durmus yılmaz : turkey beyond 2008 speech by mr durmus yılmaz, governor of the central bank of the republic of turkey, at the annual investment conference " turkey beyond 2008 ", organised by the foreign economic relations board ( deik ) and the turkish - american business council ( taik ), new york, 17 march 2008. * * * dear guests, as you all may know, the turkish economy used to experience boom - and - bust cycles throughout the 1990s. the economic crisis in 2001 was the low point of this period, when the economy contracted more than 5 percent. since then, turkey has put in place a very intense and ambitious structural reform agenda, coupled with sound monetary and fiscal policies, to establish macroeconomic and financial stability and to improve the business environment. central bank independence that was granted by law in 2001 was one of the milestones of this agenda. the introduction of free - floating exchange rate regime in 2001 and inflationtargeting regime in 2002 were other key steps. the central bank of turkey has also experienced a comprehensive institutional change towards a better communication policy and clearly defined accountability measures. we have experienced a significant disinflation process since 2001. the consumer price index came down from 68. 5 % in 2001 to 8. 4 % in 2007. i should call your attention to the fact that the list of countries that lowered inflation in 2007 was quite short, thanks to global inflationary pressures in food and other commodities. in fact, the average inflation around the world increased from 3. 5 percent in 2006 to 4. 8 percent in 2007 and to 5. 5 percent in january 2008. in this environment turkey was able to reduce inflation by 1. 3 percentage points in 2007. in fact, this was the sharpest drop among 60 major developed and emerging countries. the disinflation process is even more pronounced in core inflation, which excludes energy and food prices. it stood at 4. 36 % as of february 2008. the favorable outlook in core inflation indicators despite the surge in energy and food prices has allowed the central bank to cut policy rates since september 2007. the cumulative rate cut reached to 225 basis points as of february 2008 bringing the overnight borrowing rate to 15. 25 % from 17. 50 %. the timing of further easing depends on developments in global markets, demand conditions, fiscal policy performance and other factors affecting the medium term inflation outlook. according to the forecasts of our january 2008 inflation report, the year

young population and low rate of credit utilization among households and private business. capital adequacy ratio ( car ) of the banking sector stood at 18. 8 %, well above the minimum legal requirement of 8 % and the average of the european union, which is 12. 1 %. short - term liquidity ratios comfortably meet the legal thresholds. thanks to sound and resilient structure of the sector, foreign direct investment to the turkish banking system has surged since 2005 and the share of foreign investors in the total capital of the sector is now more than 40 %. rather than financing government deficits, the banking sector has returned to its core function, which is being intermediary between borrowers and lenders. the ratio of total credits to total deposits, which is a proxy for the intermediation function of the banking sector, has increased almost twofolds since 2001 and reached to 80 % as of 2007. the strong growth performance of the turkish economy may be considered as the fruit of these structural reforms, fiscal discipline, and cautious monetary policies of the last 6 years. turkey has grown for 23 consecutive quarters since 2002 and has been one of the fastest growing countries in the world during this period. the real gdp has grown almost 50 % on a cumulative basis in that period, bringing the average annual growth rate to 7 %. this strong growth performance was private sector driven and supported by continuous productivity gains. along with high economic growth, openness of turkish economy has also increased substantially. exports, which stood at only usd 31 billion as of 2001, increased by more than two - folds and reached to usd 107 billion in 2007. dear guests, there are four distinguishing characteristics of turkey that set her apart from other emerging market countries. first, unlike other countries in the central and eastern europe region, turkey has a young population, which is a demographic gift that could accelerate economic growth. of course, having great potential does not guarantee success. currently, the turkish economy is utilizing less than half of its workforce. improving the state of the labor market, removing rigid labor market regulations, reducing the tax wedge, and more importantly enhancing the human capital through education reforms are essential to accelerate the growth rate of the economy on a sustainable basis. second, turkey is a net commodity importer in contrast to latin american countries and south africa. we need to import in excess of 35 billion usd worth of oil and natural gas each year, almost 5 % of our gdp. looking at the composition of the foreign