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Since the Second World War the Turkish economy has been transformed by the steadygrowth of industry and services. Turkey’s econo-mic growth rate has been one of the highest inthe OECD.In the early 1980s, Turkey launched a prog-ram of structural change and liberalization to alle-viate the recession of the late 1970s.

The prog-ram proved to be quite successful in terms of res-toring economic growth, improving exports andreducing the inflation rate. Within this context,Turkey’s economy grew by 7.5% between 1981and 1985. However, since 1986, the achieve-ments of the stabilisation program in question ha-ve been overshadowed by high inflation risingfrom gradually increasing public sector deficit.Nevertheless, Turkey was able to realize anaverage growth rate of 6% during the period of1985-1992. 1992 was the year in which econo-mic activity recovered strongly from its stagnantcondition of the previous years, which was largelythe result of the Gulf crisis.

Uncertainties and un-favourable external conditions related to the GulfWar led to a sharp contraction in economic acti-vity. Its adverse effects on Turkishexports to the Gulf region are stilla major problem. Expansionarypolicies pursued in 1992 and1993 kept the growth rate relati-vely high, but created expensivemacroeconomic imbalances. Bri-efly, the fluctuation in the eco-nomy till 1992 can be summarisedas stop-and-go cycles, which weremainly initiated by domestic fac-tors.High inflation and the devalu-ation of the Turkish Lira resultedin difficult economic conditions for the year 1994.A series of negative developments such as risinginterest rates, stagnation in credit markets, andvolatility in foreign exchange, an unanticipated in-ventory build-up and a resulting contraction in do-mestic demand led the Turkish Government tointroduce a Stabilization and Structural Adjust-ment Package on April 5, 1994.

The Government’s main policy objectives for1995 focused on public sector deficit reduction,which would subsequently alleviate inflationarypressures. Economic growth, as opposed to thesignificant contraction in 1994, resumed muchfaster than anticipated, experiencing an unexpec-ted growth of 8% in 1995. This growth stemmedmainly from the revival of domestic demand.The Turkish economy grew far more than ex-pected in 1996.

The rate of growth almost doub-led the official target of 4.5% and equaled 7.1%.The expected rate of growth was relatively lowermainly due to two factors. First, it was supposedthat the introduction of the Customs Union withthe EU would slow down the rate of growth by means of increasing competitive imports. Secondand most importantly, general elections at theend of 1995 increased the possibility of puttingthe long-awaited stabilisation policies into effectvia a new government. Imports, especially thoseof consumer goods, increased remarkably drivenby a live domestic demand supported with expan-sionary policies, and the real growth rate rema-ined high.In 1997, GNP increased by 8.3%.

Regardingthe sub-sectors, industry was the best performingsector with a growth rate of 10.2%. This sectorwas followed by the services sector, which had agrowth rate of 9.0%. While the construction sec-tor growth rate reached 5.0%, the agriculturalsector recorded a narrowing down of 2.2%.The macroeconomic performance of the Tur-kish economy in the period of 1995-97 can bebest described as strong output growth backedwith fiscal expansion and an accommodating mo-netary policy. Strong domestic demand driven bya number of factors, including the role played bythe large unrecorded economy and high interestrates on government securities held by the priva-te sector, all contributed to the high growth per-formance.In 1998 growth appeared to be slowing signi-ficantly mainly due to a contraction in private con-sumption and investment resulting from the eco-nomic crisis in the Russian Federation.

GNPgrowth rate was realised at 3.9%.Despite the positive signs of overcoming theeffects of the Russian crisis at the beginning of1999, the earthquakes of August 17 and Novem-ber 12, continuing high interest rates and incre-asing domestic taxes deepened the decliningtrend in GNP. Thus, the growth rate was realisedas -6.1% in 1999, which was the greatest declineobserved in GNP since the years of the SecondWorld War. By the end of that year, taking into considera-tion the effects of high inflation and interest rateson Turkey’s economic performance over the last25 years, the government focused on an econo-mic program which aims to free the country frominflation and enhance the prospects for growthand for a better standard of living for all parts ofsociety.

Thus, a disinflation and fiscal adjustmentprogram was initiated on December 22, 1999supported by a stand-by arrangement (SBA) withthe International Monetary Fund. The program rested on three pillars: Up-frontfiscal adjustment, structural reform, a firm exc-hange rate commitment supported by consistentincome policies. This firm exchange rate commit-ment and consistent income policies were neededto lead inflation and interest rates down more ra-pidly, particularly in the first phase of disinflation.Within the framework of the program, GNPgrowth in the range of 5-5.5 percent in 2000,partly reflecting the rebound from the negativegrowth in 1999 was projected and in line withthe measures, in 2000, a recovery was observedin the economy and GNP showed an increase of6.3%.Significant progress has been made towardsachieving the program’s goals.

Following the se-cond review, progress in the implementation ofthe undertakings has become more apparent.These results have been achieved through thestrict implementation of the policies, which havegarnered credibility in both domestic and interna-tional financial markets, as also reflected in upgra-des by major credit rating agencies.