, the istanbul exchange market has existed and operated since 1858. it grew out of the activities of non - muslim bankers in the galata district of istanbul. these operators, mostly levantines, jews, armenians, and greeks, used to risk their own capital by extending credit to the government, secured by pledges of future tax collections. even though during the early years of the exchange market ’ s operation in the 1860 ’ s, the amount of foreign direct investment in turkey was negligible, foreign capital was being encouraged to form joint stock companies. up until the beginning of the 20th century, the market helped the government find funds to finance its obligations. in 1906, the istanbul exchange market was re - organised and once more became a source of new capital for young private ventures. without giving the whole history of the istanbul exchange market, i want to emphasise that turkey ’ s experience with free markets did not begin in 1980 but goes back more than a century before. what the reforms of 1980 did accomplish was to institutionalise the markets and put them on a solid legal footing. besides liberalisation, the structural reforms begun in 1980 included measures providing investment and tax incentives. i would like to review these issues briefly. the aims of these incentives were to encourage activities that would earn foreign exchange on the one hand, and to help foreign sources of capital finance investments in turkey on the other. it can be said that by liberalising its capital account and introducing structural tax changes to improve investment returns, turkey issued an invitation to foreign capital. under these new arrangements, the tax incentives aimed at deepening the securities market and encouraging investment in it are of two kinds : - double taxation of dividends was prevented by raising the corporate income tax rate and making it the only tax on dividend income. in addition, the income tax rate for small shareholders was lowered. - for residents, capital gains on shares became exempt from taxation if the security was listed on an exchange. capital gains from the sale of through licensed intermediaries were made tax free. premiums from the issuance of stock are also tax free for stocks listed on a stock exchange that does not distribute dividends to shareholders. there are also tax facilities for government securities. privatization is an important part of our modernisation and liberalisation effort. turkey embarked on a privatization program in the 1980s. turkey ’ s telecommunications and energy sectors are great targets for global partnership. despite extensive exemptions from the program, by 1994 total proceeds derived from privatization since it began

figure 1 : contribution to annual cpi inflation food and energy * tobacco and gold * * services basic goods * food and energy : food, non - alcoholic beverages and energy * * tobacco and gold : alcoholic beverages, tobacco products and gold. source : turkstat, cbt. in the first quarter, the increase in food prices lost pace over previous years in response to the significant slowdown in the processed food group and energy prices dropped owing to the lagged effects of the recent decline in oil prices. goods prices excluding food and energy slumped by a lower margin over the first quarter of the previous year. the slowdown in services prices became more pronounced ( figure 2 ). figure 2 : cpi sub - groups ( first quarter percentage change ) - 2 - 4 food energy goods excluding food and energy services source : turkstat, cbt. the unprocessed food group posted monthly price hikes of significant levels in the last quarter of 2007 and the first half of 2008 on account of production losses and cyclical developments all over the world. annual inflation in this group surged to 25 percent. with the reversal of these effects since the second half of 2008, the downward trend in annual inflation of this group gained pace in this quarter ( figure 3 ). meanwhile, the downward trend in the annual rate of increase in food prices is expected to continue in the second quarter as well. figure 3 : food prices ( annual percentage change ) processed food unprocessed food - 3 source : turkstat, cbt. esteemed guests, i would like to further clarify the developments related to services prices as i deem it helpful to focus on them to better understand the significant downturn in the underlying trend of inflation. services inflation, which had remained relatively elevated in the first three quarters of 2008 due to the second round effects of energy and food prices, has eased considerably since the last quarter of 2008 following the sharp contraction in aggregate demand. the cumulative rate of change in services prices during first three months of 2009 was merely 0. 53 percent on lower costs and weaker domestic demand, which is the lowest percentage recorded in the 2003 based cpi index ’ s history. the slowdown in the growth rate of services prices has spread across all services subgroups ( figure 4 ). the lagged effects of dips in international oil prices had a favorable impact on transport services in the first quarter. rental price movements remained quite below the averages of previous years due to the contraction of domestic demand. the prices of the restaurants and