Development of the Financial Reforms in Turkey
October 13, 2009
Speech by Mr. Mehmet Şimşek, the Minister of Finance
Distinguished Guests
Turkey experienced serious problems as a result of the
wrong monetary and fiscal policies implemented in the 1990s
and lack of necessary financial reforms.
Therefore, at the beginning of 2000 an economic program
was put into effect which aimed to endow public financing
balance with a sustainable structure and to ensure a
sustainable growth environment in the economy.
However the banking and finance crisis broke out in
February 2001 caused an increase in the interests, inflation and
unemployment and further deterioration in the macroeconomic
stability due to the economic contraction and led the public
financing balance into an unsustainable situation.
The 2001 crisis made it compulsory to restructure the
economic and financial system all over again and to redesign
the monetary and fiscal policies in order to enter into a
disinflation process along with a sustainable economic growth.
Therefore during the political stability environment ensured
after 2002, banking reform, public management reform, local
administrations reform and labour markets and social security
reform were implemented. Resilience of the economy to the
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external shocks was improved by restoring economic and
financial stability.
Public Financial Management Reforms
Distinguished Guests,
Public finance was one of the most important fields where
the reforms were implemented.
The Public Financial Management and Control Law
No.5018 enacted at the end of 2003 made radical changes in
the financial management system that had been implemented
for long years in Turkey.
With this law, a new public financial management and
control system was established which is in compliance with the
international standards and the EU practices. This law
strengthened the framework of public financial management,
transparency and accountability. Coverage of the central
government budget was expanded and medium term
expenditure framework and multi-year budgeting were
introduced.
Most of the extra-budgetary funds were included into the
budget and cleared. As of 2005, special revenue and special
appropriation practices were terminated. Activities of the SOEs
which can create duty loss started to be carried out by
allocating appropriations to them in the budget.
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Furthermore, in order to develop their capacities for the
financial management, internal control and internal audit
structures were established in the public administrations, and
strategic plan, performance program and annual accountability
reports started to be prepared.
Economic units implementing fiscal policy became more
efficient with the introduction of basic legal amendments
concerning public revenues, expenditures and borrowing.
In addition, legal and institutional infrastructure of the
public debt management was strengthened. In this regard, limits
for the guarantee and borrowing were determined with the Law
on the Regulation of Public Financing and Debt Management
enacted in 2003.
Treasure guarantee was imposed as a condition for the
external borrowing of the public agencies and risk account was
introduced. Transparency was enhanced by introducing regular
reporting of the public debt management problems to the
Parliament and the public.
In accordance with the European Union acquis, the new
Public Procurement Law was put into effect which strengthens
the competition, transparency and accountability.
In this respect, in line with the international examples,
Public Procurement Authority was established to undertake the
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regulatory and supervisory mission for tendering procedures of
the public administrations.
Having deficits as a result of the deterioration in the
actuarial balances and financed from the budget, three social
security institutions united under a single roof and its efficiency
was increased.
Uniform standards and norms were provided for all
employees, a general healthcare insurance system was
launched and retirement age was increased gradually.
With this reform, it was intended to reduce the deficit of the
social security system in the medium term and to remove it in
the long term.
During this process, more importance was placed on
privatization to improve competitiveness in the economy and to
create additional resources for the public.
Distinguished Guests,
One of the most important elements of the fiscal policy is
revenue policy and tax management. As a result of the legal
amendments put into effect after 2001 and restructuring of the
tax administration, significant developments were experienced
in this field.
In this respect, some important amendments were made to
the tax laws in order to enhance harmonization of the
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fundamental tax laws with the international norms and to reduce
informal economy by ensuring broad-based taxation.
As required by the policies of overseas expansion and
integration with the global economy implemented in the period
after 2001, a new Corporate Tax Law was put into effect.
Corporate tax rate reduced from 30 percent to 20 percent.
Moreover in the income tax, number of the income
brackets was reduced from 5 to 4, and the lowest rate was cut
from 20 percent to 15 percent and the highest tax rate from 40
percent to 35 percent.
Revenue Administration was restructured in 2005 with an
aim to enhance efficiency in the tax management, to introduce
a functional structuring and to make a separation between
policy making and implementing functions.
In this regard, Revenue Administration was founded to
carry out the revenue practices as an affiliated agency to the
Ministry of Finance. Furthermore General Directorate of
Revenue Policies was formed within the ministry in order to
carry out the policy making function. In addition, Large
Taxpayers Unit was established in order to keep a close watch
on the large taxpayers.
Distinguished Guests,
Expenditures for social purposes were directed to more
productive areas through redefinition of the budget priorities.
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Then the savings made were channeled into the fields which
will increase the dynamism of the private sector.
Thanks to the structural reforms implemented along with
revenue-enhancing and expenditure-reducing policies, fiscal
discipline was ensured. Thanks to this, European Union
Maastricht Criterion has been met in terms of the budget deficit
as of 2005. Budget deficit to GDP ratio decreased to 1.8
percent in 2008 from 11.5 percent in 2002.
In the period of 2003-2008, a policy was implemented to
obtain high rates of primary surpluses continuously.
As a result of the improvement in the revenue and
expenditure balance, efficiency in the resource allocation was
enhanced. The consequent primary surplus resulted in both a
reduction in the public debt burden and an increase in the
resources allocated for the healthcare, education and
infrastructure expenditures.
In 2002, 85.9 percent of the tax revenues had been used
to cover the interest expenditures in Turkey, whereas this ratio
was decreased to 30.1 percent in 2008.
Share of the interest expenditures in the GDP decreased
to 5.3 percent in 2008 while it was 14.8 percent in 2002.
The fiscal discipline ensured and the cautious budget
policies implemented after the 2001 crisis period reduced the
need for borrowing and resolved the roll-over problem.
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Ratio of the public sector borrowing requirement to the
GDP moved to the negative side in 2005 and 2006, which was
9.99 percent in 2002. This ratio was 0.10 in 2007 and 0.87 in
2008.
Public debt burden decreased substantially as a result of
the restoration of public financing balance. The ratio of EU-
defined general government debt stock to GDP decreased from
73.7 percent in 2002 to 39.5 percent in 2008 which is well
below the Maastricht Criterion of 60 percent. The ratio of net
public debt stock to GDP decreased from 61.4 percent in 2002
to 28.2 percent in 2008.
Reforms in Banking and Finance Sector
Distinguished Guests,
Learning from the 2001 financial crisis, the financial sector
was restructured and serious measures were taken for this
sector. Banking regulatory and supervisory system was
strengthened and state owned banks and private banks were
restructured.
In order to restructure the banking sector, in addition to the
methods of removing the failing banks from the system,
strengthening the banks in capital terms, reducing non-
performing loans and promoting mergers, some changes were
made to the rules of the sector.
Within this period, for the state owned banks:
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Duty losses were cleared.
Short term obligations were reduced.
Capital structure was strengthened.
Operational structure was changed.
In order to restructure the private banking system, critical
amendments were made to the Banking Law. These
amendments aimed at increasing the confidence in the system
by strengthening the system. To this end:
Conditions for the establishment of a bank were
tightened.
Shareholding and share transfer rates were
changed.
Personal responsibilities of the partners and
managers of the banks were increased.
Administrative and legal crimes and penalties were
rearranged.
Banking Regulation and Supervision Authority was
authorized to establish and remove private financial
institutions.
Arrangements on bank reserves were made.
Foreign currency position limits were defined.
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Changes were made to the establishment, operation,
merger and transfer of banks.
Banks were demanded to prepare financial
statements on the consolidation basis.
Implementation of international accounting standards
was strengthened.
Authorities of the Saving Deposits Insurance Fund
were redefined.
A limit of 50 thousand TRY was set for deposits
insurance.
As a result of these developments, in the Turkish banking
sector:
Financial risk reduced to a manageable level.
Audits provided a rise in the transparency of the
system.
Banks’ profitability increased.
Capital adequacy of the system increased and thus
capital structure strengthened.
The vulnerable structure in the banking system was
removed.
Disruptive effect of the state owned banks was
eliminated.
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Within the scope of the operational restructuring, on the
other hand, the number of branches and personnel of the state
owned banks was decreased.
The number of branches and personnel of the SDIF banks
was reduced and resolution methods used for these banks
included mergers via sale and transfer.
In addition, private banks started to reduce the number of
their branches and personnel and promote automation and
cooperation among branches in an effort to reduce costs and
increase efficiency.
Within the framework of the structural restructuring
performed in order to provide competition for the sector,
measures were taken for regulation of the system, improvement
of supervision and development of legal and institutional
infrastructure related to risk management.
Since 2002, these regulations and supervisions regarding
the banking system were implemented without making any
concessions. Thanks to this, resilience of Turkish financial
system to the shocks has increased as compared to finance
systems of many developing countries.
Sound and stable structure of Turkish banking system with
an improved capital system, increased asset quality and a
significant progress on the risk management came into
prominence as a basic element reducing adverse effects of the
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negative external shocks on our economy in the current
conjuncture.
On the other hand, strengthened independence of the
Central Bank made it focus on the price stability which is the
main objective of the Bank. With implementation of the floating
exchange rate regime since 2001 and inflation targeting regime
since 2006, a stronger basis for the monetary policy has been
provided and thus our country has become more sheltered
against global crises.
Distinguished Guests,
International markets have been facing a deep crisis
affecting the world severely from both financial and socio-
economic aspects for the last two years.
Breaking out in 2007 as a result of the housing credit
problems in the US and then transforming into a global financial
problem by spreading all over the world in the last quarter of
2008, economic crisis caused major downturns in the world
economies.
Although the fiscal discipline implemented in Turkey for the
last seven years, cautious monetary policies and structural
reforms in the financial area improved resilience of our country
to the external shocks, it is very natural for Turkey to be
affected from these developments taking into account the
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deepness of the crisis experienced and its integration level with
the global system.
Thereby, the global crisis affected financing opportunities
and external demand and caused a pronounced slowdown in
the economic activities.
Distinguished Guests,
Until today, a number of measures have been taken in
order to ensure smooth flow of liquidity and funds, support the
real sector, promote employment and diversify financing
resources.
Both the government and the CBT have taken necessary
steps since the first day when impacts of the crisis began to be
seen.
To increase the stability and confidence in banking
and financial sector:
Foreign exchange market was strengthened.
Credit facilities were increased.
Interest rates were reduced.
Equity and liquidity structures of the banks were
strengthened.
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In addition to the Central Bank interest cuts, a series of
measures were taken for ensuring liquidity in the financial
system and effective functioning of the credit markets.
TRY liquidity need arising in the market was met by the
auctions held regularly and interests in the overnight market
were ensured to remain at close levels to the borrowing rate of
the Central Bank.
In the periods when the global uncertainties increased,
measures for the foreign exchange liquidty were taken with an
aim to avoid foreign exchange liquidity crunches and to
maintain smooth functioning of the foreign exchange markets.
To increase the credit facilities of real sector:
SME subsidies were diversified and increased.
Export subsidies were put into effect.
Production and R&D subsidies were prioritized.
Credit guarantee system for the SMEs was
introduced.
To minimize the unemployment rate in employment
market:
Employer insurance premium was cut.
Women and youth employment was promoted.
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Availability of unemployment fund was increased.
Short time allowance was increased and extended.
To revive the economic activities:
In some sectors VAT, SCT, fees and funds were
cut.
Tax receivables were restructured.
In order to repatriate the assets abroad back to the
national economy, “Repatriation Amnesty” was put
into effect.
Priorities of the expenditures were redefined.
More importance was placed on public
infrastructure investments.
Transfers to the local administrations were
increased.
New stimulus package was launched.
Distinguished Guests,
As a result of the expansionary fiscal policies and other
measures taken against the current crisis, budget deficits
increased in Turkey as it was the case all over the world.
Because expansionary fiscal policies were compulsory to
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improve the economic activity, to rebalance the economy and to
revive domestic demand towards the exit of the crisis.
This caused an interruption in the momentum gained in the
Turkish economy since 2002 and increased the need for
financing.
Therefore we estimate 2009 budget deficit to GDP ratio as
6.6 percent. In the Medium Term Programme for 2010-2012,
budget deficit to GDP ratios for 2010, 2011 and 2012 were
forecasted as 4.9 percent, 4 percent and 3.2 percent
respectively.
In the medium term, fiscal discipline will be our priority,
again. Fiscal discipline is a precondition for macroeconomic
stability and enables a sustainable growth because high public
debt burden and negative debt dynamics adversely affects the
private sector by diminishing access to the financing resources
and increasing costs of those resources.
On the other hand maintenance of the favourable
performance levels attained as a result of the financial
restructuring operations depends on the effective and efficient
operation of the financial agencies continuously.
Finance sector is a sector reflecting the current situation of
the whole economy. Therefore the slightest problem
experienced in this sector will affect the economy by growing
incrementally and finally penetrate to the whole economy.
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The period seems to end when the sector was operating
with high profit rates by ignoring their expenditures in an
environment of high public deficits and inflation rates. Therefore
concepts of efficiency and effectiveness should be the most
important agenda item of the financial sector.
Because of the recent crises which have global impacts, it
became crucial to set internationally accepted principles and
standards in order to ensure soundness and stability of the
financial system at global level.
In this regard, international regulations made by the
European Union, Basel Committees and OECD frequently take
place in the banking area.
Goldman Sachs forecasts that Turkey will be the 9 th
largest economy in the world and the 3rd largest economy in
Europe in 2050. To this end, financial sector which is the driving
force of the economy should be enlarged and endowed with a
sounder structure.
Intervention strategies implemented for the financial
system after the crisis should ensure the stability of the financial
sector in the shortest time and reactivate the system in an
efficient way. During this process measures should be taken to
institutionalize the financial markets and deepen them further.
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The important thing here is to learn from the previous
mistakes and to focus on what should be done in the following
period.
As it has been the case up to now, we will continue to
follow the developments closely and take the necessary steps
by making no concessions to the fiscal discipline and structural
reforms in the upcoming period.
These will undoubtedly be carried out within a program
because the perspective will be more powerful with the support
of a program. Provided that the medium-term perspective will
be fully adopted in a successful way, then in overcoming the
crisis, the monetary policy will support the real economy under
the current situation in a better way.
The Medium Term Programme for 2010-2012 is prepared
as our exit strategy. This programme has been prepared with
an extensive participation and a participatory approach, and by
taking into account the forecasts for the external economic
cycle. With the measures in the programme, predictability of the
economy will increase and the confidence will be promoted.
The Medium Term Programme aims that the Turkish
economy enters in a sound and sustainable growth period
again in this challenging period when the uncertainties in the
world are felt intensively.
Thanks to lessons learned, strong steps taken and
progress made after the 2000 and 2001 crises, I have no doubt
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that Turkey will overcome this crisis with the lowest loss and will
resume its long-term growth and development process by
further strengthening.
I would like to thank you all for your attention.
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