Süreyya Serdengeçti: Basic changes in the Turkish economy - problems and
solutions
Opening speech by Mr Süreyya Serdengeçti, Governor of the Central Bank of the Republic of Turkey,
on the occasion of the 73rd Shareholders' Ordinary General Meeting of the Central Bank of the
Republic of Turkey, Ankara, 12 April 2005.
* * *
Esteemed Shareholders, Distinguished Guests and Dear Members of the Press; Welcome to the 73rd
Shareholders' Ordinary General Meeting of the Central Bank of the Republic of Turkey.
Before I begin my speech, I would like to share with you the happiness that we have this year been
able to achieve the single digit inflation figures that we have wished for many years and the Turkish
lira has once again gained credibility. The main framework of my speech will cover the process that
has brought us up to this point and what we need to do in order to achieve and maintain price stability.
In other words, leaving aside the shallow evaluations stuck in the triangle of FX rates-exchange
ratesinterest rates-stock market rates; the core of my speech today will focus on apart the basic changes in
the economy, deep-rooted problems and the ways out of these problems.
The Turkish economy has faced a problem of almost 30-years of high and chronic inflation. During this
period, many programs have been implemented to push down inflation. In the same period, inflation
has at times relatively declined, but it was impossible to maintain a permanent recovery that could be
identified as price stability.
During the period between the first half of the 1970s and the early 1980s, studies and applications to
fight inflation and to maintain price stability in developed economies intensified, whereas inflation
accelerated due to the financing of public deficit by the Central Bank.
In the second half of 1980s, the inertia arising the Central Bank meeting public deficits brought about
abandoning of discipline in public expenditure changes in production-consumption behavior together
with inflation and deterioration in the social structure. In the early 90s, apart from relatively short-term
periods of stability, lax fiscal policies continued to be implemented along with monetary policies aimed
at preventing a possible crisis. Price stability was not a priority, moreover, inflation entered a
selffulfilling cycle. It is a fact that during this 30-year period, price stability was not the main objective and
the necessary structural arrangements for maintaining economic stability, including price stability and
sustainable growth, were not taken into consideration.
This period of long-term chronic inflation brought with it a lot of negativity. As it is known, price stability
is the sine qua non for maintaining economic and social stability. The extent of the damage to the
economy as well as political and social structure of a country caused by failing to achieve price
stability is clearly in the in the state of the country during this period and in the experiences of other
countries. At this point, it is important to underline once more the damage caused by high inflation in
order to remind us why should do everything in our power to stick to the price stability objective. This is
especially important in an environment where the benefits of overcoming inflation are not yet fully
understood.
The consequences of failure to maintain price stability, in other words, the damage caused by inflation,
can be clearly seen in our country both in society and in the economy, as is the case in all countries
that have experienced high and chronic inflation.
High inflation, one of the main reasons for poverty, depravation, unfair distribution of income, and the
economic instability environment it creates has been one of the most influential impacts of inflation on
society. The legacy of inflation on poverty, depravation and the unfair distribution of income have been
clearly felt by society.
Another effect of high inflation, which manifested itself in the short-term in society, is that of immoral
behavior. High inflation led to moral corruption in our country. While Turkey ranked low in fields such
as infrastructure, education, health and the fair distribution of income in international development
indicators, it ranked high in indices of corruption.
Another factor worth mentioning in this context is the relationship between high inflation and political
instability. Shortsighted policies by political instability and the resulting inflation as a result have
featured several times in economic literature. However, the other side of causality has not been
mentioned much. Economic instability triggered by inflation is one of the main factors that leads to
political instability. In other words, political instability creates inflation and inflation invokes political
instability. Hence, high inflation and political instability create a vicious circle.
When we look at the effects of high inflation on the economic sphere, we see that deposit savers put
most of their savings into unproductive areas such as foreign currency and real estate with the aim of
protecting themselves from the impacts of an inflationary environment. However, keeping most of their
savings as foreign currency has achieved nothing and created real revenue loss. This is due to the
fact that for economic units, the long-term revenue of foreign currency remained below the revenues of
Turkish lira assets, despite devaluations in the Turkish lira.
When we look at this from the investment angle, since there is a kind of tax burden on investments,
this creates an additional cost for investors and causes seasonal volatility in investment. This leads to
diversifications in economic growth rates. As a result, growth rates drop in countries experiencing high
inflation in the long-run, moreover the quality of growth deteriorates. The average growth in the last 20
years in Turkey has lagged behind most of the developing countries. In our country, continual high
inflation, apart from having a negative impact on economic growth, has led to the erosion of the quality
of products and services and has caused an unrelenting regression in our competitiveness. However,
competition indexes show that the devaluation of the Turkish lira do not increase Turkey's
competitiveness in any way.
The unfavorable impact of high inflation has also been the felt in the labor market and prevented it
from functioning effectively. Economic growth within continuous expansion and contraction cycles
made the labor force volatile. Those, who want to work in this volatile environment, especially unskilled
workers, are the first ones to lose their jobs in periods of contraction and the last ones that are
employed in expansion periods. This means that the period of high and chronic inflation experienced
by Turkey is one of the underlying reasons for social problems triggered by the fact that sustainable
employment growth has yet to be achieved.
Meanwhile, alongside the tendency of currency substitution with high and volatile risk premium created
by high inflation, real interests, which were high due to the problematic public debts, caused a debt
spiral and the vulnerability of the economy to exogenous shocks increased. This situation both
clouded expectations and hindered the effective utilization of monetary policy
Inflation diminished the effectiveness of financial markets to intermediate. This is due to the fact that,
in a highly inflationary environment, players in the market are unable to foresee the future as they lack
the appropriate knowledge. This situation, combined with the problem of public deficit, led to a
significant decline in the credits that the banking sector provides to the non-financial sector. Therefore,
the banking sector failed to fulfill its core function as a provider of resources for the economy. At the
same time, risk management principles were not put into practice in the banking system and the
consequences were apparent in the 2000-2001 crises.
Another unfavorable impact of high and chronic inflation on the economy in our country is that
economic units became used to operating in a highly inflationary environment. To put it more clearly,
backward indexing behavior became common in pricing activities. Thus, wall of inertia evolved in
inflation, which was difficult to break. Here "inflation inertia" simply refers to the situation of,
yesterday's inflation designating today's inflation and today's inflation designating future inflation.
Hence, as inflation increased, inflation expectations increased with it and a self-nurturing inflation cycle
began.
In a period of high and chronic inflation, consumers were not inclined to control price and quality less
and were also less concerned about diversity in selecting products. At the same time, producers were
less concerned with cost and efficiency while pricing and were willing to determine profit margins
freely, and invest less on increasing product diversity.
As a result of this behavior created by the inflation process, goods and services could be sold at any
price since consumers did not control prices, while producers did not control cost. Thus, this attitude
provoked a resistance against anti-inflationary policies that were introduced at intervals and
significantly slowed down the decline of inflation. In other words, the main inertia, which needed
breaking, was that stemming from the resistance in peoples' minds. This resistance still exists and
repeatedly stands in the way of stability programs and efforts. However, since it is gradually being
understood that inflation is also a moral issue, the fight against inflation is no longer the direct target.
My ideas on the fight against inflation are presented in detail the interview given on January 16, 2005,
which is available on our website.
To sum up, the protracted chronic inflation made our economy highly vulnerable. It hindered the
establishment of macroeconomic balances in the long run. Consequently, it induced a heavy cost on
both our economy and social life.
During the last three years, we have repeatedly explained the damage caused by inflation in every
possible platform. Today we are content to see that a significant part of the society agrees with us. In
the rest of my speech, I would like to focus on where we stand on fighting inflation, how we got here
and what should to be done to preserve these gains and maintain price stability.
With strict and efficient implementation of the economic program devised after the crisis, the thirty-year
period of chronic inflation has come to an end in our country, and the focus has shifted to the declining
inflation environment and permanence of price stability. Besides, there is a persistent and visible
recovery in inflation dynamics, and thus the inflation inertia has, to a great extent, been.
When we consider where we are after four years of fighting inflation following the crisis, we see that
CPI inflation, which was 73.2 percent by January 2002, remained below the end year targets for three
consecutive years, declining to single digit figures; annual CPI is realized as 7.94 percent in March
2005. The total decline in inflation during this period was more than 65 percent. This favorable
development was apparent in the expectations as well. While the reliability difference, which is the
difference between target inflation and inflation expectations, was 13.3 point at the beginning of 2002,
it dropped to 0.4 points at the beginning of 2005. As of today, according to the results of the survey of
expectations of the Central Bank of the Republic of Turkey, the year-end inflation expectation dropped
to 7.5 percent. This figure is below the official target of 8 percent. As well as being a concrete
indication of the fact that the inflation inertia has been broken to a great extent, this improvement in
inflation expectations is clear evidence of the increased confidence in monetary policy.
Moreover, this situation shows that the inflation target will be a nominal anchor for economic units in
their future decisions.
Figure 1: Credibility Gap
(Rates of Inflation Expectations and Targets as of the Beginning of the Year)
Inflation Targ
60
13,3 points
48.3 0,4 points
50
credibility
Credibility gap
4,9 points
gap
1,1 points
40
credibility
35.0
credibility
gap
(%
gap
30
24.9
)
20.0
20
13.1
12.0
8.4
8.0
10
0
2002 2003 2004 2005
Source: SIS, CBRT.
In 2004, there were high increases in world commodity prices; mostly in oil and primary metal prices
and in April and May there were fluctuations in the financial markets. Despite these developments, the
fact that the inflation target was realized is owing to coherent implementation of disciplined monetary
and financial policies. In addition, there are four other main factors that contributed to the steady
decline of inflation; the controlled recovery of domestic demand, the continual increase of productivity
in the economy, income policies almost coherent with inflation, and relative stability in FX rates.
The inflation figures of the first quarter of 2005 indicate that the positive outlook in price developments
continues. In the new index with a 2003 basis year, the tendency to decline persists in the special CPI
aggregates which were formed by adjusting inflation according to external factors- such as raw
material prices around the world, prices affected by natural causes or determined by the public. In the
first quarter of 2005 cumulative inflation figures remained historically low.
At this point, instead of going into detail about the inflation outlook, I suggest that you refer to the
press release "March Inflation and Outlook", which is available on our website.
Figure 2: Inflation Developments *
100.0
90.0 CPI WPI
80.0
70.0
60.0
50.0
(%)
40.0
30.0
20.0
10.0
0.0
Jul-01 Jul-02 Jul-03 Jul-04
Jan-01 Mar-01 May-01 Nov-01 Jan-02 Mar-02 May-02 Nov-02 Jan-03 Mar-03 May-03 Nov-03 Jan-04 Mar-04 May-04 Nov-04 Jan-05 Mar-05
Sep-01 Sep-02 Sep-03 Sep-04
*For the January-March 2005 figures, 2003 base year index was used.
Source: SIS.
I would like to briefly consider the underlying reasons for the success of the fight against inflation.
Along with the issues mentioned above, the implementation of firm and sound policies and important
institutional reforms are crucial to the decline of years of inflation and finally getting rid of the label; "a
country with chronic high inflation".
The first, and perhaps the most significant institutional development, is that the institutional structure of
our Bank has become conducive to maintaining price stability. As you know, in 2001, in amendments
to its law, the main purpose of the Central Bank of the Republic of Turkey was designated as
maintaining price stability and the Bank was given the mandate to directly determine necessary
monetary policy and monetary policy instruments.
Another essential change made in Central Bank law was the prohibition of advances and credits to the
Treasury and public institutions and establishments. As is known, public expenditures can be financed
through collecting taxes, privatization, borrowing from domestic and foreign markets or Central Bank's
resources. Financing through Central Bank resources may cause inflationist pressures due to
increases in 'fiduciary' supply. Therefore conducting monetary policy independently and preventing the
use of Central Bank resources in public financing are significant factors for removing this effect. It is
not a coincidence that in our country inflation followed a declining trend after November 2001, when
the provision of public credit was prohibited. It has since dropped to single digit figures after 30 years.
Another contributory factor to be mentioned in the process of fighting inflation is the communication
policy of the Central Bank. The significance of efficient communication is undeniable in reducing
ambiguity and increasing reliability by making Central Bank policies understandable, assessable and
predictable. Since 2001, the Central Bank has placed communication policy at the core of its policies;
and consequently adopted an efficient policy, sharing all knowledge and forecasts with the public and
explained its policies clearly throughout the country. I think efficient communication is highly important
in terms of the point we have reached today.
Besides central bank independence and communication strategies, the tight fiscal and monetary
policies implemented are two other important factors in the fight against inflation. It is very well known
that it is really hard to implement price stability-oriented monetary policies in an environment of fiscal
dominance environment stemming from budget deficits and excessive domestic borrowing. In order to
solve this problem, under the current economic program, giant leaps have been taken towards
decreasing interest rates and achieving sustainable borrowing by employing tight fiscal policies. In
addition, steps have been taken towards eliminating the public debt sustainability problem in the
medium and long run by achieving primary surplus. At this point, I would like to underline that the
stability, confidence and positive expectations, which have emerged in the markets as a result of the
tight fiscal policies, have significantly contributed to the downward trend in inflation.
Furthermore, continuous increases in productivity, the strong position of the Turkish lira and an income
policy in line with inflation have to a large extent contributed to the favorable course of inflation in the
recent period. Domestic demand has been kept under control as a result of the tight and prudent fiscal
and monetary policies. The postponed consumption and investments, accompanied by advanced
consumption, which was driven by worries stemming from old habits, have been instrumental in the
rapid increase in domestic demand in the first two quarters of 2004. However, the increase in domestic
demand slowed down evidently as of the second half of 2004, as expected. . Accordingly, the level of
domestic demand did not exceed the production capacity, and thus no demand-side pressure was
created on inflation. These developments were foreseen by the Central Bank and, after a brief
interlude, short-term interest rates began to be reduced again from September 2004.e. No apparent
pressure of this kind is expected in 2005 either, provided that the tight monetary and fiscal policies
continue to be implemented and the incomes policy follows a course in line with inflation. However, as
I have just mentioned, the recent press release "March Inflation and Outlook" needs to be read
carefully.
Graph 3: Demand Deficit (Total Supply -Total Domestic Demand)
12,0
Excess Supply
10,0
8,0
6,0
4,0
2,0
(%)
0,0
-2,0
-4,0
-6,0
-8,0
-10,0
1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1
Source: SIS, CBRT.
Although the period of chronic inflation has been left behind, a period of lasting price stability has not
yet been entered. As I have occasionally emphasized in my speeches, we are still experiencing a
period of "disinflation". Having said that, the distance covered and the gains attained are significant.
Throughout this whole process, inflation dynamics not only changed as a result of the policies
implemented, but also the effect of disinflation itself. This, in turn, helped inflation to be pushed down
in an irreversible way.
Breaking inflation inertia is the first clearly noticeable achievement in terms of the changing dynamics
of inflation. As I have mentioned before, due to increased confidence that the fall in inflation is
permanent and the effective communications policy implemented in the last three years, the inflation
target has become an increasingly reliable anchor for economic units and there have been significant
breaks in the inflation inertia.
Another change observed in inflation dynamics is that the decline in inflation also led to reducing its
volatility. With less volatility in inflation, it can be seen that prices have resumed their signaling role in
the economy. This development, which shows ease in uncertainty, has been instrumental in the
decline of the risk premium and thus the nominal and real interest rates. It has also helped to reduce
the borrowing cost for consumers and the opportunity cost of investment for producers. In fact, during
this period not only real interest rates eased, but also the general level of interest rates and the
extension of maturities. During the last three years, ex-ante real interest rates declined more than 20
points and nominal interest rates more than 50 points. The Turkish Treasury borrowed for the first time
ever with a 5 year-maturity in the domestic market. Long-term housing credits, known as "mortgages"
and widespread in developed countries for a long time, will start to be extended for the first time in the
country's history. This is the most striking evidence that enough confidence has been established in
the economy. Uncertainty has eased owing to reduced volatility in inflation and economic units have
been able to foresee longer maturities, thus that the risk premium has declined.
Graph 4: Volatility in Inflation*
2,5
1,99
1,89
2
1,5
1,08
0,71
1
0,5
0
2001 2002 2003 2004
* Volatility is calculated as the 12-month moving averages of the standard deviations of monthly inflation rates.
Source. CBRT.
Another significant point I will mention in relation to the changing dynamics of inflation is the apparent
change observed in the pricing behavior of producers and consumers. Hand-in-hand with the start of
the disinflation process and the acknowledgement to a large extent in economic units that this is a
permanent state, producers and consumers have adopted a different approach. Producers have
started to pay more attention to cost control and the increase in productivity, while setting their profit
margins in pricing policy and consumers have begun to be more actively involved in the pricing
process by conducting price and quality controls, using the advantage of a more competitive market.
Graph 5: Risk Premium and Real Interest Rates
1000 35
900
30
800
25
700
600
20
500
15
400
300
10
200
Risk Premium (JPMorgan) 5
100
Real Interest (Calculated w ith inflation expectations)
0 0
Jul-02 Jul-03 Jul-04
Jan-02 Jan-03 Jan-04 Jan-05
Mar-02 Mar-03 Mar-04 Mar-05
Sep-02 Nov-02 Sep-03 Nov-03 Sep-04 Nov-04
May-02 May-03 May-04
Source: CBRT, JP Morgan.
Graph 6: CBRT Interest Rates and Secondary Market Nominal Interest Rates
90
ISE T-Bill and Bond Market Interest
Ratescompound
80
CBT Overnight Interest Rates
70
60
50
(%)
40
30
20
10
1/2/02 3/2/02 5/2/02 7/2/02 9/2/02 1/2/03 3/2/03 5/2/03 7/2/03 9/2/03 1/2/04 3/2/04 5/2/04 7/2/04 9/2/04 1/2/05 3/2/05
11/2/02 11/2/03 11/2/04
Source: CBRT, ISE.
At this point, within the scope of the changing dynamics of inflation, I would like to talk about the
passthrough effect of the exchange rates on inflation, which is quite significant not only in terms of the
determinants of inflation, but also the current exchange rate regime. The pass-through effect has been
gradually becoming weaker, as a consequence of the transition to the floating exchange rate regime,
increasing competitiveness, inflation targets increasingly assuming the role of being an anchor owing
to reliable economic policies, as well as changes in the pricing behavior of producers and consumers.
Especially in the recent period, the effects of the changes in the exchange rate on inflation were lower
than expected, and at the same time were weaker and more lagged compared to previous periods.
As a matter of fact, worldwide examples also show that in economies that have achieved price
stability, the pass-through effect on prices of exchange rate movements becomes weaker owing to the
prevalence of pricing in terms of the domestic currency, thus perceiving any depreciation of the
national currency as temporary, and companies resort to price adjustments much less frequently.
In fact, it is inevitable that exchange rate developments will influence prices in Turkey due to the fact
that the goods basket of the CPI mainly consists of imported goods and imported intermediate goods
make up a significant portion of input costs. Another contributory factor is that Turkey is a small
sizeopen economy obtaining goods at global prices. Yet, studies conducted under the umbrella of the
CBRT point to an evident breach regarding the reflection of exchange rate developments on prices
following the 2001 Crisis. The pass-through effect of the historically high exchange rates on prices
seems to have weakened especially in case of non-tradable goods.
On the other hand, compared to the CPI index with the base year 1994, the CPI index with the base
year 2003 includes more of the commodities groups with prices susceptible to exchange rates, and
thus causes the effects of exchange rate movements on the general index to be somewhat higher. As
for the PPI, the start of the release of those prices, excluding taxes, together with the index with the
base year 2003 heightened the susceptibility of this index to exchange rates. Having said that,
independent of the nature of the index, when compared with the pre-2001 period, the exchange
rateinflation relationship is forecasted to have been at lower levels and is concluded to have weakened
structurally.
Graph 7: Pass-Through Effect of Exchange Rates on Prices
0.6
WPI
0.5
CPI
0.4
0.3
0.2
0.1
0
01-98 05-98 09-98 01-99 05-99 09-99 01-00 05-00 09-00 01-01 05-01 09-01 01-02 05-02 09-02 01-03 05-03 09-03 01-04 05-04
Source: Kara, H., Küçük-Tuğer, H., Özlale, Ü., Tuğer.B., Yavuz, D. ve Yücel, E.M. (2005),"Exchange Rate
Pass-Through in Turkey: Has it changed and to What Extent?', TCMB, Working Paper.
Another significant development stimulated by the disinflation process and the environment of relative
macroeconomic stability was the launch of the operation to drop zeros from the Turkish lira, i.e. the
eventual launch of the monetary reform in 2005.
Plans put forward from time to time from the early-1990s, which proposed dropping zeros from the lira
continually had to be postponed as the structural economic problems could not be solved, nor could
the rate of inflation or the inflation expectations be brought down to acceptable levels. The chronic and
high inflation experienced during this period gradually took its toll on banknote denominations and
monetary values. As you all know, this process eventually not only led to the Turkish lira having the
highest denominated banknote numerically all over the world, but also adversely affected someof its
functions, namely as a medium of exchange and a store of value.
Following the program under implementation, the distance covered in terms of economic stability
prepared a suitable environment for monetary reform, and six zeros were dropped from the Turkish lira
as of 1 January 2005 when the New Turkish Lira was put into circulation.
The experiences of other countries that dropped zeros from their currencies differ in those which
suffered from hyperinflation and those , which had relatively, lower rates of inflation. In the former, it
can be seen that monetary reforms were generally carried out as part of the stability program, without
waiting for inflation to go down considerably. Whereas, in the case of the latter, reforms were
implemented after inflation was brought down sufficiently. In other words, reforms were carried out
after a certain distance had been covered in the fight against inflation. Also, in the case of Turkey,
monetary reform was launched, not as part of the stability program, but after having monitored the
results of the program and achieved macroeconomic stability to a large extent.
At this point, I would like to point out that the realization of monetary reform up to now has been mainly
in tune with our forecasts and has followed a favorable course. As of 8 April 2005, the amount of YTL
banknotes in the total amount of banknotes made up 73.5 percent.
Within this framework, it has come to our attention that some foreign financial enterprises have
recently begun to issue bonds denominated in the New Turkish Lira. Another positive impact of
monetary reform which also strengthens the macroeconomic stability process is that the securities
issued in international markets in New Turkish Lira can now be cleared. Due to the inability of the
technical facilities of foreign financial enterprises to keep records of a currency unit with all those
zeros, issues denominated in Turkish lira could not be cleared in the international systems of safe
custody such as Euroclear or Clearstream before the transition to the New Turkish Lira. This obstacle
has been removed with the dropping of six zeros from the Turkish lira and the introduction of the New
Turkish Lira.
After all, monetary reform is one of the most prominent indicators of the permanence of
macroeconomic stability and of the fact that price stability will be attained within this context.
At this point in my speech, I would like to underline that price stability has not yet been achieved in
Turkey. As I have just mentioned, significant distance has been covered in the fight against inflation.
However, it is a fact that inflation is still relatively high in Turkey compared to fellow developing
countries. The process of the fight against inflation still continues.
Within this framework, there are certain factors that need to be paid attention to, for price stability to be
achieved in the upcoming period. The first one of these is ensuring that the increase in domestic
demand continues to materialize in a controlled fashion.
The second factor I would like to emphasize is avoiding reform fatigue. Several structural reforms have
been made in the Turkish economy up until now. Yet there are still more reforms pending. . It should
be remembered that maintaining the reforms made up to this point is not sufficient to attain positive
outcomes from them, but making new reforms is also equally important.
The third factor that requires attention within the framework of achieving price stability is the
susceptibility of established economic balances to expectations. Therefore, developments that may
adversely affect expectations should not be allowed to occur.
The last factor that should be taken into consideration in this respect is the fact that since
policymakers, both agricultural, cannot control them and energy prices may at times have adverse effects on
the course of inflation. Yet, it should be kept in mind that these effects may be temporary and do not
have an evident impact on the basic trend of inflation.
After assessments on inflation, monetary reform and the risks, I would now like to share with you
certain points I consider significant with respect to growth.
As you all know, the Turkish economy has been enjoying high rates of growth for three consecutive
years. The GNP growth rate was realized as 9.9 percent in 2004. Accordingly, the real growth rate
compared to 2001 was 25.5 percent. A growth rate of 5 percent is forecasted for 2005. Thus, positive
growth rates will be attained for a period of four years owing to a determined and sustainable stability
program, as well as the gradual increase in the role of the private sector. Whereas in the past, in an
environment of high inflation and uncertainty, the Turkish economy displayed a rather unstable growth
performance. At this point, I would like to draw your attention to the changing dynamics of growth:
High growth rates were achieved while inflation was in decline. Now, the growth process is driven by
productivity increase, the private sector and exports.
Graph 8: Growth and Rates of Inflation*
15
140
10
120
5
100
(%)
(%)
80
0
60
Growth
Inflation
-5
40
-10
20
0 -15
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
GNP (right scale) WPI CPI
* The data for 2005 is the forecast value for growth and the target value for the CPI.
Source. SIS, CBRT.
Together with the fall in interest rates in recent years and the appreciation of the Turkish lira, the
production of private firms has acquired a capital-intensive nature. Besides, firms resorted to a series
of measures in the post-crisis period, to remedy the inefficiency of the production process. All these
developments led to high-rated increases in productivity in recent years. Productivity increases not
only raised the return on capital, but also encouraged investments.
The positive impact of these favorable developments in productivity increase as well as the high
growth performance of the last three years began to be seen in employment. Total employment
increased by more than 5 percent in the last quarter of 2004 compare