(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001100510001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: January 12, 2017
• Document Release Date: September 2, 2010
• Sequence Number: 1
• Publication Date: July 31, 1984
• Content Type: MEMO

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Memorandum for:
The attached memorandum was prepared by
Iberian-Aegean Branch, Western
Europe Division, at the request of Ann Corro,
Turkish Desk Officer, for Frank Vargo, Deputy
Assistant Secretary for Europe in IEP/ITA.
Distribution:
1 - OD/EURA
2 - EURA Prod.
4 - IMC/CB
1 - WE
1 - IA Branch
1-
EURA/WE/IA/
31 Aug84
EURA
Office of European Analysis
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31 July 1984
EMORANDUM
Prime Minister Ozal's Economic Reforms and
Prospects for the Turkish Economy
Introduction
Turkey is in a transitional period, both politically and
economically. Prime Minister Turgut Ozal's victory in the
election last November restored civilian government following
three years of military rule, and his mandate was reaffirmed by
his party's victory in local elections this March. Ozal and
President Evren, who retains strong ties with the military, have
achieved an acceptable working relationship despite the fact that
Ozal was not Evren's favored candidate. Ozal has had a
relatively free hand in reorienting the economy along free market
lines, although Evren is not entirely comfortable with such
policies. In just eight months the new prime minister has
instituted sweeping reforms aimed at furthering the 1980 economic
stabilization program by relaxing economic constraints and
promoting competition. Many of Ozal's policies depart radically
from Turkey's tradition of state capitalism and will receive the
support of Evren and the public only so long as they produce
Background
Turkey has made steady progress in recovering from the
economic crisis of the late 1970s. Policy errors in response to
the oil price shocks of the 1970s--expansionary fiscal and
monetary policies, price controls, and an overvalued exchange
rate--combined with structural problems to produce a balance of
payments crisis and triple-diqit inflation. The 1980
stabilization program, largely drafted by Ozal as Deputy Prime
Minister and "economic czar" in the previous civilian government,
emphasized free market policies and exports to generate growth
and improve the balance of payments. The program included a
substantial devaluation of the lira, the removal of price
controls, cuts in government spending, and a sharp rise in
interest rates. In a major policy departure, exports were
encouraged by maintaining a realistic exchange rate and lowering
barriers to foreign investment.
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The results were dramatic: exports rose sharply and the
current account deficit shrank by nearly two-thirds from 1980 to
1982. Inflation fell from a triple-digit level to below 30
percent by the end of 1982, while GNP growth climbed back to an
average 4.3 percent per year in 1981 and 1982.
The economy suffered a setback in 1983 because of policy
errors and factors beyond Ankara's control. A loose monetary
policy pursued by the military government to rescue failing
businesses fueled inflation in the second half of 1983. The
inflation rate climbed back to over 40 percent by the end of the
year. In addition, the government cut interest rates to help
financially troubled firms. This reduction spurred domestic
demand and along with rising inflation tamped savings. In
addition, exports stagnated as the cash flows of several
important Middle East trading partners fell, and bad weather hurt
the harvest, reducing Turkey's important tobacco and cotton
exports. A slight rise in imports and a sharp drop in worker
remittances from abroad helped to boost the current account
deficit to $2.1 billion in 1983.
Ozal's Economic Program
Ozal has moved quickly to reinvigorate the stabilization
program. His stated intention is to reduce inflation, generate
long-term economic development through increased exports and
foreign investment, shrink the large state role in the economy,
and reduce high unemployment. To achieve these goals Ozal has
introduced a series of bold measures, including reducing many
import restrictions, abolishing most*foreign exchange controls,
and providing new export incentives. He has continued the
policy of adjusting the exchange rate as needed to keep the lira
at a competitive level. In addition, he raised interest rates to
attract savings and substantially increased,the prices of state
sector goods to reduce the budget deficit.
Ozal also has pushed through Parliament a controversial bill
permitting the state to sell private investors shares in the
State Economic Enterprises (SEEs) and some other government
projects such as bridges and dams. In June, Ozal announced a
sweeping reorganization of the bureaucracy and SEEs. He
abolished more than half the committees, boards, and commissions
within the various ministries; eliminated several umbrella
organizations within the SEEs; and imposed experience
requirements for SEE management positions. We believe the
reforms are intended to improve efficiency and strengthen his
control over the public sector because he is skeptical of the
bureaucracy's commitment to his policies.
*See Annex II for details of the program.
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Early Results
Ozal will need time for his program to work; the results so
far have been mixed. He has had success on the balance of
payments side, but inflation has risen steadily, drawing intense
criticism from labor, business groups, and political opponents.
Exports for the first five months of 1984 are up nearly 33
percent over the same period last year, while imports have risen
just 7 percent. Despite the continued decline in worker
remittances, the current account deficit for the first quarter of
1984 has fallen by nearly three-fourths to $148 million. An IMF
team recently in Turkey expressed confidence that the external
targets would be met, improving the prospects that Turkey will
also be able to meet its increased debt service next year when
rescheduled debt payments fall due.
Inflation was boosted in March by Ozal's price increases for
public sector goods. Although the increases were badly needed,
they pushed the 12-month inflation rate to 60 percent in May.
Labor's criticism has grown more vocal, in large part because
Ozal has limited wage increases this year to about 30 percent.
Blanket bans on collective bargaining and strikes have now been
lifted, and unions are anxious to recover some of the real income
lost over the past four years. However, although wage
negotiations will be a major challenge to the Ozal government, we
do not expect serious strike problems because of restrictions
imposed by the new labor laws. Unions are now excluded from
engaging in political activities, and the requirements for
determining a union's authority to bargain have been made
tougher. In addition, strikes for political purposes and general
strikes are now outlawed, and the number of industries where
strikes are banned altogether has been expanded.
businessmen remain skeptical
that Ozal can simultaneously slow inflation, reduce unemployment,
and stimulate investment. They have begun expressing their
doubts publicly and are especially critical of his tight monetary
policy because high interest rates and the scarcity of credit
have aggravated the financial difficulties of many firms. Gross
domestic investment as a share of GNP has declined from about
26.5 percent in 1980 to an estimated 20.5 percent in 1983.
Although opposition to his policies has increased markedly
in the last two months, we do not believe Ozal's government is in
jeopardy. His Motherland Party still retains a solid majority in
Parliament and President Evren--while publicly distancing himself
from Ozal's policies--has shown no inclination as yet to
interfere. Ozal has lost some public support, especially as
prices have continued to rise, but various polls indicate that a
majority of people are still willing to give his policies some
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Economic Prospects
We are cautiously optimistic about the prospects for the
Turkish economy so long as the Iran-Iraq war does not spread and
domestic stability is maintained as martial law is gradually
lifted. Moreover, we believe that while Ozal is in charge,
Ankara will not return to the imprudent policies that fostered
previous economic crises. We believe that Ozal's policies--given
a chance to work--will result in a more efficient economy with
higher growth and less inflation, although the results probably
will fall short of the ambitious targets set out in the Five-Year
Plan for 1985-89--an average GNP growth rate of 6.3 percent per
year, exports to increase nearly 16 percent per year, and
inflation to fall to 10 percent by 1989.
The Domestic Economy
We believe that GNP growth in 1984 will be around 3 or 4
percent, with the foreign sector contributing positively.
Agricultural production should return to normal--weather
conditions permitting--and expand by around 3 percent, while
industry is likely to expand at close to the 1983 rate of about
6 percent. This will not be enough, however, to reduce the
20-percent unemployment rate because of the continuing rapid
growth of the labor force. Ozal's stricter monetary and fiscal
policies should begin to reduce pressures on prices by the end of
the year, but inflation will most likely not drop below 40
percent for the year.
The Balance of Payments
Balance of payments prospects for 1984 are fairly good.
Exports are doing well and could rise by as much as 20 percent
over last year, reaching about $7 billion. Despite the easing of
many restrictions, the steady depreciation of the lira and steep
tariffs on several classes of goods, especially "luxury" consumer
goods, have helped to limit the inflow of foreign goods.
Although invisible earnings continue to fall--worker
remittances in the first quarter were down 21 percent from the
year-earlier period--the extent of the decline is deceptive. A
large portion of such "lost" foreign exchange returns to Turkey
in the form of foreign currency deposits through a scheme Ankara
has worked out with West German banks. Tourism continues to be
weak, despite Turkey's enormous potential in this area.
Development of this potential will be a long-term project
requiring a substantial expansion of tourist facilities coupled
with a major promotional effort.
Prospects beyond this year are less certain, although Ozal's
efforts to tackle the economy's structural problems provide some
grounds for optimism. His recent reorganization of the state
sector is aimed at gaining greater control over the bureaucracy
to enable him to implement his free market policies and improve
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efficiency. Eventually he intends to sell some of the SEEs to
the private sector, but he first must improve their profitability
to attract potential investors. Reform of the public sector,
however, is where Ozal is likely to meet his greatest
resistance. Feelings of etatism run deep in the bureaucracy,
and, more important, Evren and the military may not permit Ozal
to implement fully economic liberalization. We expect Ozal to
have some success in trimming the government's role in the
economy, but progress will be slow.
There are many downside risks in Turkey's payments position,
most of them related to an uncertain international environment.
Turkey must continue to boost exports to reduce the current
account deficit and thus keep foreign borrowing needs low.
Rescheduled payments on Turkey's $18.5-billion debt begin to fall
due later this year, and debt service will rise sharply in
1985. Ankara will continue to need substantial Western aid--from
the IMF, the World Bank, the OECD, and the United States--to
cover its international payments problems over the next several
years.
An IMF team was recently in Turkey, however, and indicated
that Ankara should have no difficulty in receiving another
tranche under its present one-year $230-million standby agreement
with the Fund, since Turkey has remained within the IMF's targets
and ceilings. And Ozal almost certainly will continue to adjust
the exchange rate daily to keep exports competitive. In
addition, he has actively. pursued new opportunities for Turkish
exports, concentrating on Middle East markets. These have boomed
since 1980 and now account for almost 40 percent of Turkey's
exports. Iran and Iraq together account for almost a fourth of
total exports.
Another area of fragility also relates to the Middle East.
Turkey imports about 85 percent of its oil, over a third of total
imports, of which Iran and Iraq supply 70 percent. A significant
oil supply disruption due to the Iraq-Iran war would have serious
repercussions for the Turkish economy.
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ANNEX I
Foreign Investment Opportunities
The Ozal government is encouraging foreign investment in
Turkey. New regulations build on the 1980 program by eliminating
many restrictions on the repatriation of profits and reducing red
tape and other obstacles. Ozal hopes to eliminate remaining
barriers, and legislation reducing the tax differential between
foreign and domestic investors is currently under review. The
response thus far has been slow. Foreign investors are still
hesitant about Turkey, largely because of its history. For many
years, Ankara discouraged outside investment by maintaining a
wide range of bureaucratic obstacles. As a result, direct
foreign investment in Turkey in the 30 years to 1980 totaled only
$200 million. Investors are also waiting to see if the return to
democracy will bring long-term political stability.
Ankara is most anxious to attract foreign capital in the
energy sector, agriculture, transportation, and communications.
Ankara is particularly interested in joint ventures to gain the
capital and technology needed to improve productivity and promote
growth. Although investors and exporters will generally find new
opportunities in Turkey, many barriers still exist. The
liberalization of imports is genuine, but many important
categories of goods are still restricted and others face
significant tariff barriers. Higher debt service payments over
the next few years will also restrain Turkey's import capacity,
and it remains to be seen how effectively the new foreign
investment rules will be implemented because many Turkish
bureaucrats still harbor negative attitudes on this subject.
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ANNEX II
Ozal's Program - Trade and Foreign Exchange Provisions
Exports
Authority over exports has been centralized in the new
Undersecretariat of Treasury and Foreign Trade.
Tax rebates to exporters are to be reduced in steps to
45 percent.
The list of exports subject to license is reduced to 11
items. In addition, permission must be obtained for
temporary exports, transit trade, re-exports, and
contract sales.
Responsibilities for formalities are to be gradually
passed to exporters' organizations such as the Chambers
of Commerce and Industry and exporters' unions.
Only firms having exports at over $50 million in 1983
are permitted to trade with state trading (i.e.,
Communist) countries.
Companies with over $30 million in exports in 1983 are
entitled to additional incentives with respect to
special credit funds, duty-free imports, and foreign
exchange.
Imports
The general rule is that all goods may be imported
unless they are specifically listed as being prohibited
or subject to licensing; previously the opposite
approach was followed--a product had to be specifically
listed to be freely importable.
Import licensing procedures have been simplified,
including authorizations and access to foreign exchange.
The requirement to prepay in local currency the
equivalent of the foreign exchange for which a letter of
credit has been opened has been eliminated.
Import duties and production tax rates have been
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The 1984 import regime contains three lists and a fourth category
consisting of all other goods.
The first list is composed of articles whose importation
is prohibited; it includes such items as foodstuffs,
leather and leather goods, textiles and clothing, and
other finished products.
The second list is composed of goods which can be
imported only with specific licensing by the
Undersecretariat of Treasury and Foreign Trade; it
includes such items as raw materials, parts,
intermediate goods and tools for industry, and some
electrical equipment.
The third list consists of goods whose importation is
free after payment of a specific surcharge in addition
to custom duties; it is made up of luxury consumer
goods.
All other goods not included in the three lists are
freely permitted with payment of custom duties.
Foreign Exchange 25X1
- Travel abroad by Turks is now unrestricted.
Travelers may legally convert up to $1,000 in foreign
currency and can carry up to $3,000 abroad.
Turkish citizens can now hold foreign currency, open
foreign currency bank accounts in Turkey or abroad, and
receive interest paid in that currency within Turkey.
There are no longer limits on the amount of foreign
currency which can be brought into Turkey.
Stocks and bonds purchased in Turkey with foreign
exchange can be taken out of Turkey.
Exporters are permitted to keep 20 percent in foreign
exchange of the amount of foreign exchange they bring
into Turkey.
Foreign residents in Turkey will be able to purchase
foreign currency for Turkish lira.
Commercial banks are now free to buy and sell foreign
currency within a band of +6 percent (+8 percent for
transactions in bank notesT around the official or
"central" rate of the Central Bank; the spread between
the buying and selling rates at a commercial bank cannot
exceed 2 percent.
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Turkey: Projected Debt Service Payments
on Existing Medium- and Long-Term Debt, 1983-88
(In millions of US dollars)
1984 1985 1986 1987 1988
Debt service payments
including IMF 2,563 3,073 2,920 2,843 2,550
Principal 1,495 2,129 2,083 2,125 1,993
Interest 1,068 944 837 718 557
Memorandum item:
Debt relief
Principal
Interest
580 150
* Projections are based on disbursed and undisbursed external debt as of
September 30, 1983. The projections assume LIBOR of 10 percent for
dollars, 5.25 percent for Deutsche Marks, and 3.25 percent for Swiss
francs.
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TURKEY: BALANCE OF PAYMENTS, 1977-84
(in millions of US Dollars)
1977
1978
1979
1980
1981
1982
1983a
1984b
-4,044
-2,311
-2,808
-4,999
-4,230
-3,097
-3,508
-2
800
Exports, f.o.b.
1,753
2,288
2,261
2,910
4,703
5,746
5,727
,
6,900
Imports, c.i.f.
-5,797
-4,599
-5,069
-7,909
-8,933
-8,843
-9,235
-9,700
618
792
1,158
1,319
1,888
1,844
1,427
1
490
Workers' remittances
982
983
1,694
2,071
2,490
2,187
1,554
,
1
500
Interest payments
(before debt relief)
-360
-489
-1,010
-1,138
-1,443
-1,565
-1,345
,
-1,350
Tourism
-65
145
179
212
277
262
284
325
Other Services (net)
61
153
295
174
564
961
934
1,015
-3,426
-1,519
-1,650
-3,680
-2,342
-1,252
-2
081
-1
310
Capital account (long-
and medium-term)
1,533
1,184
680
2,342
1,049
1
119
2
505
,
825
Of Which:
Debt repayments
(before debt relief)
-214
-451
-945
-1,556
-1,185
,
-1,502
-2,080
-1
880
Debt Relief
--
295
924
1,450
850
750
1
000
,
580
Principal
--
--
(460)
(980)
(600)
(650)
,
(930)
(580)
Interest
--
--
(464)
(470)
(250)
(100)
(70)
(--)
Overall Balance
-1,892
-335
-702
-370
-65
277
-238
665
b projection
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