Recent Economic Performance An incredibly close integration with the world economy, proximity to Europe, the external anchor of EU accession, and a lengthening track record of solid economic management and structural reform drive Turkey’s long-run economic prospects. Due to its integration with the world economy, through both trade and financial channels, Turkey was also seriously affected by the global recession since the fourth quarter of 2008. After the 2001 crisis Turkey entered a period of high growth and structural transformation. Following a rebound in 2002, over the five years 2003-2007 annual growth averaged nearly 7 percent, public debt fell from 74 percent of GDP at end-2002 to 42 percent at end-2007 (with an improvement in composition also reducing market risk). A strong reform program encompassed an exchange-rate float, financial-sector supervision, privatization, revenue administration, investment climate, the energy sector, and social security. At the same time, capital inflows (in an environment of high international liquidity) and reliance on imports of petroleum-related products for Turkey’s energy needs and intermediate inputs for Turkey’s exports drove high current account deficits (which averaged 5.2 percent over 2004-08). These were partly financed by a build-up of external debt, mostly in the private sector, where external debt rose from 16 percent of GDP in 2004 to 25 percent by end-2008. High amortizations of this debt in 2009 and 2010 create additional economic uncertainty, given tight global credit conditions in 2009. The ongoing global economic downturn has hit Turkey hard. GDP growth in 2008 was 1.1 percent, implying stagnant per capita income, with the Turkish economy contracting in the fourth quarter by 6.2 percent relative to one year earlier. Year-on-year quarterly growth fell further to -13.8 percent in the first quarter of 2009 and, despite signs of the recession bottoming out in mid-2009, the Turkish economy is expected to shrink by more than 5% in 2009. Unemployment in the period April – June 2009 was 13.6 percent (higher than at the peak of the 2001 crisis), and more than one in four young workers is unemployed. The government’s response has combined monetary easing with foreign-exchange liquidity and confidence building measures in the financial sector (banks are well-capitalized and well-regulated), some employment measures, and temporary tax cuts. Challenges Ahead Policies and programs to promote a strong post-crisis recovery and to mitigate the social impact of the slowdown will likely include (i) measures to spur a recovery in domestic consumer demand starting in late 2009 (the main policy interest rate has been cut by 900 basis points since October 2008); (ii) social protection measures to help those groups most vulnerable to the impact of the slowdown—namely children and young workers; (iii) the demand creation effects of automatic fiscal stabilizers (the 2008 central government primary surplus of 1.8 percent of GDP has been replaced by a deficit over the first half of the year of the order of half a percent); and (iv) the announcement of a new medium-term fiscal framework within which fiscal measures can be well understood by markets. The long-run challenge will be to sustain robust economic growth. Aggregate saving in the public sector can be increased: reforms on the expenditure side can aim for higher-quality spending and protecting growth-enhancing investments, while limiting increases in expenditure. On the revenue side there is the opportunity to improve revenue collection, in particular by addressing the informal economy and tax evasion. In addition, reforms to the business environment, particularly relating to FDI and exports, can help generate growth that is sustainably financed—and measures to increase labor market flexibility will help translate economic growth into jobs. Over the longer-term, reforms to enhance energy efficiency and invest in alternative energy sources have the potential to reduce the Turkey’s dependence on oil and gas imports and thus its exposure to volatility through oil prices. Finally, a strategy to reduce the carbon intensity of the Turkish economic recovery could build on Turkey’s recent commitment when, on February 17, 2009, the parliament ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change. Turkey's development agenda focuses on a vision of Turkey with stable growth, a more equitable income distribution, and increased global competitiveness, as the country transforms into an information society and completes EU harmonization. Development priorities are therefore clustered around improved competitiveness and employment, equitable human and social development, the efficient provision of high-quality public services, and energy security and efficiency, with an emphasis on the reduction of regional disparities. | 
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