RESTRICTED
WORLD TRADE WT/BOP/4
23August 1995
ORGANIZATION(95-2462)
Committee onBalance-of-Payments Restrictions
CONSULTATION WITH TURKEY UNDER THE BALANCE-OF-PAYMENTS
PROVISIONS OFTHE GATT 1994 AND THE RELATED UNDERSTANDING
Basic Document supplied byTurkey
I. Background
1. During the last simplified consultation which was held in1991, pursuant to
Article XVIII: 12(b) oftheGeneral Agreement andtheDeclaration onTrade Measures Taken for
Balance ofPayments Purposes (BISD 26S/205), theCommittee congratulated Turkey onthesubstantial
trade liberalization andmarket expansion policies asregards toboth tariffs andimport licensing
pursued since theprevious consultation andencouraged Turkey tomove further towards tocomplete
theliberalization measures maintained forbalance-of-payments difficulties.
2. AttheApril 1993 fullconsultation, theCommittee commended Turkey fortheabolition ofall
additional taxes previously applied, effective 1January 1993. Theelimination included thestamp duty,
themunicipal tax,thetransportation infrastructure taxonimports andthepayments tothePrice
Support andStabilization Fund. TheCommittee welcomed thecontinuation oftheliberal import policy
byTurkey which excludes allkinds ofquantitative restrictions andlicensing system, including the
termination oftheimport guarantee deposit system in1990.
3. Turkey, hasnotified theCommittee with thedetailed information regarding alltariff lines on
which thecombined incidence ofthecustoms duty andtheMass Housing Fund charge exceeding
bound rates (BOP/314/Add.1) andalsoprovided background about substantial improvements introduced
with the1994 Import Regime, which included inmost cases further reduction oftheMass Housing
Fund bybetween 3percent to94percent (BOP/314/Add.2).
4. Inorder togain thefullbenefits oftheliberalization andadjustment programme, atthe1993
fullconsultation, theCommittee encouraged thecontinuation oftheprivatization process andstressed
theneed forsteady reduction ofthefiscal deficit andforcontinuity in,andconsolidation of,fiscal and
monetary policies, including greater discipline over thefinancing ofState Economic Enterprises
(SEEs).
5. The economic reform andliberalization programme pursued since thelastconsultation by
Turkey hasresulted insubstantial improvements. Summary oftheresults isasfollows.WT/BOP/4
Page 2
II. Macro economic developments
(a) Developments prior tothestabilization programme
6. Asaresult oftheprogramme ofeconomic reform andliberalization begun inearly 1980s, the
Turkish economy experienced rapid economic growth forover adecade. However, high andrising
fiscal deficits over thesecond halfof1980s, combined with therapid increase ofrealwages andreal
appreciation ofTLsince 1989, undermined thesustainability ofthese achievements. These imbalances
inthedomestic economy have alsobeen translated intoasharp deterioration ofexternal current account
andculminated inanexchange market crisis inearly 1994.
(b) Exchange market crisis inearly 1994
7. Very sharp depreciation ofTL,accompanied ofwide fluctuations wasexperienced inthe
exchange ratesince thesecond halfofJanuary 1994. Thecounteractions oftheCentral Bank caused
theinterest rates tohike andtheofficial reserves todecline sharply: Gross international reserves of
theCentral Bank, including gold, declined from $7.7 billion attheendof1993 to$4.5billion atthe
endofMarch 1994. Meanwhile themonthly inflation rates climbed uptohigh levels duetosharp
nominal depreciation andprice adjustments ofSEEs.
8. Theability oftheTreasury toborrow from domestic sources wasdramatically eroded bythe
uncertainty andhigh inflation. Treasury wasnotabletoborrow enough funds from domestic market
inspite ofinterest rates ashigh as340percentonannual compound basis until theendofMay 1994.
(c) Stabilization programme
9. On5April 1994, theGovernment announced acomprehensive macroeconomic stabilization
andstructural reform programme, designed toredirect themacroeconomic imbalances intheeconomy
andre-establish theconditions forsustainable growth.
10. TheStabilization Programme aims atreducing therateofinflation, improving theexternal
balance andrestoring stability totheforeign exchange market. Thecoreofthestabilization programme
consists ofasetofstrong measures toreduce thepublic sector deficit. This fiscal retrenchment isto
besupported byarestrained monetary andcredit policy. Under theprogramme, there will beno
retreat from thefreemarket principles thatcharacterize theTurkish economy.
11. Thesustainability ofthefiscal consolidation istobeensured through structural reforms. These
reforms include privatization, taxreform, social security reform andchange inagricultural support
policy.
12. This stabilization andstructural adjustment programme hasalsoreceived thefullsupport of
IMF intheform ofastand-by arrangement which wasapproved bytheExecutive Board ofIMF on
8July1994. On21April 1995, theterm ofpresent Stand-by arrangement wasextended bysixmonths
until February 1996 upon theapproval of1995 program targets bytheIMF Executive Board.
(d) Results ofthestabilization programme
13. Theimplementation oftheprogramme hasbeen rather successful especially inreducing the
public sector borrowing requirement, which isidentified asthecore oftheprogramme. Recovery in
theexternal sector hasbeen better thanenvisaged andstability intheforeign exchange market hasbeenWT/BOP/4
Page 3
restored. However; notwithstanding thesuccessful fiscal retrenchment, theinflation results have been
lessencouraging. Contraction intherealeconomy hasbeen sharper than envisaged.
14. PSBR hasdeclined from 12.1 percentofGNP in1993 to8.2percentofGNP in1994. This
improvement inthesphere ofpublic deficit mainly stems from theconsolidated budget. Theratio of
consolidated budget deficit toGNP declined from 6.9percentin1993 to3.7percentin1994. The
main obstacle thathinders further reduction inthebudget deficit isthehigh domestic interest payments.
This canbeobserved from thefactthatthenon-interest budget balance hasturned from adeficit of
0.9percent ofGNP in1993 toasurplus of3.9percent ofGNP in1994.
15. Intheexternal sector, theexports, which have stagnated inthefirst 5months oftheyear,
began tosharply increase asaresult ofrestoration ofstability intheexchange rateinparticular, and
general macroeconomic environment ingeneral. Thevalue ofexports during May-December 1994
period hasincreased by30percentascompared tothesame period oftheprevious year. This sharp
increase inexports anddecline inimports duetoeconomic recession have resulted inasubstantial
decline intrade deficit from $14.2 billion in1993 to$4.2 billion in1994. Parallel tothisdevelopment,
thecurrent account balance hasrecorded asurplus of$2.6billion in1994, insharp contrast with the
current account deficit of$6.4billion in1993.
16. Asaresult ofthese developments; theofficial international reserves, which have declined by
more than $3billion inthefirst quarter of1994, have more than recovered andeven exceeded its
year-end level by$820 million bytheendof1994.
17. Stability intheforeign exchange rate was one ofthemain targets ofthestabilization
programme.1Therapid depreciation andwide fluctuations came toanendafter April 1994. US$rate,
which hasdepreciated by131percent during thefirst 4months oftheyear, depreciated byonly
16percent during thefollowing eight months.
18. Although theimplementation oftheprogramme wassuccessful infiscal consolidation, asfar
asinflation isconcerned theresults have been lesssatisfactory. Themonthly rateofinflation,which
hasdeclined sharply after price adjustments ofApril began toriseagain since September. Theannual
rateofWPI (Wholesale Price Index) andCPI(Consumer Price Index) have been 150percent and
126percent, respectively, inDecember 1994. Rapid reserve accumulation duetostrong recovery in
external sector ledtoanincrease inliquidity andcaused aggregate demand toincrease. Thesurge in
exports hasalsobeen afactor thatcontributed toincrease inaggregate demand. Onthesupply side,
sharp decline inindustrial production andpoor harvest have caused aggregate supply todecline. As
aresult, theinflationary pressure intheeconomy hasincreased andledtoinflation toriseinspite of
substantial fiscal retrenchment.
19. Although GNP hasincreased by3.5percent inthefirst quarter oftheyear, itwasrather a
carry over effect ofthehigh growth rateoftheprevious year. GNP hasdeclined by6.0percent in
realterms in1994.
1Turkey made considerable liberalization inherforeign exchange regime in1989 and1990 andremoved
restrictions oncurrent andcapital transactions byheracceptance oftheobligations ofArticle VIII oftheIMF
Articles ofAgreements on22March 1990. Turkey follows anindependently floating exchange ratepolicy under
which theexchange rateisdetermined onadaily basis.WT/BOP/4
Page 4
(e) Thestructural reforms
20. Inorder toaddress theunderlying causes ofmacroeconomic imbalances andtoensure the
sustainability ofthegrowth inastable environment some structural measures aretaken:
21. Upon formation ofapolitical andsocial consensus, anew privatization lawhasbeen enacted
onNovember 1994. In1995 and1996, itisexpected thatprivatization process willgain momentum
depending onmarket conditions. In1995, aprivatization of2.4billion dollars isprogrammed ingross
terms.
Some other important steps towards structural reforms aretaken:
- TheLaw onProtection ofCompetition entered intoforce inDecember 1994,
- Thenecessary legal provisions have been made forSEEs tobeopen forattachment,
bankruptcy andliquidation,
- Statutory Decrees onProtection ofPatent Rights, Industrial Designs, Trade Marks
andGeographical Indications entered intoforce on27June l995.
- Patent Cooperation Treaty (1970) asamended in1974 andmodified in1984;
Rome Convention fortheProtection ofPerformers, Producers andPhonograms and
Broadcasting Organizations (1961); Paris Act(1971) oftheBerne Convention forthe
Protection ofLiterary andArtistic Works were ratified bytheTurkish Grand National
Assembly on7July 1995.
- Anew lawwasenacted inorder tofinance theinfrastructural projects by
Build-Operate-Transfer (BOT) model.
- 3plants oftheState Monopolies and1plant ofEtibank were closed.
(f) Developments in1995 andprospects fortherestoftheyear
22. The recovery intheexternal sector isexpected tocontinue in1995. While theexport
performance hasbeen strong enough with arateofincrease of29.3 percent during January-May
period of1995 over thesame period of1994, theincrease inimports have been quite higher than
expected, ie,37.1 percent, especially inApril andMay (73.1 percentand78.4 percent, respectively),
implying arecovery inreal production. Asaresult, theexport/import ratio hasdeclined to
65.4 percentasofJanuary-May period of1995 compared tothe70.1 percent inthesame period of
1994, which was77.8 percentattheendof1994. During January-May period of1995, trade deficit
hasbeen recorded as$3.8 billion which is62percent higher than thedeficit recorded inthesame
period of1994. Ontheother hand, there hasbeen asmall current account deficit of$20million
during thefirst 5months of1995 with respect todeficit of$212 million inthesame period oflast
year. This development resulted mainly from high increases inother goods andservices income and
inworkers ’remittances. Inaddition, duetoincrease inthenetshort term capital inflows, overall
balance ofpayments gave asurplus of$4.5 billion asofJanuary-May 1995, whereas there wasadeficit
of$2.9 billion during thesame period of1994.
23. Theimpressive performance of1994 inreducing thebudget deficit isrepeated inthefirst
4months of1995. Therealized figure asofApril 1994 hasbeen only TL147.8 trillion.WT/BOP/4
Page 5
24. Another positive development isinthesphere ofdomestic borrowing. Therateofborrowing
hasdeclined sharply while thematurity hasbeen extended considerably. This development inrates
and maturity ofthedomestic borrowing indicates therestoration ofconfidence and downward
expectations fortherestoftheyear.
25. In1995, determined implementation oftight fiscal andmonetary policies willcontinue tobe
thecentral pieces ofmacroeconomic stance. PSBR (Public Sector Borrowing Requirement) istargeted
tobefurther reduced to5.6percentofGNP in1995. Tight fiscal andmonetary policies together with
lower inflation expectation areexpected tocause therateofinflation tofalldown from thehigh level
of1994 toaround 40percent attheendof1995. Asaresult ofstability inthemacroeconomic
environment, realGNP growth isexpected toincrease to3.1percent in1995. Parallel tothese
macroeconomic improvements, theexternal position ofTurkey, with itshigh degree ofresiliency, will
remain toberelatively strong inthecourse of1995. Adeficit of$7.1 billion isexpected intrade
balance while thecurrent account balance isexpected torecord asurplus of$1.2 billion in1995.
However, asitismentioned above, thehigh increases inimport figures inApril andMay suggest that
there could beawidening inthetrade deficit andtherefore adownward revision could bemade inthe
current account surplus.
III. Developments since thelastconsultation andfuture prospects
26. Thesuccessful conclusion oftheUruguay Round andentering intoforce oftheAgreement
Establishing theWorld Trade Organization coincided with Turkey ’smost important move towards the
regional integration under theframework ofWTO: thecompletion ofthecustoms union with the
European Union.
27. Having inmind Turkey ’ssubstantial contribution totheoutcome oftheUruguay Round, the
customs union willcontinue tobethemain determinant shaping Turkey ’sliberal foreign trade policies
andorientations. Theenvisaged arrangements towards thecompletion ofthecustoms union comprises
commitments farbeyond thelevel oftheTurkey ’sUruguay Round commitments.
28. Within theframework oftheobjectives setoutbytheAnkara Agreement between Turkey and
EU,thedecision related totherules forimplementing thefinal phase ofthecustoms union wassigned
on6March ofthisyear during theEEC-Turkey Association Council meeting andwillenter intoforce
on1January 1996. Bythecompletion ofthecustoms union, Turkey willapply theCommon Customs
Tariff oftheEUwith respect toproducts originating inthird countries. Considering thefactthat
customs duties applied bytheEUaregenerally lower than those applied byTurkey, thiswillmean
greater liberalization inTurkey ’simport regime. Tobemore specific, Turkey ’saverage rateof
protection weighted inindustrial sector imports which is10.8 percentatpresent forthird countries will
decrease to5.8percent andwillbe3.5percent after thefulfilment bytheEUofitscommitments
under theWTO.
29. Inaccordance with theconclusions ofthe1993 BOP consultation, Turkey hastaken important
steps inorder tofulfil hercommitments onaprogramme ofprogressive reduction andphasing-out of
theMass Housing Fund. Inthisframework, meanwhile, theImport Regime for1994 fully eliminated
Mass Housing Fund surcharge on2600 items andreduced atrates varying from 3percent to
94percentonremaining items. Asaresult, thearithmetic average ontherateofprotection decreased
from 29percentin1993 to22percentin1994 fortheEuropean Union andEFTA countries andfrom
33percent in1993 to27percent in1994 forthird countries.WT/BOP/4
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30. Same direction wasalsofollowed inpreparing 1995 Import Regime which wasputintoforce
on31December 1994. The Import Regime provided anadditional 10percent and15percent
alignment totheEU’sCommon Customs Tariff and5percent and10percent reductions inthe
customs duties of12and22years lists respectively. Thus, thearithmetic average ofthetotal
protection ratefortheEUandEFTA countries decreased to20.5 percent, thesame rateforthird
countries wasalsoreduced to25.3 percent. Inaddition, theMass Housing Fund onindustrial products
wasreduced by20percent across theboard bytheImport Decree thatwasintroduced on15April
1995. Furthermore, on9July1995, another 20percentreduction across theboard inMass Housing
Fund hasbeen provided inaccordance with Turkey ’sdeclaration forprogressive elimination ofthe
Fund. After thefirsttwophases ofreductions 20percenteach, theremaining 60percentisexpected
tobeeliminated bytheendoftheyear. Therefore, weighted protection rateinindustrial products
originating intheEUandEFTA countries wasdecreased to5.94 percentandforthird countries itwas
reduced to10.8 percent recently.
31. Asregards tobindings, fullWTO consistency issecured, except afewitems mentioned inthe
annex. Itshould bekept inmind thatunder theImport Regime, most ofthebound items aresubject
toprotection rates much lower than thetariff concessions intheTurkey ’sSchedule XXXVII.
32. Theimport policy isbased ontheprinciple ofintegrating thedomestic market with theworld
market viaopening domestic industry tointernational competition inabalanced manner and
conforming toregional andglobal developments while fulfilling themultilateral obligations. Thesteps
thatTurkey continues totake incompliance with itscommitments forthecompletion ofthecustoms
union areparallel toitscommitments vis-à-vistheWTO.
33. Ontheother hand, estimations based ontheimpacts ofthecustoms union reveal thatits
negative effect may befeltmore strongly intheshort run. This willbemainly duetoincreased
foreign trade deficit after theelimination ofcustoms duties fortheEUandEFTA countries and
adaptation totherelatively lowlevels oftheCommon Customs Tariff tobeapplied forthird countries.
Although itispredicted thatinthemedium term theTurkish economy willpick upitsstrength and
acquire astronger position intheworld markets within thecontext ofthecustoms union, itis
anticipated thatintheshort runtrade balance deficit could increase andthebalance ofpayments
situation could beunder pressure foracertain period oftime.WT/BOP/4
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Table AV.1
ListoftheTariff Lines where theWTO bindings exceeded
HSCode Description ofproduct WTO Bound Rate %Applied rateunder theimport regime
introduced on9July1995
6911.10.11
6911.10.12
6911.10.19
6911.90.11
6911.90.12
6911.90.19Tableware, kitchenware, other
household articles andtoilet
articles, ofporcelain orchina.31,4 37
8701.90.11
8701.90.12
8701.90.13
8701.90.14
8701.90.15
8701.90.21Tractors foragricultural use. 21.4 29.5
8702.10.12
8702.10.22
8702.90.12
8702.90.22Midibus 20 27.9
8702.10.32
8702.10.42
8702.90.32
8702.90.42Midibus19.4 27.2
8702.10.13
8702.10.23
8702.90.13
8702.90.23Minibus 20 27.9
8702.10.33
8702.10.43
8702.90.33
8702.90.43Minibus 19.4 27.2
8704.21.21
8704.21.22
8704.22.21
8704.22.22
8704.23.21
8704.23.22
8704.31.21
8704.31.22
8704.32.21
8704.32.22Motor vehicles forthetransport
ofgoods (lorries) witha
cylinder capacity exceeding
2500 cm3-2800 cm322 30.3
8704.21.31
8704.21.32
8704.31.31
8704.31.32Lorries withengines ofa
cylinder capacity notexceeding
2500 cm3-2800 cm319.4 27.2
*These 42items cover 0.7percentofthetariff linesbound toWTO. Theimport value ofthese items corresponds onlyto0.37per
cent
ofthetotalimports in1994.
*Fortheabove mentioned items, asof1.1.1997 and1.1.1998 10percent; 1.1.1999 and1.1.2000 15percentand1.1.2001 50per
cent
alignment willbeachieved totheCommon Customs Tariff ratesoftheEuropean Union.