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After a deep crisis in
1994, with a negative growth rate of -6.1% and an annual average inflation rate of
121%, economic variables indicate a better performance in 1995: the growth rate is
estimated to reach 7.1% and the inflation rate to decrease to 89%.
The 1994 crisis was
the worst in the country's history. The financial crisis in the first quarter, caused
by short term capital outflow and the unmanageable public sector financing problem,
affected the real sector from the second quarter onwards. The government introduced
a stabilization program and structural reforms, the so-called 5 April measures, in
order to correct the imbalance. Although the structural measures did not materialize,
the stabilization program, which was supported by the stand-by agreement with the
IMF, had a favorable impact. Stability in the financial markets was restored, the
currency substitution was reversed, the foreign deficit was reduced sharply, the
current account balance improved remarkably, international reserves increased to
historically high levels and the consolidated budget deficit was temporarily reduced.
The first half of 1995
remained fairly stable, relying on the favorable achievements, particularly on the
monetary side. Although the consolidated budget deficit was contained at a level
of $5,000 billion, no further improvement was possible. The pressure on the consolidated
budget remained due to interest payments on the domestic debt. In February 1995,
nominal interest rates on government paper declined, reflecting the fall in inflation
and the renewed confidence in TL. However, the real interest rate remained high and
the rate of devaluation fell short of the inflation rate, making government paper
more attractive than foreign currency denominated assets.
The stabilization program
was short-lived and macroeconomic balances began to worsen after the third quarter
of 1995, due mostly to political uncertainties.
The budget deficit remained in line with the program targets in the first three quarters
of 1995. However, the early general elections stimulated government expenditures.
Together with the lower than expected privatization revenue, the consolidated budget
deficit is estimated to have reached $6,000 million.
The foreign trade balance
also began to worsen in the summer. The revenue from services and transfer payments
partially offset the widening trade deficit, as a result of which the current account
deficit remained tolerable. Although the trade deficit reached $8,933 million, the
current account deficit remained at $11 million in the first nine months of 1995.
The high differential
between real interest rates on government paper and the real rate of return on US$
attracted short term capital inflow. The total of net short-term capital inflow and
net errors and omissions reached $7,229 million in the January- September period.
The reversal in the
currency substitution caused by the real appreciation of the TL and the high return
on TL assets and high capital inflows resulted in a rapid improvement in foreign
currency reserves of the Central Bank reaching $16,820 million at the end of October
from $ 7,100 million at the end of 1994. The excess liquidity from this increase
in reserves partially supported the increase in domestic demand, but also hampered
monetary control and augmented the inflationary expectations which were stimulated
by the political instability.
The İstanbul Stock
Exchange, formerly one of the world's best performing emerging markets, was severely
hit by the 1994 crisis. Net profits of the ISE-listed firms over the January-December
1994 period plunged 29% in US$ terms, compared to the same period the year before.
In May 1994, the ISE index in US$ terms fell to 242, the lowest since 1990. As the
favorable impacts of the stabilization program began to be felt, the ISE index recorded
a rapid recovery in the second half of 1994, which continued until May of 1995. Starting
from February 1995, ISE displayed outstanding performance. The index rose 55 % in
the first half of 1995. However the ISE was largely indexed to political developments
in the second half of 1995. Political instability and the rise in interest rates
on government paper caused a drop in the ISE index. In the first 10 months of 1995,
the ISE index rose by 12% and the transactions volume by 250% in US$ terms.
The interest rate on
domestic debt began to rise in September. Although the rate of devaluation has also
accelerated since the end of September, with the implicit aim of limiting the growth
of international reserves and thus the creation of TL, the interest rate-devaluation
differential widened in order for Treasury to attract private sector funds.
Increasing political
instability and uncertainties in the financial markets stimulated the shift towards
towards foreign currency, and aggravated the financing problem of the public sector,
although the Treasury offered high real interest rates. The real interest rate at
the beginning of 1996 is at the same level as the peak recorded during the 1994 crisis,
and the differential between the real interest rate-real rate of return on US$ is
even higher than the 1994 crisis. The economy once again is characterized by foreign
trade and public sector deficits. Although the inflation rate was held back to pre-crisis
level, a year end rate of 65% is still high. The yearly inflation rate is set to
rise further with the adjustment of public sector prices, which were postponed to
the post election period.
Despite the pessimistic
outlook, the Turkish economy may still overcome the difficulties if it undertakes
the necessary structural adjustments, to benefit from the Customs Union.
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