improving efficiency: although fertilizer
usage fell more than 20 percent last yea a agricultural
output still managed a slight increase
Unemployment and underemployment continue to be
major problems in Turkey. While official figures put
the unemployment rate at around 15 percent, it is
probably closer to 20 percent. Employment probably
rose about 1 percent over the last two years, and. a
significant number of Turks found work in OPEC
countries, but job creation has lagged considerably
behind the 2.5 percent annual growth of the labor
force. The government will have to make more pro-
gress on problems that discourage job creation such as
traditional labor militancy, restrictions on layoffs, and
past government encouragement of capital-intensive
development. Meanwhile, in the absence of a devel-
oped state welfare system, strong family ties provide
support for the jobless.
Turkish wage earners were hard hit by the soaring
inflation rates of the late 1970s. Real wage rates for
some workers have fallen as much as 50 percent since
1976, although this has been offset to some extent by
bonuses, higher benefits, and the large tax cuts in-
cluded in the tax reform bill last year. There is little
prospect in the near term for an increase in real
wages, as contract disputes are now being settled by a
"supreme arbitration board" that currently is limiting
increases to around 25 percent-the expected infla-
tion rate this year. Low real wages should encourage
more investment, particularly investment in labor-
intensive activities, thus fostering the reduction of
unemployment and promoting recovery. Civil servants
have been budgeted a 25-percent raise this year,
although higher increases are being granted for key
positions in an effort to prevent talented managers
from leaving for the private sector.
Criticism of the stabilization program in the business
community has come mostly from disgruntled busi-
nessmen complaining about high interest rates and
the loss of protected markets. The doubling of the
number of bankruptcies in 1981, which received wide
play in the Turkish press, no doubt involved wrench-
ing dislocations. Nevertheless, business failures ap-
pear to have been more than offset by new business
ventures.
Fiscal Policy on Track
One of the government's most important pieces of
legislation in 1981 was the tax reform package. The
first such reform since 1970, it reduced inequities and
increased revenues by restoring progressivity to the
tax system, broadening coverage, and improving col-
lection procedures. Before the reform, nearly all wage
earners had been pushed into the maximum 60-
percent tax bracket by inflation. Wage earners were
shouldering two-thirds of the total tax burden, al-
though they accounted for only about one-third of
total income. In addition to revising the personal
income brackets, the government expanded coverage
to include taxation of farmers and self-employed
individuals for the first time. Corporate taxes were
simplified and special breaks were provided for ex-
porters.
The reforms succeeded in reducing the fiscal deficit to
$800 million-1.4 percent of GNP-from $2.4 billion
in 1980, as tax revenues rose 59 percent. The govern-
ment has enacted new tax cuts for this year on
interest income and corporate earnings and plans to
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lower personal income tax rates by 15 percentage
points over the next three years. A value-added tax is
being planned and could be implemented as early as
1983, although unsophisticated Turkish bookkeeping
will hinder effective implementation.
Ankara has managed to slow the growth of govern-
ment expenditures as well, with spending dropping as
a share of GNP from 28 percent in 1979 to 23 percent
in 1981. The investment program has been pared to
include only projects that can provide an economic
return in the near future, and the government is
giving priority to investments in energy, agriculture,
and export projects.)
The State Economic Enterprises (SEEs), which con-
tribute 30 percent of value-added in manufacturing,
continue to be overstaffed and a drain on the budget.
As part of the 1980 stabilization program, the govern-
ment permitted most SEEs to set prices to cover costs
and imposed limitations on the filling of job vacancies.
The reported elimination of 21,000 positions reduced
the share of labor in total costs from 23 percent in
1977 to 15 percent in 1981. This, along with price
hikes, enabled the SEEs to turn a $15 million profit in
1981 on their operational accounts following losses of
$300 million in 1980 and $2.3 billion in 1979. Never-
theless, on the investment accounts the SEEs still had
a financing requirement of nearly $5 billion in 1981-
8 percent of GNP-which was only a slight improve-
ment over 1980. The SEEs have relied heavily on
budget transfers and loans from the Central Bank to
finance their investment program.
Much more needs to be done to reform the state
sector, and the government is preparing legislation to
reorganize the SEEs to increase their efficiency and
enable them to finance investments from their own
resources. It has begun limiting direct access to
Central Bank credits to all but one SEE-the agricul-
tural purchasing agency-and has imposed cash lim-
its on budget transfers. A lack of buyers combined
with the etatist traditions dating to Ataturk-the
founder of modern Turkey-make it unlikely that the
government will act on suggestions to turn state
industrial firms over to the private sector; neverthe-
less, it is lessening their drag on the economy by
making them more responsive to market forces and
ending their haphazard expansion.
More Market-Oriented Monetary Policies
The freeing of interest rates in July 1980 has led to a
more than sevenfold rise in time deposits. Interest
rates on savings deposits, which previously had been
held below the inflation rate, quickly rose to about 50
percent per annum, but major banks soon put together
a "gentlemen's agreement" to keep rates from rising
further. Current rates remain at about 50 percent,
well above the inflation rate, and provide a positive
real return on savings for the first time in years.
General loan rates reportedly exceed 50 percent when
taxes and fees are added in, but preferential rates on
export and agricultural credits are considerably lower.
The large pool of savings may permit a drop in 25
lendin rates and an increase in investment later this
year.
Liberalization of the money markets led to a prolif-
eration of nonbank financial institutions-referred to
as "money brokers"-which, not subject to bank
reserve requirements, were offering returns of over
100 percent per annum by selling discounted certifi-
cates of deposit. These firms attracted a lot of busi-
ness, leading the established banks to clamor for
restrictions on them. The matter was poorly handled
last fall by the Finance Ministry, which announced a
series of piecemeal decrees that frightened depositors
and led to a panic. Premature withdrawals precipitat-
ed a number of bankruptcies among the weaker
money brokers.)
In response to this crisis and to a rapid expansion of
established banks, Ankara imposed a new capital 25
market law, which should consolidate the banking
sector. The new law requires money brokers to adhere
to regulations governing banks, sharply increases the
capital requirements of banks-the amount rises with
the number of a bank's branches-and restricts the
number of branches that foreign banks can open.II
Despite the turmoil in the money markets, the Turk-
ish Central Bank has brought expansion of the money
supply under control. MI growth fell from close to 60
percent in 1980 to about 23 percent last year.' M2
' M1 is a monetary aggregate comprising currency in circulation
plus demand deposits whil ncludes these categories plus
savings deposits.
25
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Figure 1
Turkey: Consumer and Wholesale Prices"
Legend:
Istanbul consumer price index
- Wholesale price index
V
I I I I I III
0 1977 78 79 80 81 82
1
51111711 7-11
much faster in 1981-about 60 percent-
because of the sharp rise in savings deposits, but the
illiquidity of most of the time deposits probably makes
MI more relevant. Central Bank credit growth has
slowed, and lending has been shifted increasingly to
the private sector over the past year as the ublic-
sector deficit was brought under control
Tighter fiscal and monetary policies have brought
considerable success in the fight against inflation.
Despite the inadequacies of Turkish price indexes, the
relative trend is unmistakable (see figure 1). Consum-
er and wholesale price inflation-at triple-digit rates
in early 1980-slowed last year to 25-30 percent.
(December over December). This performance is espe-
cially impressive considering the lira's devaluations
and public-sector price hikes. The 1982 goal of 25-
percent inflation may still be attainable, although
Turkey got off to a bad start in the first quarter with
state-sector price hikes causing wholesale prices to
rise at about a. 40-percent annual rate.
Competitve Exchange Rate Maintained
The most dramatic economic improvement has been
in the balance of payments, and the central factor in
restoring payments equilibrium has been Ankara's
exchange rate policy. The major devaluation in Janu-
ary 1980 brought the lira to a realistic level, but
during the following year or so the situation deterio-
rated somewhat as additional devaluations failed to
compensate fully for the inflation differential between
Turkey and its trading partners. Last May, however,
the government began making small daily exchange
rate adjustments, enabling it to accelerate the lira's
depreciation without attracting the attention given to
earlier sporadic devaluations (see figure 2). This prac-
tice must be maintained if Turkey is going to sustain
its improvement in foreign exchange earnings
Exports Booming
Turkey has embarked on a vigorous export drive aided
by realistic exchange rate policies, weakened domestic
demand, and such export incentives as tax breaks,
interest rate subsidies, and foreign exchange retention
rights. Exports rose nearly 30 percent from $2.3
billion in 1979 to $2.9 billion in 1980, then soared
more than 60 percent to $4.7 billion last year, easily
surpassing Ankara's export target of $3.8 billion. The
quick response to the new market environment by
traditionally inward-looking Turkish business people
is encouraging for the future of the recovery effort
The biggest gains occurred in sales to the Middle
East, where exports have risen fivefold since 1979 and
the share of Turkish foreign sales has increased from
less than 20 percent to about 40 percent. The single
largest gain was in Libya, with exports up over 600
percent in 1981. Payment problems cropped up be-
cause of Libyan bureaucratic and cash flow difficul-
ties, but future payments can be covered by Libyan oil
exports to Turkey. Turkey has yet to reach its export
growth potential in the Middle East, despite declining
oil revenues in some OPEC countries. Ankara's mar-
ket share is still very small-Turkish goods comprise
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Figure 2
Turkey: Lira Exchange Rate Indexa
Ankara begins daily
exchange rate adjustments
70 1970 72 74 76 78 80 82
Legend:
- 1970
- 1978
- 1979
- 1980
_ I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I
70 -l 0 5 10 15 20 25 28
Months from devaluation
I
no more than 5 percent of the total imports of any
Middle East trade partner-and most payments could
be covered by Turkish oil imports. Although Turkey's
growing dependence on Middle East markets clearly
makes it vulnerable to instability in the area, Turkish
exports to these countries consist primarily of food-
stuffs, agricultural equipment, and basic capital
goods, none of which would be an easy target for
retrenchment policies. Further, Turkey's Islamic heri-
tage and geographic proximity should continue to
work in its favor.
Exports to the OECD rose an impressive 35 percent
despite sluggish import demand in the developed
countries (see table 1). Exports to the United States
and Switzerland more than doubled while sales to the
European Community rose more than 20 percent. The
biggest gains came in agroindustrial goods, textiles,
and cement. Meanwhile, exports to East European
countries fell nearly 60 percent, reducing their share
in Turkish exports to under 3 percent. A major
Turkish concern is growing EC protectionism; the
Community imposed antidumping levies on Turkish
raisins and yarn late last year and recently voted to
continue restrictions on yarn. The protectionist meas-
ures appear to have hurt these important exports; in
the first two months of 1982, raisin exports were down
about 25 percent from year-earlier levels and cotton
yarn sales were off 5 percent.
The shift in commodity composition of Turkey's
exports has been encouraging, with industrial exports
more than doubling last year and surpassing agricul-
tural exports in value for the first time. Agricultural
exports could not respond as quickly but still in-
creased by one-third in 1981 (see table 2). The growth
in agricultural exports may have been impeded by
export levies on some key crops and by the stockpiling
of wheat by dealers hoping for an increase in the
support price. Exports of foodstuffs should accelerate
this year, particularly to Middle Eastern markets.
High-level Turkish visits early this year to Iran, Iraq,
Jordan, and Kuwait resulted in calls for increased
imports of Turkish goods.
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Turkey: Trade by Countries a
Value of Exports
(Million US $)
Percent
Change
Share in Total
Exports (Percent)
Imports
(Million US $)
Percent
Change
Share in Total
Imports (Percent)
1980
Total
2,910.1
4,702.9
61.6
100
100
7,909.4
8,933.0
12.9
100
100
OECD
1,679.7
2,263.7
34.8
57.7
48.1
3,583.4
4,279.5
19.4
45.3
47.9
EC
1,242.1
1,502.9
21.0
42.7
31.9
2,267.8
2,519.5
11.1
28.7
28.2
West Germany
604.0
643.2
6.5
20.8
13.7
837.5
939.9
12.2
10.6
10.5
France
163.9
215.7
31.6
5.6
4.6
376.6
400.0
6.2
4.8
4.5
Italy
218.4
246.1
12.7
7.5
5.2
299.7
372.0
24.1
3.8
4.2
UK
104.5
148.0
41.6
3.6
3.1
316.8
433.7
36.9
4.0
4.9
Other EC
151.3
249.9
65.2
5.2
5.3
437.2
373.9
-14.5
5.5
4.2
490.6
326.9
-33.4
16.9
169.0
193.7
14.6
5.8
321.6
133.2
--58.6
11.1
Turkish exports should be more than 15 percent
higher this year at around $5.5 billion.' On a seasonal-
ly adjusted basis exports were actually running at a
$5.8 billion annual rate in the fourth quarter of last
year, but slowed markedly in the first quarter of this
year (see figure 3). Other export forecasts-which do
not take into account the first-quarter seasonally
' This is a conservative figure based on recent trends. It assumes
continued incentives for exports including a competitive exchange
rate as well as interest and tax subsidies. It also assumes no sharp
change in import demand from OECD or Middle East countries.
Exports are unlikely to approach the 1981 rate of increase because
of ph sical limitations in productive capacity and export infrastruc-
ture
adjusted decline-range from the $5.85 billion pro-
jected by the IMF and the OECD to the o timistic
$6.5 billion anticipated by Turgut Ozal.II
Even with Turkey's excellent performance last year,
exports still amounted to only 8 percent of GNP.
Inadequate marketing and storage facilities and un-
derdeveloped transportation infrastructure could be
important long-run impediments to exports; ports,
railheads, and border-crossing points now are congest-
ed with goods bound for Iran and Iraq. Ankara has
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Turkey: Commodity Composition of Trade a
Fruits and vegetables 753.9
Other 254.3
Minerals 191.0
Industrial 1,047.4
Agroindustrial 209.4
Petroleum Products 38.5
Textiles 424.3
Other manufacturing goods 375.2
Imports 7,909.4
Agriculture 49.8
Minerals and fuels 4,005.7
Crude oil 2,952.2
Petroleum products 909.8
Other 143.7
Industrial 3,759.1
Chemicals 1,121.7
Iron and steel 462.5
Machinery 842.4
moved to increase incentives and to simplify export
procedures further, and exporters are still lobbying for
an export insurance system. We, along with the IMF
and other foreign observers, believe that the govern-
ment eventually will have to wean exporters from a
costly incentive program and rely more on exchange
rate policies to maintain competitiveness.
795.1
5.5
25.9
16.9
569.3
123.9
8.7
12.1
193.4
1.3
6.6
4.1
2,290.1
118.6
36.0
48.7
411.7
96.6
7.2
8.8
107.0
177.9
1.3
2.3
820.8
93.4
14.6
17.5
950.6
153.4
12.9
20.2
8,933.0
12.9
100
100
125.0
151.0
0.6
1.4
4,098.3
2.3
50.6
45.9
3,257.0
10.3
37.3
36.5
620.7
-31.8
11.5
6.9
220.6
53.5
1.8
2.5
4,640.7
23.5
47.5
52.0
1,198.9
6.9
14.2
13.4
604.7
30.7
5.8
6.8
1,222.8
45.2
10.7
13.7
largely in higher oil imports as the oil bill rose from
$1.7 billion in 1979 to $3.9 billion in 1980. The
volume of imports of crude oil and petroleum prod-
ucts, after falling for two years, rose 27 percent in
1980 to 15.8 million tons (316,000 b/d), some of
which went to rebuild stocks. With stocks built up and
higher prices encouraging conservation, oil import 25
volume fell 12 percent in 1981 to 13.9 million tons
(278,000 b/d). The average price per barrel rose about
13 percent to $38, so the oil import bill was un-
Imports Resume Growth
Imports soared 56 percent in 1980 as the foreign
exchange shortage eased, but last year rose only 13
percent to $8.9 billion. The sharp jump in 1980 came
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changed at about $3.9 billion.)
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Figure 3
Turkey: Imports, Exports, and Worker
Remittancesa
Legend:
Imports
Exports
Remittances
"Seasonally adjusted quarterly
data at an annual rate,
b 1st quarter 1982 are estimates.
Domestic oil prices have jumped since 1980 because
of the devaluations of the lira, the increase in adminis-
tered prices to world levels, and the doubling of
OPEC prices in 1979/80. Higher domestic prices
should encourage movement toward a lower oil/GNP
ratio-the experience in other countries-and possi-
bly toward reduced oil imports. With the softening of
the oil market this year, the oil import bill should
decline. Assuming no change in oil import volume and
a drop in price to $34 per barrel, Turkey's oil bill will
be about $3.4 billion.
largely rebuilt, nonoil import volume should rise less
than 15 percent this year, even with the planned
further liberalization of import regulations.' Assum-
ing the US dollar holds steady against other major
currencies and nonoil import prices rise 6 percent,
nonoil imports could reach $6.1 billion and total
imports $9.5 billion. Forecasts must be tentative
because Turkish trade statistics are subject to major
revisions-1980 imports were revised upwards by $1
billion last spring and another $240 million early this
year.
Invisible Earnings Accelerating
The above forecasts yield a trade deficit of $4.0
billion, down from $4.2 billion last.year and $5.0
billion in 1980. Most of the shortfall will be covered
by increased invisible earnings, of which the largest
category is remittances from the more than 1 million
Turks working abroad. Worker remittances rose
sharply after the inauguration of the 1980 stabiliza-
tion program in response to the lira devaluation, the
freeing of interest rates, and the improved economic
and political stability in Turkey. After having stag-
nated for several years at around $1 billion, remit-
tances climbed to $2.1 billion in 1980 and $2.5 billion
in 1981. The dollar value of the increase would have
been even greater if the West German mark (the
currency of the majority of remittances) had not fallen
so sharply against the dollar. Remittances in deutsche
mark terms rose over 50 percent in 1981 compared to
a 20-percent rise in dollar terms. With a neutral
exchange rate assumption for 1982, remittances are
expected to be up about 12 percent to $2.8 billion,
largely because of the increased number of Turks
working in the Middle East on construction projects.'
F I
' The slower projected rate of growth of nonoil imports is based on
the trend in late 1981 and early 1982 and the expectation that
domestic consumption will continue to be flat this year. Although
import elasticities have shown no consistent pattern in past years, a
16-percent volume rise in nonoil imports should easily permit a 4.5-
Nonoil imports soared in 1981, rising about 25 per-
cent in dollar terms to nearly $5.1 billion. In volume,
nonoil imports may have risen as much as 35 to 40
percent because export prices of Turkey's main West-
ern trading partners dropped roughly 8 to 10 percent
last year in dollars. This would put real imports close
to the level of 1976-77. The import trend slowed
toward the end of the year, and with stocks now
percent rise in GNP and a 15-percent rise in exports
This projection assumes that the number of Turks in Western
Europe will remain stable while another 50,000 find work in the
.Middle East (about 14,000 workers went abroad in the first quarter
of this year). Estimates vary but Turkish workers in the Middle
East may remit $5,000 to $6,000 each, thus providing $300 million
more in remittances than last year. Remittances from Western
Europe should be flat because higher wages will be offset by
increased unemployment among the Turkish population there.r
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Outflows for interest payments should be approxi-
mately $1.45 billion this year (before debt relief),
unchanged from 1981. With a favorable exchange
rate and continued civil calm, net tourism receipts
could approach last year's 30-percent rise to reach
$350 million. Tourism continues to have great longer
run potential, but sizable investments are needed to
attract and accommodate visitors. Net receipts in the
"other invisibles" category more than tripled in 1981,
exceeding $560 million, apparently because of in-
creased receipts from contracting in Arab countries.
Turkish construction firms have gained a strong
foothold in the Middle East, and business generated
from existing and future projects promises to become
a major source of foreign exchange and jobs for the
Turks. The reported $10 billion worth of building
contracts signed in the last two years probably repre-
sents some "overbooking," and Libya, which report-
edly has contracted for $7 billion of the business, may
be unable to complete all the contracts because of
revenue problems. Still, with a continuing rise in
contracting earnings, plus transit fees from the large
volume of goods passing through Turkey to Iran and
Iraq, "other invisibles" should continue to rise rapid-
ly, reaching perhaps $800 million this year. Thus, the
invisibles balance before debt relief (interest debt
relief is included in the capital account) is expected to
run a surplus of $2.5 billion this year, up from $1.9
billion last year and $1.3 billion in 1980. The project-
ed current account deficit of $1.5 billion compares
favorably with the $2.3 billion experienced in 1981
and $3.7 billion in 1980
Capital Account Inflows To Close Gap
Capital account inflows are difficult to pin down, but
credits and aid already in the pipeline should be
sufficient to cover the current account deficit (see
table 3). A net of $320 million is expected from the
IMF in 1982 under the three-year standby agreement.
World Bank and other project loans should total $760
million, while perhaps $400 million in outstanding
1981 OECD pledges (including $200 million of the
US pledge released in January) will be available this
year. Debt relief will provide $550 million, and pri-
vate foreign capital should reach $200 million. Euro-
loans and loans from the Middle East that already
have been arranged may provide about $400 million
more. Capital outflows are likely to consist mainly of
debt repayments of $1.4 billion. The capital account
surplus, including IMF drawings, is projected to total
about $1.5 billion, offsetting the current account
deficit without considering possible fresh loans or aid.
Although no estimate of errors and omissions is
included in our balance-of-payments forecast, this
could be an important additional source of foreign
exchange in 1982; net inflows in this category exceed-
ed $1.1 billion in each of the last two years.
Outlook for New Aid and Loans
If our payments projections prove accurate, Turkey
will achieve balance-of-payments equilibrium in 1982
without significant new aid. The OECD aid-pledging
group, which has provided Turkey with close to $1
billion per year in pledges since 1979, was expected to
meet this spring, but the session was postponed be-
cause of political sensitivities about Ankara's military
regime in some West European countries and Tur-
key's improved balance of payments. Denmark and
Norway have already frozen disbursement of their
198 1 pledges, and the EC has suspended its fourth
financial protocol to Turkey-worth some $600 mil-
lion over the next five years. Other countries-West
Germany most importantly-have encountered par-
liamentary opposition to providing economic support
to the military government
The prospects for a pledging session later in the year
are uncertain. OECD consortium head Rolf Gerberth
has proposed an alternative involving a meeting of
OECD representatives to discuss Turkey's economic
situation but no formal pledge announcements. Aid
could then be proposed later on a lower key, bilateral
basis.
According to OECD officials, Turgut Ozal favors a
formal pledging session. Nevertheless, we believe that
Ankara would probably accept a less formal alterna-
tive because it wants to avoid providing smaller
OECD countries, whose aid contributions are relative-
ly low in any case, with another opportunity to speak
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Imports
-7,909
-8,933
-10,000
-9,500
Oil
3,862 c
3,877
4,310
3,400
Nonoil
4,047
5,056
5,690
6,100
Worker remittances
2,071
2,490
2,850
2,800
Interest (before debt relief)
- 1,138
-1,443
-1,450
-1,450
Tourism
212
277
350
350
Other
174
564
600
800
Capital account
2,342
1,129
1,135
1,210 d
Private foreign capital
148
129
235
200
Principal
980
600
450
450
Project and suppliers' credits
547
642
850
760
Program credits
1,811
840
900
1,100
a Estimated.
b Projections made by Ankara with concurrence by OECD and IMF
are as of January 1982 and were based on 1981 export estimates of
only $4.5 billion.
Revised upward in February by $240 million (previously unrecord-
ed of 1 imports).
d Including only aid and loans already arranged.
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out against the military in an international forum.
The Turks would welcome bilateral aid-provided no
political costs were involved-particularly if oriented
toward infrastructure and energy development pro-
jects. Additional grants and loans obviously would
provide a margin of safety for Turkey in case of
unforeseen adverse developments.
The balance-of-payments improvement and the US
proposal for $350 million in new economic aid this
year could provide other OECD donors with an
excuse not to push the politically sensitive issue of new
aid to Turkey. Aid will come from other sources,
however. The World Bank has agreed to another $300
million structural adjustment loan and will supply
new project credits. The recent high-level Turkish
visits to Middle Eastern countries reportedly resulted
in agreements to provide more capital through in-
creased investments and joint ventures. Further,
Turkey will receive $60 million from the Kuwait
Development Fund, $46 million from the Islamic
Development Bank, and $200 million from the Arab
Banking Corporation according to press reports.I
Turkey is engaging in commercial borrowing on the
Euromarket this year for the first time since 1979. So
far this year Turkey reportedly has arranged syndi-
cated loans for aircraft purchases ($75 million) and
construction projects ($77 million). According to Eur-
omoney and Institutional Investor, Turkey was one of
the few countries whose creditworthiness improved in
1981 although its rating is still low. Turkey could
encounter some reluctance among bankers still smart-
ing from two reschedulings of Turkish bank debt in
the last three years. Turkey may have done itself a
disservice by pushing for the second rescheduling-
off until it could get new commercial loans.
Ankara probably needs to be more aggressive in
attracting private foreign investment to provide Tur-
key with jobs and Western technology. On paper such
inflows registered a big increase in 1981 but very little
capital actually entered the country. Most of the
reported inflows represented repayment of overdue
foreign commercial debts. The payments were made
in liras and the money had to be invested in Turkey.
Policy Prospects
Ankara has clearly taken a big step toward making
the economy responsive to supply and demand forces,
but Turkey is still a long way from being a basically
free enterprise economy. Government intervention
remains widespread, the SEEs are still too large,
wages are not freely determined, and exports are
subsidized. In addition, Ankara retreated somewhat
from its liberalization of the banking sector with the
new capital market law and seems to be encouraging
the "gentlemen's agreement" among banks
Turgut Ozal has said publicly that he wants to keep
Turkey moving cautiously-but steadily-on its
course toward a market-oriented economy. Neverthe-
less, the return of civilian rule in late 1983 or early
1984 will bring increased pressures for renewed ex-
pansionary and interventionist measures that would
jeopardize sustained economic improvement. Infla-
tionary monetary and fiscal policies, an overvalued
exchange rate, and reliance on statist solutions have
triggered economic crises three times in the last 30
years. Although the current stabilization program
appears to go further than previous ones, particularly
in its approach to fundamental problems of the ex-
change rate and the state sector, there is still ample
leeway for Turkish policymakers to repeat past mis-
takes.
Even a civilian administration with stronger constitu-
tional powers than past ones had will be hard pressed
to ignore criticism from labor, consumers, and some
sectors of the business community who are tired of
belt tightening. The success of the stabilization pro-
gram will be a strong example for future govern-
ments, but with the most pressing problems behind
them, civilian leaders may look for expedient ways to
accelerate Turkey's development and try to reduce
unemployment through inflationary policies. Al-
though the chances for a continuation of wiser policies
are better as long as Turgut Ozal remains the chief
economic policymaker, even he might eventually bow
to pressure to ease monetary and fiscal restraints to
ease the unemployment problem. If Ozal is removed,
foreign investors and bankers would again become
doubtful about Turkey's economic outlook, and oppo-
nents of his policies would have less trouble reversing
them.
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