House of Commons - Trade and Industry

Select Committee on Trade and Industry Ninth Report

III. TRADE AND ECONOMY

25. Preparing its economy for EU membership is a great challenge for Turkey. Growth has been held back by structural weaknesses. The inflation rate (Consumer Price Index or CPI) averaged 60.4% between January and September 2000, down from 80.4% in 1996.[10] Interest rates fluctuated and the economy as a whole suffered from a combination of a recession in 1998-99, the 1998 crisis in Russia and the Former Soviet Union and the earthquakes of August 1999. In December 1999 the Government established an economic reform programme to stabilise the Turkish economy and bring inflation down to single figures. The agenda covered most of the Turkish economy; public finances, public administration, privatisation of states enterprises, banking, agriculture and social security. The programme was underwritten by a three year stand by arrangement with the International Monetary Fund, and sectoral reform programmes had been agreed with the World Bank. It aimed to bring Turkey in line with financial areas of the Copenhagen criteria. On 6 December 2000 Turkey received a $10 billion aid package from the IMF. This was in response to the financial crisis created by a lack of public confidence in Turkish banks, during which inflation reached 1000%.

26. Until a crisis in November 2000, the reform programme was proceeding well. Inflation had been reduced by over 20% in one year; privatisation had been accelerated and the Privatisation Administration looked likely to hit its target for the year. Interests rates had halved, standing at 35%. This had been brought about in part by the stability of the Government, and in part by strong management such as controls on the exchange rate and low increases on public sector wages. We heard in Turkey of the determination to suffer in the short term for a long term stable economy.

27. Following a second crisis in February 2001, the disinflation programme was revised, including a new target of 25%, raised from 10-12%, by the end of 2001. The reform programme had to be abandoned.

28. In March 2001, a new Minister of the Economy announced a rescue programme. This hung on the restructuring of the three state banks under one supervisory board. Other measures include legislation to make the central bank independent and to facilitate the liquidation of any insolvent banks. The government announced the issue of 'marketable domestic debt instruments'[11] to the value of $16 bn to cover banks losses built up by subsidised loans made to farmers and small businesses. An agreement was put in place to block all new spending and investment not immediately necessary.

29. Although we consider the reform programmes to stand a good chance of succeeding in the long term, the inherent instability of the Turkish monetary and political system will remain a major block to steady economic improvement. The apparent ease with which the banks and markets go into freefall, and the widespread consequences of this, perpetuate the unwillingness of other nations to invest in Turkey — in one day in February $5 billion of investment was pulled out of Turkey, much of it foreign. There has also been slow progress since the November 2000 crisis in speeding up privatisation and reorganising the banks; both conditions of the IMF loan aimed at attracting more foreign investment.

PRIVATISATION

30. Improvement of the privatisation programme was a priority for the reform programme. The privatisation process began in Turkey in 1985. In 1994 a privatisation law was passed, creating the current Privatisation Administration and Privatisation High Council and setting out the legislative framework for future privatisation. Despite the establishment of a strategy for privatisation, there was only limited success until 2000. In the period 1986 to 1999 gross revenues from privatisation totalled $4.6 billion.[12] The privatisation portfolio contained little of interest to the public, or to international investors. The state was reluctant to put its major industries into the public domain. As part of the reform programme, the government made a commitment in 2000 to wholesale privatisation of state assets. In 2000 gross revenue had reached $2.7 billion by the third quarter thanks to the successful privatisation of several large state holdings such as Tüpra_ (Petroleum Refining). The rescue programme in March 2001 included measures to accelerate the privatisation of Turkish Airlines, the alcohol, tobacco and sugar monopolies.

31. Turk Telecom was put out for tender in June 2000, with a 20% stake offering. There was a requirement that the buying consortium should include at least one international telecoms operator. There were no consortia bidding, on 31 August, the deadline for registering an interest. The Privatisation Administration are now considering alternative sale structures for Turk Telecom. Under Turkish law no more than 34% of stock can be offered to buyers; the maximum Initial Public Offering (IPO) is 51% and 15% must be offered to employees. The decision at present is to re-tender Turk Telecom at 34%, although we were told that the legislation could be changed in future to allow for larger IPOs. Regulations concerning IPOs in Turkey's privatisation legislation could well hinder effective international participation in future. The rescue programme has sent the privatisation of Turk Telecom as a priority. We recommend that the European Commission raise with the Turkish authorities the possible benefits of amending the privatisation legislation with a view to increasing the attraction of Initial Public Offerings abroad.

BANKS

32. Privatisation of the banks led the reform of the financial sector. After suffering fund management problems, ten banks were taken under state control at the end of 2000 when a financial regulator was appointed. Four banks remain independent. The banks now under state control will be offered for privatisation in 2001. The three main state-controlled banks are to be brought under the auspices of one board, and the central bank is to become fully independent. The Turkish banking sector remains unsteady; fluctuating interest and inflation rates render many of its usual activities almost impossible. As Turkey's economy stabilises, it would be useful to monitor developments in the privatisation process. As we heard from out meeting with HSBC in Istanbul, there is little UK banking involvement in Turkey.

33. When reporting on our visits to other applicant nations over the last two years we have commented on the dearth of funding from UK banks for potential investment projects in these countries. We have remarked that this lack of support results in lost opportunities for UK companies and perpetuates their exclusion from these expanding markets.[13] In Turkey, perhaps due to the size of projects, we found some UK banking investment presence; for example Natwest's involvement in the Izmit Dam Build Operate Transfer (BOT) Scheme. We recommend the Government ensures that the UK banking sector can be made aware of the potential opportunities in any future public offerings involving Turkish banks.

INSURANCE

34. The insurance sector has changed over the last decade, conforming to international expectations to a higher degree. Upcoming legislation, introducing private pensions, is set to provide unprecedented opportunities for UK firms to enter the Turkish market. In order to supply private pensions, companies must obtain a Treasury licence which will only be granted to firms with qualified actuaries. Turkey suffers from a lack of qualified actuaries; we were given an estimate of fewer than thirty for the whole country. DTI and BTI should make companies in the UK financial services sector aware of the private pensions legislation and encourage them to explore the potential for offering their expertise to take advantage of the new situation.

10 2000 Regular Report from the Commission on Turkey's progress towards accession, 8 November 2000, p 22 Back

11 http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3MQWRL8KC&live=true Back

12 Republic of Turkey Prime Ministry Privatisation Administration (T 11), p 12 Back

13 Eg Industrial and Trade Relations with the Baltic States, Twelfth Report, Session 1999-2000, HC 835 Back