•
Many structural reforms regarding banking, telecommunication,
energy (electricity, gas, and petroleum) sectors,
public procurement, tobacco and alcoholic beverages
were implemented; independent regulatory and supervisory
authorities were set-up.
•
As part of the banking reform launched in the early
2000’s, the Banking Regulatory and Supervisory
Authority was set up; the State Banks were restructured;
the insolvent banks were taken into the portfolio
of the Savings Insurance Depository Fund and were
resolved; private Banks were strengthened by means
of effective new regulations. All these measures led
to huge amount of costs to the Treasury. However,
these measures yielded favourable outcomes in a very
short time: the capital adequacy ratio of the banking
system surmounted 30%; the banking sector gained comparatively
significant profits for the five consecutive years
2002-2006.
• The functions of the Central Bank of the Republic
of Turkey (CBRT) were enhanced and the CBRT was made
independent in May 2001 and floating exchange rate
regime was introduced. Thus, exchange rates have been
determined by market conditions, namely, supply and
demand, and the CBRT held foreign exchange auctions
where needed or launched volatility interventions
time to time. By end-2005, the CBRT started implementing
implicit inflation targeting, in which main policy
tool is short-term interest rates for which decisions
are to be based only on inflation outlook. As of 2006,
formal inflation targeting has been started. Moreover,
monetary conditionality was introduced for the CBRT.
In other words, base money and international reserves
were used as performance criteria whereas net domestic
assets were chosen to be indicative targets; money
demand increase was also allowed.
•
The economic authorities successfully worked in collaboration
with international organisations such as IMF
and World Bank. The last Stand-by Agreement with IMF
was successfully implemented (It is important to note
that Turkey experienced 17 unsuccessful Stand-by arrangements
before the 18th one which was successfully completed
in February 2005. This last arrangement also is one
of the most successful Stand-by implementations IMF
has ever experienced. Currently the 19th arrangement
is being implemented and will be finalised in the
first quarter of 2008).
•
Within the context of EU
accession process, Turkey experienced a vast transformation.
The Constitution, hundreds of laws, lots of regulations
were amended to converge to the EU norms. Turkey met
all of the Copenhagen Criteria, the political criteria
which are the pre-requisites for starting the full
EU membership negotiations. As a result, on December
17, 2004, in the summit of the presidents and prime
ministers of EU countries, EU decided upon starting
the membership negotiations with Turkey as of October
3, 2005.
•
All these made economic actors have positive future
expectations and believe that political stability
is about to be achieved. Moreover, three important
behavioural changes which also contributed to disinflation
were observed:
-
Foreign currencies were heavily used by Turkish
people as a savings media in order to hedge against
inflation especially before 2001. However, by the
introduction of the free-floating exchange rate
regime, people saw that TL appreciated time to time
and was always subject to ups and downs depending
on the economic conditions. This made people realise
that foreign currency was not a good hedge against
inflation. Thus, they started increasing the weight
of TL-denominated savings instruments in their investment
portfolios.
-
Private sector as well as public sector started
indexing the wage increases to the expected inflation
rather than realised inflation.
-
In the past, public sector used to determine the
prices or tariffs of its goods and services irrationally.
Contrary to that practice, in last three years,
the Government imposed a policy on the State-Owned
Enterprises (SOEs) in a manner that pricing and
other relevant issues were linked to the performance
criteria in line with the official economic targets
such as programmed primary surplus and targeted
inflation. Hence, when some costs increased, the
relevant SOE was to either increase the prices of
its goods or services or to have to create savings
so as to attain the performance criteria. Most of
the SOEs were encouraged for the latter and thus
their tariffs did not change too much. Thus, those
SOEs contributed to disinflation. It is important
to note that private sector in Turkey is highly
sensitive to the price or tariff changes introduced
by SOEs although absolute weights of those goods
and services in the relevant inflation baskets are
comparatively lower. Some economists call this as
psychological effect.
