Back Matter

APPENDIX I: Privatization 1/

1. Overview

Turkey’s privatization program was initiated in the mid-1980s. The state-owned enterprise sector at the time consisted of some 35 enterprises which served as parent holdings for over 120 wholly owned companies; the state also held majority shares in numerous affiliated partnerships, and minority shares in more than 100 joint-stock companies. 2/

State enterprises (SEEs) in Turkey are divided into those which are considered primarily commercial in nature, and those which are not necessarily expected to operate at a profit. The latter, called public economic institutions, include providers of infrastructure-related goods and services, such as TEA$ and TEDA$ (electricity), TCDD (railways), and TTA$ (telecommunications), as well as agricultural producers such as TEKEL (alcohol and tobacco), and çaykur (tea). The SEEs and their affiliates are active in almost all sectors of the economy, playing a dominant role in services (e.g., railways, telecommunications and electricity), commodity trading, banking, mining, the production of basic metals and chemicals, and defense.

The overall progress of the privatization program has been very slow. Divestment has proceeded on a piecemeal basis, reflecting inadequacies in the legal and institutional framework for privatization, shifting objectives for the sales drive, and effective political opposition to reform. Early on, the government stressed the need to improve economic efficiency as the motivation for its privatization efforts, but in the late 1980s, the focus shifted to domestic capital market deepening through the promotion of wider share ownership; more recently, the emphasis has moved to raising revenue and limiting the financial burden of SEEs on the budget. The process has also been hampered by thin capital markets and by the absence of post-privatization competition legislation in sectors covered by state monopolies.

2. Legal and institutional framework

The legal and institutional framework for privatization has developed over the last decade in a somewhat ad hoc fashion, with elements of the legislation being repeatedly subject to successful constitutional challenges.

Law 2983, passed in 1984, established the Housing Development and Public Participation Administration (HDPPA) to implement privatization and finance mass housing and major infrastructure projects such as highways and dams. The HDPPA was subsequently split into two separate bodies: the Mass Housing Administration and the Public Participation Administration (PPA). The latter was given the responsibility for implementing privatization, i.e., determining the strategy and method of sale, conducting valuations, managing the legal and administrative process, hiring consultants, initiating the tender process, handling promotional activities, and conducting the final sale operations.

Law 3291 in 1986 outlined the decision-making process and procedures for the incorporation and privatization of SEEs. The Council of Ministers was given the authority to decide which SEEs (wholly state-owned companies) were to be transferred to the Public Participation Administration (PPA) for privatization. A High Planning Council (HPC), chaired by the Prime Minister, was given the corresponding authority for partially state-owned companies and subsidiaries, and for the sale of minority shareholdings. Once a decision to privatize was made by the Council of Ministers or the HPC, the SEE was transferred from the Treasury and relevant line ministries to the ownership of the PPA, which had the authority to convert it into a joint stock company and then sell it. The PPA operated under the supervision of the Public Participation High Council (PPHC), also chaired by the Prime Minister, which was established by a decree law in 1991.

In 1993, the government attempted to accelerate the privatization program by pushing through Parliament enabling legislation to allow it to enact reforms by decree. However, the privatization decree was subsequently annulled by the Constitutional Court. A similar enabling act passed in mid-1994 was also blocked by the Constitutional Court, following cross-party opposition to the act on the grounds that it was unconstitutional and would result in arbitrary and hasty divestment.

In November 1994, the government enacted a new privatization law- -Law 4046- -with a view to speeding up the pace of privatization by overcoming the legal obstacles that had been raised in Parliament. Law 4046 replaced the PPA with the Privatization Administration (PA), and established the Privatization High Council (PHC) as the ultimate decision making body for privatization, taking over the duties previously held by the Council of Ministers and the PPHC The PHC, comprising the Prime Minister and four other Ministers, decides on such matters as the SEEs to be privatized, the privatization method to be used, and the preparatory restructuring (including closure) to be undertaken, and sets the privatization targets and the budget for the PA. Unanimous PHC approval is required for the sale of any SEE. The PA’s responsibilities are to coordinate and supervise the valuation and tender process, to deal with legal and administrative issues regarding the company under privatization, and to handle all promotional activities associated with the sale. The 1994 privatization law also stipulates that privatization proceeds cannot be used to finance the budget, but instead should be devoted to paying for the privatization process, to finance selected infrastructure projects, or to retire existing public debt. Law No. 4046 does not cover the privatization of public economic institutions; separate laws are still required for such enterprises. 1/

3. Progress to date

Since 1985, over 160 companies have been taken into the privatization portfolio. Nine companies were later withdrawn for various reasons, including two state banks, Türkiye Öğretmenler Bank, which was merged with Halk Bank in May 1992, and Denizcilik Bank, which was merged with Emlak Bank in November 1992. Privatization implementation began with the transfer of a few incomplete plants to the private sector to be finished or reconstructed, and continued at a relatively slow pace, with block sales of a few small agro-industrial companies and five cement companies. As the main objective of the privatization drive shifted toward promoting wider share ownership among the Turkish public, public offerings of minority shareholdings became more common. Indeed, the earlier cement plant sales (which had been made to foreign investors) were overturned by court rulings for failing to meet the privatization objective. However, the foreign owners continued to operate the firms and were subsequently supported by an ex post decree.

From 1986 to 1993, the privatization process generated less than US$2 billion in gross revenues, most of which was used to subsidize loss-making enterprises in the PPA portfolio (Annex Table 1). The most significant sales in the initial years of the privatization program were the public offering of 8 percent of PETKİM (petrochemicals) shares, which raised US$150 million, and the public offering of 3 percent of ERDEMİR (iron and steel) shares, for US$53 million; together, these accounted for over 40 percent of total privatization revenues between 1986 and 1991.

Table 1.

Turkey: Privatization gross revenues, cash proceeds and expenditures

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Source: Data provided by the Turkish authorities.

Payments received, including previous years’ installment collections.

Capital injections, transfers, and other credits to companies under privatization.

Social assistance supplements and retirement bonuses.

In 1992, changes in the management and structure of the PPA lent a new impetus to the privatization program, and accelerated the pace of divestment. Block sales of state shares in 18 companies were completed, the most important ones being IPRAGAZ (a liquid petroleum gas distributor) for US$64 million, and six cement companies for a total of US$281 million. These were followed in 1993 by block sales of four more cement companies for US$166 million, and the sale of minority shareholdings in some electricity producers and telecommunications equipment companies.

In early 1994, an international offering of the state’s 16.67 percent holding in the automobile manufacturer, T0FA$, raised US$300 million, but the privatization program stalled in the middle of the year after the Constitutional Court blocked the Government’s plans to privatize by decree. When the new privatization law was finally passed in November 1994, the privatization program was expected to pick up momentum. The government announced an ambitious target for 1995, projecting US$5 billion in revenues from the sale of some 20 enterprises. However, the program was held up by the uncertain political environment during the year: there were three different heads of the PA, and a large number of tenders and final sales were held up by the inability of the PHC to meet and reach a unanimous decision. Also, several sales were canceled or reversed by the PHC. As a result, the target was revised downward over the course of the year, to US$2.7 billion in June, and US$1 billion in October. Actual revenues for 1995 amounted to only US$515 million from 13 block sales, some asset sales and a few share participations. The major sales were that of KÜMAŞ (mining) for US$108 million and Sümerbank—the first state bank to be sold—for US$103 million.

To date, some 108 companies have been privatized—89 of them fully—either through the sale of shares or asset sales, and the privatization program has generated gross revenues of around US$2.8 billion, of which some US$2.6 billion has been realized 1/ (Annex Table 1). Together with US$0.9 billion of dividend and other income of privatized companies, total cash proceeds as of end-1995 amounted to slightly over US$3.5 billion. As noted, a substantial portion (about 65 percent) of these proceeds went toward financing companies in the privatization portfolio, through equity participation and loans; only about 15 percent of the cash proceeds were transferred to the Treasury.

The labor market impact of the divestment program has so far been minimal: the privatized companies have all been relatively small and very few workers have been laid off. However, the privatization program remains unpopular with trade unions, particularly in those sectors with substantial overstaffing, such as steel, textiles and electricity.

4. The 1996 program

There are currently some 59 companies in the privatization portfolio, two thirds of which are majority owned by the state. The PA has set an ambitious program of almost US$2.5 billion in gross receipts for 1996. In March, ÇİNKUR, a zinc and lead mining and production company, was sold for US$14 million and in May 1996, 5 cement factories previously owned by ÇİTOSAN were sold piecemeal for about US$200 million.

Included in the 1996 program are several large firms that have been in the privatization portfolio for several years. The most significant are: PETKlM, the state-run petrochemicals producer; POAŞ, the main distributing and marketing company for petroleum products; and ERDEMṞR, the sole integrated flat steel producer in Turkey. The PA plans to partially privatize these companies, by selling 60-70 percent of its shares in PETKİM, 1/ up to 40 percent of its shares in POAŞ, and 30 percent of its shares ERDEMIR. 2/ Also slated for full privatization are several large firms such as Etibank and the loss-making TEA$ (four electric power plants). Smaller enterprises expected to be sold in 1996 include the remaining ORÜS forestry products plants, KBİ (copper), and several Sümer Holding textile plants.

Beyond 1996, the PA expects to dispose of three of the four petroleum refineries of TÜPRA$; to complete the privatization of Turk Telekom (see below); and to include in its privatization portfolio power generation companies belonging to TEDA$, sugar producing companies belonging to $EKER, and tobacco factories belonging to TEKEL. The establishment of post-privatization regulatory mechanisms will be crucial for sales to proceed, particularly in the cases of TÜPRA$, Turk Telekom, and utilities sales.

5. Privatization of Turk Telekomünikasyon A.S. (Turk Telekom)

The sale of the large state-owned telecommunications company, Turk Telekom, has long been a key objective of the privatization drive, but the proposed privatization has been beset by legal and political obstacles, and interrupted by no fewer than three court annulments in almost as many years.

Turk Telekom was separated from the state-run Turkish Post Office (PTT) in 1993 by a decree law which provided for the future sale of up to 49 percent of the shares in Turk Telekom and the full privatization of services such as mobile telephones, paging, and data transmission. However, the privatization process was halted when the decree was declared unconstitutional by the Constitutional Court later in 1993. A second attempt met with a similar fate when Law No. 4000, passed in 1994, was annulled on the grounds that it granted too much power to the Communications and Transport Ministry: the legislation had authorized the PHC to draw up guidelines for the sale, and charged the Communications and Transport Ministry with the responsibility for issuing operational licenses to private companies for telecommunications operations.

A third attempt was made in 1995 when Law No. 4107 was passed, making the PHC responsible for setting out the principles and procedures for the transfer and sale of Turk Telekom shares as well as approving the final sales, and assigning the PA the task of determining the value of the shares and administering the privatization procedure. In accordance with this law, 10 percent of the shares was to be transferred free of charge to the Turkish Postal Services, 5 percent was to be set aside for employees of Turkish Postal Services and Turk Telekom, and the remaining 34 percent was to be offered to international and domestic investors. By December 1995, the PA had received several bids for privatization consultancy services, and was in the process of evaluating final bids from a short-list of six international consultants.

However, in February 1996, the Constitutional Court again struck down certain articles of Law No. 4107 as unconstitutional, and suspended all executive action based on this law. Three articles of Law 4107 were annulled: the article granting the PHC final authority over the sale and transfer of Turk Telekom shares; the article giving the PA responsibility for pricing the shares and running the privatization process; and the article authorizing the PA to price and tender licenses for value-added services such as paging and GSM (Group Special Mobile) licenses. As a result of the ruling, the tender process for privatization consultancy services was canceled and further work on the sale has been shelved, pending the adoption of new legislation.

APPENDIX II: Social Security Reform 1/

The financial position of Turkey’s state social security system has deteriorated markedly in recent years, with rising deficits imposing an increasing burden on the budget. The financial imbalances are occurring despite a relatively young population, and reflect deep-rooted structural problems that were exacerbated by the abolition of the minimum retirement age in 1992. Also, the interaction between pension and health insurance and other social security schemes (e.g., severance pay and social assistance) is having adverse effects on employment creation, the level and intermediation of savings, and social equity, with inadequate targeting of social assistance to the poor and elderly. Further deterioration in financial performance is expected in the coming years unless major reforms are implemented.

Proposals to reform the pension system and other elements of the government’s social welfare system have been under consideration for some time. In 1994, the government, with financial assistance from the IBRD, 2/ commissioned a study to clarify the reform options available in regard to pension insurance; a related study was also initiated on reform options in health care provision. The study on pension system reform, undertaken by the ILO, was completed in 1995 and, at the government’s initiative, has been widely disseminated in Turkey as a means for promoting public debate on social security reform. The results of a related study on health insurance, prepared by the Australian Health Insurance Commission, have also recently been released.

1. Current social security system

There are three public pension institutions in Turkey: Sosyal Sigortalar Kurumu (SSK), Emekli Sandigi (ES), and Bag-Kur (BK). SSK is the largest of the three organizations, providing coverage to almost one third of the population, including all workers in the (formal) private sector and the public sector, except for civil servants. SSK also extends voluntary coverage to seasonal workers in the agricultural sector. ES covers civil servants, while BK provides coverage to the self-employed as well as housewives, elected village and municipal officials and agricultural workers. Together, these pension schemes cover about 70 percent of the population. However, this figure includes direct and indirect beneficiaries, i.e., contributors, pensioners, and their dependents. The number of active members is much smaller: out of the 40 million or so who are “covered”, only around 7 million are active members of the social security institutions.

The three social security institutions also provide health, disability, and death benefits. SSK and BK provide health insurance coverage for ail members and their families, while ES provides health insurance coverage only for retired civil servants (leaving the employing ministries to cover health insurance for working civil servants). SSK is a major health care provider; ES and BK do not directly provide health care. Health coverage for the remainder of the population not covered by these institutions is provided by the Ministry of Health, university hospitals, other sectoral ministries, and the private sector.

The social security institutions essentially operate on a pay-as-you-go (PAYG) basis. The contribution rate for SSK is 33.5 percent (21.5 percent for pensions and 12 percent for health insurance); 19.5 percent of the contribution is paid by the employer and 14 percent by the employee. Voluntary and agricultural contributors to SSK pay a contribution rate of 20 percent (which does not include health insurance). The contribution rate for BK members is 32 percent (20 percent for pensions and 12 percent for health insurance). The contribution rate for civil servants in ES is 35 percent (inclusive of health insurance).

Despite these contribution rates, the actual contribution revenue is low, mainly due to the fact that the base wage on which the contributions are calculated is subject to a low ceiling (of 1.4 times the minimum wage in the case of the SSK, for example). Furthermore, there is a widespread tendency to under-report income, and to make contributions on an irregular basis, especially in the informal sector where enforcement is problematic. The compliance rate is particularly low for BK—which is estimated to collect only about 10 percent of contributions due—partly reflecting its deliberate policy of not collecting from its poorest members. The compliance rate for the other two institutions is higher: ES collects 100 percent of contributions due from civil servants, 1/ and SSK has, reportedly improved its collection from 70 percent to 85-90 percent of contributions it reports as being due. 2/

Retirement benefits 3/ provided by the three major social security organizations are proportional to contributions, but only weakly related to earnings. This is because benefit payments are subject to the same ceiling as the base wage on which the contributions are calculated. All public sector retirees also receive a flat rate social support supplement (SYZ). This supplement, which is an unfunded payment in the sense that it was introduced without a corresponding increase in contribution rates, represents a large proportion of the benefits paid from SSK. The ratio of the average pension to average insured earnings in 1995 was 95 percent for SSK, 67 percent for ES, and 78 percent for BK.

Under the current system, there is no minimum qualifying age for a pension: members may receive retirement benefits once they have accumulated 5,000 premium-paid days, regardless of age. There is no standard retirement age either: men may retire after working for 25 years and women after working for 20 years, implying that the pensionable age could be as low as 43 years for men and 38 for women. The average age of new retirees has been declining in recent years, and now stands at around 49 for men and 46 for women. This trend toward early retirement has contributed to an increasing ratio of pensioners to contributors, currently at 55 percent for SSK (meaning that each pensioner is being supported by approximately 2 active contributors to the scheme), 63 percent for ES and 34 percent for BK.

Returns on pension fund assets are small as a share of expenditures—about 4 percent in ES, 2 percent in SSK, and close to zero in BK.

The high and increasing incidence of early retirement, large unfunded social assistance payments to retirees, low compliance ratios in the informal sector, and poor returns on pension fund assets have been reflected in continued deterioration of the financial position of social security system. In 1995, the combined deficit of the major social security institutions amounted to TL 142 trillion (about 1.8 percent of GNP). This represents a growing drain on the budget: budgetary transfers to the pension institutions amounted to 1.4 percent of GNP in 1995, and the figure is expected to rise to 2.1 percent of projected GNP in 1996. ILO projections suggest that, in the absence of policy changes, the combined deficit of the three pension schemes will increase from 1.8 percent of GNP to almost 3.5 percent of GNP by 2005. Looking to the longer term, this deficit is projected to rise to 10 percent of GNP by 2050,

2. ILO proposals for social security reform

The ILO report considered four options for social security reform: (1) a restructured version of the existing PAYG scheme; (2) a mandatory, fully funded retirement savings scheme; (3) a mixed system combining a restructured PAYG system with a compulsory private pension scheme; and (4) a mixed system combining a restructured PAYG system with a voluntary private pension scheme. Under all four options, it proposes that the standard pensionable age be set initially at 55 years for men and 53 for women, but raised over a ten-year period to 60 years for men and 58 for women.

Under Option 1, the contribution rate of the current PAYG system would be set at 21.5 percent, subject to a ceiling of five times the minimum wage; the scheme would provide a pension amounting to 1.5 percent of average annual lifetime earnings (adjusted in line with movements in gross national average earnings) 1/, likewise subject to a ceiling of five times the minimum wage. This restructured PAYG scheme would cover civil servants and all other employees; the self employed would be covered by a separate restructured version of BK. 2/

Option 2 represents the most drastic change, replacing the PAYG system with a system of individual savings accounts. Mandatory contributions at a rate of 17 percent of all earnings, would be shared equally between the employer and employee. The amount of the pension would depend on the contributions paid and on the rate of return achieved by the private pension fund chosen by the individual to manage his or her pension savings. This system would cover civil servants, all other employees, and the self employed.

Option 3 is a combination of the PAYG system of Option 1 (the first tier) with the mandatory retirement savings component of Option 2 (the second tier). The contribution rate would be 16.5 percent for the first tier and 5 percent (split equally between employer and employee) for the second tier, both subject to a ceiling of 5 times the minimum wage. Two versions of Option 3 were considered: under Option 3a, the first tier pension would comprise a flat-rate element of 20 percent of national average earnings and an earnings-related element equal to 0.75 percent of average lifetime earnings; under Option 3b, the first tier pension would be simply 1.33 percent of average lifetime earnings. Option 3 would cover civil servants and all employees; the self employed would be insured for the flat rate component of Option 3a in return for flat rate contributions, and would be covered on the earnings-related component (of both Options 3a and 3b) and on the mandatory savings scheme component by a restructured BK scheme.

Option 4 is similar to Option 3 except that the second tier is voluntary instead of mandatory. As in Option 1, the first tier contribution rate would be set at 21.5 percent, and the PAYG scheme would provide for a pension of 1.5 times average lifetime earnings. Both contributions and benefits for the first tier would be subject to a ceiling of three times the minimum wage, lower than that for the first three options. This scheme would cover civil servants and all other employees; the self-employed would be covered by a restructured BK, as in Option 1.

A summary of the main reform options is presented in Annex Table 1. According to the ILO’s calculations, of the four options, Options 1 and 4 would achieve the greatest long term reduction in social security pension scheme deficits and hence, lead to the most substantial improvement in the balance of the consolidated government budget. (Annex Table 2). Both options would also lead to reductions in social protection expenditure and subsidies in the medium term. Option 2 would also reduce subsidies to the pension system, but only in the very long term. The savings scheme components in Options 2, 3 and 4 would have the additional benefit of promoting the development of the capital market.

Table 1.

Turkey: Summary of ILO proposals for reform of social security

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Source: International Labour Office, Republic of Turkey Social Security and Health Insurance Reform Project, Social Security Final Report, Geneva, 1996.
Table 2.

Turkey: Economic Impact of the ILO’s Reform Options

(in percent of GDP)

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Source: International Labour Office, Republic of Turkey Social Security and Health Insurance Reform Project, Social Security Final Report, Geneva, 1996.

3. Progress to date

Initial efforts to implement social security reform have encountered strong public opposition. A draft law for the reform of SSK, mandating a minimum retirement age and longer minimum enrolment periods for pension eligibility, was submitted to Parliament in April 1995, but was eventually shelved in the face of vigorous public criticism.

The government is promoting renewed public debate of social security reform, using the ILO report as a basis for informing and focusing the debate. In early May 1996, the government organized a two-day conference on social security reform to discuss the proposals put forward by the ILO study. Participants at the conference included several ministers as well as representatives from the major political parties, labor and employers unions, private insurance companies and international institutions, academics, and foreign experts. The Turkish authorities report that conference participants generally favored reform along the lines of the ILO’s Option 4—a reformed PAYG system, supplemented with some form of voluntary retirement savings scheme.

APPENDIX III

Turkey: Tax Summary

(as of May 1996)

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Law No. 1615 will be abolished and the Customs Law of the European Communities will be applied.

This tax will be abolished, once the Special Consumption Tax comes into effect.

APPENDIX IV: An Econometric Analysis of the Determinants of Inflation in Turkey 1/

1. Introduction

Turkey has experienced high and variable inflation since the 1970s. Various stabilization programs implemented over the years have brought only temporary relief, and inflation remains a central feature of the Turkish economy. A sizable literature has emerged examining elements of the inflationary process in Turkey, typically focusing on a single determinant of inflation. 2/ This study seeks to throw additional light on the determinants of inflation in Turkey by analyzing price determination within the framework of a simplified multi-sector macroeconomic model, along the lines proposed by Bruno and Melnick (1994).

Inflation in Turkey was in line with that of industrial countries through 1970, but accelerated throughout the 1970s to a high of some 100 percent in 1980 (Chart 1). Implementation of a major stabilization program saw a sharp drop in inflation to some 30 percent a year during the early 1980s, but this was soon reversed as inflation trended upwards from the mid-1980s, reaching a peak of 120 percent in 1994 (following an exchange market crisis) before dropping back to 88 percent in 1995. During the 1980s, wide-ranging structural reforms were introduced, notably in the financial and external sectors, that transformed a heavily regulated inward-looking financially repressed economy into one in which market forces and external competition play a central role in resource allocation. Inflation during the late. 1980s and early 1990s therefore took place in the context of an economic structure very different from that of the 1970s, but with one constant theme–a large, albeit fluctuating, public sector borrowing requirement (Chart 2).

Chart 1
Chart 1

TURKEY: INFLATION DEVELOPMENTS 1/

Citation: IMF Staff Country Reports 1996, 122; 10.5089/9781451837988.002.A999

Sources: Turkish authorities; and IMF, International Financial Statistics.1/ Period average percentage changes.
Chart 2
Chart 2

TURKEY: PUBLIC SECTOR DEVELOPMENTS

(In percent of GNP)

Citation: IMF Staff Country Reports 1996, 122; 10.5089/9781451837988.002.A999

Source: Turkish authorities.

II. A Model of the Inflation Dynamics

The model offers a simple representation of an economy in which there are four sectors—goods, money, labor, and external sectors. The goods market provides the equilibrium condition for the long-run price level. The evolution of prices in the short run is dependent not merely on conditions in the goods market, but is also influenced by conditions in the money, external, and labor markets. These influences are captured by including estimates of market disequilibria in these markets in the inflation equation, along with the standard error correction term and other short-run explanatory factors.

1. A long-run mode 1

Standard aggregate demand and supply functions are assumed that determine the long-run equilibrium level for domestic prices. 1/ Aggregate demand increases if real money balances rise and/or competitiveness improves (i.e., if domestic prices in foreign currency terms decline relative to foreign prices of competing exports). Aggregate supply declines if real wages and/or imported input prices increase. Hence, the balance of aggregate demand, yd, and supply, ys, can be written as:

yd(MP,Px*PE;εd)=ys(WP,Pr*PE;εs)

where P denotes the domestic price level, W nominal wages, E the exchange rate (defined as the price of domestic currency in foreign currency), 2/ M money, P*x the exogenous price of exports, P*r exogenous imported input prices, and ∊d and ∊s are random demand and supply shocks, respectively. Solving for the price level yields the following long-run price equation:

P=θ0E+θ1M+θ2W+θ3PX*+θ4Pr*+ε(1)

The expected signs of money, wages, export and import prices are positive, while the expected sign for the exchange rate is negative.

To identify pressures on prices deriving from external sector disequilibrium, the observed level of the real exchange rate is compared with a measure of the “equilibrium” real exchange rate (RER), defined to be the real exchange rate that, given estimated export and import relationships, is compatible with a financeable deficit on the goods and services account. The financeable deficit (K) is estimated by average levels of medium and long-term capital flows, current transfers, and net factor income. 3/ Given standard export and import functions, with export (import) volumes depending on the real exchange rate and foreign (domestic) income, the RER can be derived as follows:

RER=PEP*=K+βyfPx*δyPr*+ξPx*μPr*αPx*+γPr*(2)

where P* is a weighted average of foreign export and import prices, δ is the estimated coefficient of domestic income (y) in the import function, β is the estimated coefficient of foreign income (yf) in the export function, ξ and μ are the estimated constants in the export and import function, respectively, and α and γ are the estimated coefficients of the real exchange rate in the export and import function, respectively. The difference between the actual and equilibrium real exchange rates provides a measure of disequilibrium in the external sector that impacts on price developments.

Equilibrium in the money market is obtained when the public sector deficit, as a ratio to GNP, is fully financed by long-run seigniorage–money creation–and a sustainable level of borrowing. The long-run seigniorage level is assumed to change in proportion to expected inflation and real income growth; for simplicity, a unit elasticity of real money balances demanded with respect to income is assumed. Sustainable borrowing, both domestically and externally, is defined by reference to a debt-to-output ratio that is constant or not rising. The financeable deficit, G*, can then be written as the maximum deficit consistent with the projected demand for real money balances and a constant debt to output ratio:

G*=(y.*+π*)HYt1+D.*Y(3)

where is the projected growth in real output, Y is nominal output, π* is the targeted inflation rate, H base money and D˙* are changes in total debt such that the debt-output ratio is constant. The difference between the actual public sector deficit and the financeable deficit, as measured in equation (3), yields the disequilibrium in the money market. If a large positive disequilibrium is obtained then upward pressures on inflation will emerge. This is referred to as the required deficit reduction consistent with the stipulated macroeconomic targets. 1/

The long-run real wage is determined as a weighted average of the real wage offered by firms (i.e., the real wage on the labor demand function) and the real wage demanded by workers (i.e., the real wage on the labor supply function), with weights determined by the relative bargaining power of firms and workers. Hence, the long-run real wage is given by:

WP=ω0yL+ω1u(4)

where L is employment so that y/L measures productivity, and u unemployment. The disequilibrium in the labor market is then estimated by the residuals of equation (4).

2. A short-run model for inflation

The short-run inflation equation is an error correction representation of equation (2) expanded to include the disequilibrium term from the other three sectors:

π=β0+Σi=1n(β1iπti)+Σi=0n(β2iΔEti+β3iΔMti+β4iΔWti+β5iΔPeti*+β6iΔPrti*+β7iΔZti)+β8ECMt1+β9Det1+β10Dmt1+β11Dwt1+vt(5)

where π is the inflation rate, ECM, the error correction term, Di, i=e, m, w, represent the respective deviation of the actual real exchange rate, public sector deficit and real wage from their long run equilibrium, Zt is a vector of other exogenous variables such as changes in real government expenditure, and vt is the residual.

As pointed out earlier, the dynamic adjustment of the rate of inflation depends not only on the speed at which the disequilibrium within the goods market corrects itself, but also on the dynamic adjustment of the foreign exchange market, the money market and the labor market to their respective long-run equilibria. The expected sign of the exchange rate disequilibrium is negative because when the real exchange rate is more appreciated than its long-run level downward pressure on inflation is exerted. The disequilibrium effects originating from the money and labor markets are expected to be positively signed, as an excess supply of money and a higher-than-equilibrium real wage level raise inflation.

III. Empirical Analysis

1. Data

The model is estimated with quarterly time series data from 1970 to 1994; see Appendix I for a description of data sources. The choice of the sample period is dictated by the desire to take a long-term view while the rationale for quarterly as opposed to annual frequency, is to capture short- term inflation dynamics. For some series, quarterly data had to be interpolated from annual data.

Prices are measured by the wholesale price index for the private manufacturing sector, thereby excluding administratively influenced state enterprise prices and agricultural prices. However, because the private manufacturing index was not available prior to 1981, the total wholesale price index is used in the earlier period. Wages are estimated from the annual payments made to employees in the private manufacturing sector as well as from survey data of the Turkish Confederation of Employers’ Association. The monetary aggregate used is broad money inclusive of foreign exchange deposits, M2X, and the exchange rate variable is the nominal effective exchange rate as provided by the IMF Information Notice System.

2. Estimates for the long-run model
a. Prices

The long-run price equation is estimated over the period 1970 to 1994 (Table 1). Both likelihood ratio tests of the Johansen procedure point to multiple cointegrating relationships. The choice of the cointegrating vector to be included in the short-run inflation equation is determined by the vector that has the right signs as expected from economic theory and is shown below:

P=0.57E+0.22M+0.08W+0.52Px+0.01Pr
Table 1

Long Run Price Equation 1/

Johansen Maximum Likelihood Procedure: lag in VAR = 6

94 Observations from 1971-Q3 to 1994-Q4

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Denotes the vector chosen to represent the long run relationship.

All variables are in logarithm.

r indicates the number of cointegrating vectors.

The residuals from this estimation are included as the error correction term ECM in equation (5). The expected sign is negative because when prices are above their equilibrium level, due for instance to a shock, downward pressure on prices is exerted, thus “correcting” the error and driving prices back toward equilibrium.

b. The real exchange rate

All variables in the export and import equations—with the exception of the sum of capital inflows, transfers and income–were transformed by an eight-quarter moving average, in an effort to capture long-term trends. The financeable deficit for the goods and services balance was calculated as a four-quarter moving average of the sum of medium-and long-term capital inflows, transfers, and net factor income. No cointegrating relationships were identified for both the export and import functions when estimated over the period 1970 to 1994, which is not surprising given the significant structural break that occurred in the trade regime with the shift from an inward-looking import substitution strategy in the 1970s to an export- oriented growth strategy in the 1980s. To account for this shift in the trade regime, the estimation period was divided into two subsample periods: (i) from 1970 to 1983 and (ii) from 1984 to 1994. 1/ A cointegrating relationship was obtained for both the export and import functions in each of the subsample periods (Tables 2a and 2b). The cointegrating vector for exports includes exports of goods and services (deflated by the export price index), the real effective exchange rate, and an index of world imports, which proxies the level of demand in partner countries. On imports, the cointegrating vector includes imports of goods and services (deflated by the import price index), the real effective exchange rate and real domestic income. All the variables have the expected sign in both periods.

Table 2a

Exports of Goods and Services 1/

Johansen Maximum Likelihood Procedure: lag in Var = 4

article image

Denotes vecotr chosen.

All variables are transformed by an eight-quarter moving average.

See footnote 2 in Table 1.

Table 2b

Imports of Goods and Services 1/

Johansen Maximum Likelihood Procedure: lag in Var = 4

article image

Denotes vector chosen.

All variables are transformed by an eight-quarter moving average.

See footnote 2 in Table 1.

Chart 3 plots the actual and estimated equilibrium real exchange rates; the difference between the actual and equilibrium exchange rates is included as De in the inflation equation (5) (Chart 4, top panel). It would appear that the real exchange rate was overvalued during most of the 1970s but this was reversed in the 1980s when the authorities actively pursued a real depreciation policy. The appreciation of the equilibrium exchange rate in the early 1990s reflects the improving terms of trade and the increased availability of external financing, a trend reversed in 1994 with the cutoff in access to capital markets.1/

Chart 3
Chart 3

TURKEY: REAL EFFECTIVE EXCHANGE RATE

(1990=100)

Citation: IMF Staff Country Reports 1996, 122; 10.5089/9781451837988.002.A999

Source: IMF, Information Notice System. Equilibrium real effective exchange rates are as calculated from equation (2).
Chart 4
Chart 4

TURKEY: MARKET DISEQUILIBRIA

Citation: IMF Staff Country Reports 1996, 122; 10.5089/9781451837988.002.A999

Source: As estimated from the model.1/ A positive value implies that the actual value is higher than its equilibrium value.
c. The financeable public sector deficit

The financeable deficit is computed according to equation (3), where π is taken to be zero to imply seignorage consistent with noninflationary financing, and D grows at the rate of nominal GNP to maintain a constant debt to GNP ratio. 2/ Real GNP growth is assumed to average 4 percent a year, representing the trend growth over the sample period. The difference between the actual PSBR and the financeable deficit measure constitutes the required deficit reduction, included in the inflation equation (5) as Dm(Chart 4, bottom panel). The required deficit reduction has been mostly positive over the entire sample period. In 1994, for instance, the required deficit reduction necessary to obtain noninflationary financing and sustainable debt growth amounts to over 6 percent of GNP.

d. The real wage

Although a cointegrating vector was obtained for the wage equation, it was not satisfactory in that the coefficient for the unemployment rate was incorrectly signed (Table 3). Failure to obtain a satisfactory result may partly reflect data deficiencies, but may also be due to heavy regulation of labor markets, notably during the 1980s. The residuals from the cointegrating vector, Dw, were included in the inflation equation (5) in an attempt to capture the inflationary impact of the disequilibrium in the labor market, but did not prove to be significant.

Table 3.

Long Run Real Wage Equation 1/

Johansen Maximum Likelihood Procedure: lag in VAR = 8

92 Observations from 1972-Q1 to 1994-Q4

article image

All variables are in logarithm except for the unemployment rate, UNR, and the dummy variable, DUM1 (1970-1987-0; 1988-1994-1)

See footnote 2 in Table 1.

3. The inflation equation

A general specification of the short-run inflation equation (5) is estimated using ordinary least squares (OLS) and instrumental variables (IV) for the sample period 1972 to 1994. 3/ Table 4 reports the estimated equation obtained after eliminating variables with t-ratios less than one. The inflation equation includes (i) the first and third lags of inflation; (ii) the contemporaneous and one-period lagged change in the nominal effective exchange rate; (iii) the second lag of the change in money; (iv) the first lag of wage inflation; (v) the fourth lag of the change in export prices; and (vi) all the market disequilibrium terms, except that for the labor market. 1/ The estimated equation explains 77 percent of the variation in inflation and tracks the actual inflation developments quite well (Chart 5, top panel). The results obtained using IV estimation do not differ significantly from those obtained using OLS, and all diagnostic tests from both estimation procedures are generally satisfactory. However, Chow tests indicate significant structural breaks in the inflation equation between 1980 and 1983, in line with the substantial structural changes that the Turkish economy underwent in that period.

Table 4.

Inflation Equation

Dependent variable is ΔP

89 observations used for estimation from 1973-Q1 to 1995-Q1

article image
t–ratios in parenthesis.
Chart 5
Chart 5

TURKEY: INFLATION

Citation: IMF Staff Country Reports 1996, 122; 10.5089/9781451837988.002.A999

Source: As estimated from equation (5).

To allow for these structural shifts, the inflation equation was re-estimated for the period 1970-1980 and 1981-1994. 2/ The final results obtained are reported in Table 5 and described below; the estimated inflation equations account for up to 74 percent of the variation in inflation in the 1970s, and as much as 86 percent during the 1980s and 1990s (Chart 5, middle and bottom panels). All diagnostic tests are satisfactory. Chart 6 plots the actual and dynamic forecasts of inflation for both periods.

Table 5.

Inflation Equation

Dependent variable is ΔP

37 observations used for estimation from 1971-Q4 to 1980-Q4

57 observations used for estimation from 1981-Q4 to 1995-Q1

article image
t-ration in parenthesis
Chart 6
Chart 6

TURKEY: ACTUAL INFLATION AND DYNAMIC FORECASTS

Citation: IMF Staff Country Reports 1996, 122; 10.5089/9781451837988.002.A999

Source: As estimated from equation (5).

For the 1970s, the results indicate strong influences on prices from wages, money, and the exchange rate. The independent role for wage growth presumably reflects the sizable influence of trade union activity on wage growth during this period; real wages are estimated to have increased by some 100 percent between 1970 and 1979. Both the third lag of inflation and the error correction term are also significant and correctly signed, suggesting that inflation inertia was already of significance during the 1970s; the estimated coefficient on the error correction term implies an adjustment period to equilibrium of four quarters. The terms representing real exchange rate disequilibrium and the public sector deficit are not statistically significant, implying that these variables did not have an influence on inflation separate from variables that were statistically significant (i.e., money, wages, and the nominal exchange rate).

For the post-1980 period, the results indicate strong influences on price growth from the exchange rate and lagged inflation. Interestingly, the independent role for wage and money growth observed during the 1970s disappears. This likely reflects the more restrictive environment for trade unions (at least through the late 1980s) and the liberalization of external trade and financial relationships, which would have expanded both the direct role of the exchange rate in price determination and the importance of the exchange rate as a channel through which monetary policy influences prices.

Up to three lags of inflation are positively signed with both the first and third lag statistically significant at the 5 percent level. Moreover, the estimated coefficent of the error correction term implies an even longer return to equilibrium–almost seven quarters–for the price level compared to the 1970s. In other words, the inflationary process exhibited greater inertia during this later period as inflationary expectations became more entrenched. 1/

The terms representing the exchange rate disequilibrium and the pressure of the public sector deficit are both significant for this period. The significance of the former likely captures the effects of the policy of real exchange rate depreciation pursued by the authorities during much of the 1980s as an export promotion tool, and supports the view that at times the exchange rate has been a key factor in generating, as distinct from merely accomodating, inflation. 2/ The significance of the deficit measure supports the public finance view of the inflationary process in Turkey, although the conjunction of this result with the conclusion that money growth does not have a significant separate influence on inflation is surprising.

IV. Concluding Remarks

The econometric analysis developed here supports an interpretation of Turkish inflation in which monetary variables (initially money, more recently the exchange rate) play a central role in the inflationary process; inertial factors are quantitatively important; and public sector financing needs play a role additional to any direct role in contributing to monetary growth. Policymakers’ commitment to active exchange rate depreciation on several occasions in the past 15 years have also contributed to the inflationary process. These conclusions are broadly in line with the results from other developing countries, 3/ albeit perhaps with the exchange rate having a stronger role in the inflationary process than is the case in several other countries.

Further refinement of the analysis developed here, notably by sharpening the measures of the equilibrium exchange rate and the financeable public sector deficit, could yield stronger empirical results. Additional analysis is also needed to clarify the robustness of the results to changes in model specification, and to establish whether the results obtained are heavily influenced by the experience in crisis periods (e.g., the 1994 crisis). Perhaps the most important area for further work is in reviewing why the monetary authorities opted for accomodative monetary and exchange rate policies at various key points during the last decade–an issue which will likely focus further attention on the problems of excessive fiscal deficits and, perhaps, an excessive bias among policymakers in favor of real exchange rate depreciation.

Data Issues
  • Wholesale price index, quarterly, 1990-100. Between 1970 and 1981, the index is based on prices of all items. From 1982, the index is based on prices in the private manufacturing industry. Source: State Institute of Statistics (SIS).

  • Broad money (M2X), quarterly, in billions of Turkish liras. From 1987, the series includes foreign exchange deposits. Source: IMF, International Financial Statistics (IFS).

  • Reserve money, quarterly, in billions of Turkish liras. Source: IMF, IFS.

  • Nominal and real effective exchange rate indices, quarterly, 1990-100. Real effective exchange rates are based on consumer prices. Source: IMF, Information Notice System (INS).

  • Wages, annual, in millions of Turkish liras. Estimated as annual payments per employee in the private manufacturing industry. From 1983, the series was updated with survey data from the Turkish Confederation of Employers’ Association. Quarterly series are obtained from linear interpolation. Source: SIS and staff estimates.

  • Public sector borrowing requirement, annual, in billions of Turkish liras. Quarterly series are obtained from linear interpolation. Source: State Planning Organization.

  • Export price index, quarterly, 1990-100. Source: SIS

  • Import price index, quarterly, 1990-100. Source: SIS.

  • Consumer price index, quarterly, 1990-100. Source: IMF, IFS.

  • Average productivity, annual, in Turkish liras. Estimated as the value added per worker in the private manufacturing industry. Quarterly series obtained from linear interpolation. Source: SIS.

  • Unemployment rate, quarterly. Data for 1993 and 1994 are derived from annual averages. Source: OECD Analytical Base (1970-1992) and SIS (1993 and 1994).

  • Index of world imports, annual, 1990-100. Based on the volume of world imports of goods and services. Quarterly series are obtained from linear interpolation. Source: IMF, World Economic Outlook Database.

  • Imports of goods, quarterly, in millions of U.S. dollars. Services debit are interpolated from annual data. Imports are FOB. Source: IMF, IFS.

  • Current transfers and income, annual, millions of U.S. dollars. Source: IMF, IFS.

  • Medium and long-term capital, annual, millions of U.S. dollars. Source: IMF, IFS and Recent Economic Developments (various issues).

References

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1/

Messrs. Bass, Mecagni, and Nolan, and Ms. Tan.

1/

The industrial production and capacity utilization indices are collected monthly as well as quarterly, based on the results of separate surveys. The monthly industrial production index covers some 2,500 firms, including all public sector firms and most private sector firms; the coverage of the monthly capacity utilization index is slightly wider. The sample sizes for the monthly and quarterly data are different (in the case of both measures): for the industrial production index, for example, public sector firms–which tend to be larger firms where information is more readily accessible–are relatively more heavily represented in the monthly index compared with the quarterly index, which includes many more smaller firms found in the food and beverage and textile and apparel industries.

1/

The Turkish Agricultural Bank (Ziraat Bank) extends loans to farmers on concessionary terms. Although these loans are not legally guaranteed by Treasury, the Government from time to time has required the Treasury to offset nonperforming loans.

2/

These are funded by the Turkish Agricultural Bank, which is later reimbursed from the Support and Price Stabilization Fund (an extrabudgetary fund). The fertilizer subsidy program is the most important one; others, such as livestock incentives, are relatively small.

1/

See Appendix II in SM/95/69 (4/11/95) for a brief description of the operations of these SEEs.

2/

The compensation often falls short of the duty loss claimed.

1/

Investment allowances, which were reduced in mid-1994 to 70 percent for undeveloped regions and 20 percent for developed regions, were returned to their original levels of 100 percent and 30 percent, respectively, in mid-1995 to encourage investments in the newly established industrial zones. Unlike in the past, the allowances were also made available to small firms.

2/

Other measures, such as land allocation, energy support, and subsidized credit have been approved but not yet implemented.

1/

The Undersecretariat for the Treasury and Foreign Trade does not keep track of developments after issuing the certificates.

1/

Trend inflation is measured as the annualized rate of increase of an index constructed from the seasonally adjusted WPI and CPI.

2/

The compulsory minimum level of schooling is 5 years, but this is expected to be raised to 8 years very soon.

1/

The HLFS is the best available source of labor market statistics in Turkey. It tracks unemployment reasonably well, but not with precision due to its small sample size (approximately 40,000 individuals aged 12 and above are surveyed out of a labor force of over 20 million) and the weakness in the calculation of the “blow up” factor. The blow up factor was recently updated using the results of the 1990 census–data from 1988 have been revised using the new “blow up” factor; the population projections used in the post-1990 data have also been adjusted.

2/

Urban unemployment was 12.8 percent in April 1994 and 11.1 percent in October 1994.

1/

Between 1989 and 1991, gross wages of private sector workers increased by 355 percent, gross wages of public sector workers increased by 386 percent, and net salaries of civil servants increased by 228 percent, in nominal terms. In real terms, the increases were: 71 percent for private sector workers, 83 percent for public sector workers, and 23 percent for civil servants.

1/

Fund staff have undertaken substantial revisions to the public accounts to allow for sizeable fiscal and quasi-fiscal outlays not captured in the authorities’ measurement system. Details of the revisions are described in footnotes to the relevant tables.

2/

The addition of the general government borrowing requirement (a cash-based concept) and the SEE borrowing requirement (an accrual-based concept) to obtain a PSBR has important shortcomings. Much of the SEE borrowing requirement represents the accrual of liabilities to the general government, rather than increased liabilities to the non-governmental sector.

1/

These are the following: Capital Market Fund (SPK), Savings and Deposits Insurance Fund (TMS), Foreign Exchange Risk Guarantee Scheme (FERIS), Insurance Inspection (SMK), Student Election Fund (OSYM), Publicity and Promotion Fund (TF), and Social Solidarity Fund (SYDFF).

1/

In the staff presentation, these transfers are classified as an outlay of the budget and a revenue for the EBFs, netting out in the finances of the general government.

1/

This figure of net debt repayment to banks does not square with the sizable increase in banks’ claims on nonfinancial public enterprises reported in the monetary survey (Table A33). Treasury staff argue that the data reported by banks to the CBT overstate banks’ claims on SEEs by misclassifying claims on extrabudgetary governmental entities.

2/

Government transfers to SEEs take one of two forms: direct transfers from the budget and, since 1992, the provision of marketable government paper to selected enterprises by the Treasury. The second form of assistance is not treated as a budgetary transaction, although legal authorization for such transactions is provided through special articles of the budget law. In this chapter, such operations are included in extra-budgetary transfers.

1/

See SM/95/69, Appendix II (4/11/95) for further details on these enterprises.

2/

See Appendix III for a summary of the main features of the tax system.

1/

Under this scheme, a certain percentage of the cost of the investment may be deducted from the taxable income. This percentage varies according to regions and sectors.

1/

See paragraphs 8 and 12 of the authorities’ letter of intent (EBS/94/114, 5/27/94), and pp. 8-9 of the accompanying staff report (EBS/94/114, Supplement 1, 6/17/94).

2/

The stock of resident FX deposits fell by 20 percent during April.

1/

The charts portray the price of foreign currency, the inverse of the exchange rate; consequently, the floor on the exchange rate is a ceiling on the price of foreign currency.

2/

Broad money (M2X) includes resident foreign currency deposits; lira broad money (M2) does not include such deposits (Table A33).

3/

Growth in reserve money during the second and third quarters was more than fully accounted for CBT purchases of foreign exchange (Table A34).

1/

See paragraphs 13 and 14 of the authorities’ letter of intent (EBS/95/28, 3/9/95).

1/

With output expected to grow by 3 percent on the 1994 level, the constant real balances assumption implied a modest increase in the velocity of M2X.

2/

These inflows initially took the form of domestic banks selling foreign assets to buy government paper (reflected in a large jump in their net open FX position (Chart 4)), but expanded to include portfolio inflows and asset repatriation by non-bank residents as the year proceeded.

3/

See SM/95/69, Appendix V (4/11/95) for discussion of the instruments of liquidity management employed by the CBT.

1/

See EBS/95/142, (8/18/95) pp. 5-6, and attached letter of intent, and EBS/95/142, Supplement 1 (9/15/95) for fuller discussions of the policy understandings reached, and the considerations influencing the policy stance chosen.

2/

A monthly Indicative path for reserve money for the second half of the year envisaged growth at a pace in line with the monthly inflation target of some 1 ½ percent.

3/

Banks are required to sell a set fraction of the proceeds of exports of goods and services deposited with them to the CBT. This fraction has been reduced, in a series of steps, from 20 percent in April 1994 to 10 percent in June 1996.

1/

Program targets focused on the wholesale price index, which the authorities view as the best indicator of broader price trends. Consumer prices rose more rapidly than wholesale prices during most of 1995, having increased at a slower pace during much of 1994; divergences in the price indices are usually interpreted as an indicator of the strength of domestic demand pressures, to which the CPI is deemed to be more sensitive.

2/

Through early September, the Treasury had succeeded in selling nine-month and one-year paper; during October, the longest maturity sold was 153 days, which was to shorten to 145 days on November and 91 days in December.

1/

Forward transactions were already allowed, but did not take place within the framework of a exchange market.

1/

The central bank law imposes a limit on new CBT advances to the government in each fiscal year, set as a fraction of the nominal increase in budgetary outlays approved for the year; there is no restriction on the intra-year disbursements of these advances.

1/

A small deposit money bank, SumerBank, was privatized in 1995.

1/

Credit ratings by international agencies are available for a handful of individual banks operating in Turkey. Standard and Poor’s gave in May 1996 a rating of B+ on senior debt of one of the largest private banks in Turkey. In July 1996, Moody’s rated with D two banks, D+ the second largest bank in Turkey, and E+ another bank, on a scale ranging from A to E. Moody’s commented that the impact of the operating environment on a bank’s fundamentals meant that it would be unusual for a bank in Turkey to receive a rating above the C level.

1/

See for instance, IBRD, "Performance Audit Report: Turkey: Financial Sector Adjustment Loans I and II", June 1994, prepared by the Operations Evaluation Department; OECD, "Turkey–Economic Survey, 1996", forthcoming.

1/

Changes to the reserve and liquidity requirements were announced on July 22, 1996; details were not immediately available.

2/

Estimates derived from data provided by the Banking Department of the CBT.

1/

S&P and Moody’s downgraded their rating to noninvestment grades B+ and Ba3 in April 1994 and June 1994, respectively.

2/

The official estimate of net portfolio investment in equity securities in1995 is about US$1.3 billion, in part reflecting repatriation of assets by residents. This amount fell short of the program projection premised on accelerated privatization (US$2.2 billion).

1/

The Dresdner facility is a special arrangement between the Central Bank of Turkey (CBT) and the Dresdner Bank of Germany under which the Dresdner Bank acts as an agent of the CBT in mobilizing savings of Turkish citizens residing in Europe (mainly Germany). Under the scheme, Turkish citizens may open foreign currency accounts with the CBT, with maturity typically of 1-2 years, and interest rates on deposits and penalties for early withdrawal set by the CBT.

1/

In June 1996, the Turkish Government notified the WTO that it intends to eliminate the trade restrictions justified under the WTO balance of payments clause as of January 1, 1997. These restrictions concern tariffs in excess of bound rates on 36 items, mainly transport vehicles, accounting for some 0.2 percent of 1995 imports.

1/

Prepared by Ms. L. H. Tan.

2/

SEEs, their subsidiary companies, and affiliated partnerships are governed by a decree law; joint-stock companies are governed entirely by commercial law.

1/

The new law identifies certain “strategic enterprises” in which the state will retain “golden shares” in the event that over 49 percent is privatized. These enterprises include Turkish Airlines, Ziraat Bank and Halk Bank, TMO, and the Turkish Petroleum Company.

1/

Some of the asset and share sales were made on installment payments or in terms of a foreign currency. The discrepancy between gross revenues and cash proceeds derives from interest on instalment payments and exchange rate variations.

1/

Five percent of the shares in this company are already publicly owned.

2/

Forty-nine percent of the shares in this company are already publicly owned and traded on the Istanbul Stock Exchange.

1/

Prepared by Ms. L. H. Tan.

2/

The IBRD has had a close dialogue with the government on social security reform since 1992-93; see the recent IBRD report, Turkey: Challenges for Adjustment (Report #150760TU, April 1, 1996), Chapter 3, for further analysis of the policy issues confronting the Turkish authorities.

1/

ES contributions are deducted directly from civil servants’ salaries.

2/

SSK’s low collection rate stemmed mainly from the failure of several SEEs to keep up with their premium payments. In 1995, the government took steps to remedy this problem, including: imposing stiffer penalties on overdue payments; appointing additional collectors and inspectors; and involving private banks in the collection process.

3/

Upon retirement, SSK and ES members receive a lump sum payment (equivalent to approximately one month’s wages for each year worked) in addition to the monthly pension; BK members receive only their monthly pension. Benefits continue to accrue to the member’s spouse and dependent children upon his or her death.

1/

This means that pensioners are assumed to share in the general increase (decrease) of prosperity if real earnings rise (fall) in the economy.

2/

Contributions by self-employed persons would be subject to a floor of 50 percent of the minimum wage in the first year of membership, 60 percent of the minimum wage in the second year and so on, up to 100 percent of the minimum wage by the sixth year. Farmers and agricultural laborers would be entitled to a matching government contribution of 50 percent of the minimum contribution.

1

This appendix was prepared by Ms. C.H. Lim and L. Papi.

2

See EBS/95/142, Appendix II for a review of this literature

1/

As in Bruno and Melnick, the aggregate demand schedule is derived from the standard open economy IS-LM framework where interest rates have been substituted from the model. The aggregate supply schedule is obtained from a three-factor production function.

2/

Hence, an increase in E means appreciation.

3/

Note that the RER, as defined here, is not an equilibrium exchange rate in the broader sense of being sustainable over the medium term

1/

See World Bank (1995) for a more detailed exposition of the concept of financeable deficit and the required deficit reduction.

1/

Most of the trade liberalization measures became effective from 1984 onward.

1/

It should be recalled that the concept of “equilibrium” exchange rate used is not defined in RMS terms of a sustainable balance of payments over the medium term, but more narrowly to refer to the rate that yields a financeable deficit on goods and services given current patterns of capital inflows.

2/

For simplicity, we assume a constant level based on the debt to GNP ratio in 1970 (25 percent).

3/

The contemporaneous exchange rate is instrumented with past values of the exchange rate itself and other exogenous variables of the model. This was done to take account of the possible endogeneity of the nominal exchange rate variable given past policy of depreciating the nominal exchange rate in order to offset the impact of inflation on external competitiveness

1/

Other exogenous variables, such as real government expenditures, were not signficant when included in the inflation equation.

2/

1980 was chosen as the point of structural break on the basis that both the Turkish economy and the political system underwent significant changes. Furthermore, the F-test rejects the null that the coefficients are stable at more than 1 percent significance level.

1/

It would be important to examine the role of expectations in inflation formation more thoroughly and incorporate it explicitly into the model.

2/

Calvo, Reinhart and Vegh (1994) also find that policies of targeting the real exchange rate to enhance external competitiveness in developing countries have typically led to an undervalued real exchange rate. Their results show that depreciating the real exchange rate beyond its equilibrium level is likely to result in higher inflation as evidenced in Brazil and Columbia between 1979 and 1992.

3/

See Chapter VI of the forthcoming World Economic Outlook. “The Rise and Fall of Inflation—Lessons from the Post-War Experience”.

Turkey: Recent Economic Developments
Author: International Monetary Fund