Turkey: A Guide To Doing Business In Turkiye: ‘Removing Obstacles to Growth & Creating Jobs’ Part I

I. INTRODUCTION

The information relating to Turkiye is provided for background purposes only. The information presented herein has been extracted from and is presented on the authority of various public official documents and private publications.

Doing Business Guide titled the ‘Removing Obstacles to Growth & Creating Job’ is a report investigating the Turkish legislation (‘acquis’) in comparison with the European Union and International legislations (‘acquis) which enhance business activity and those that constrain it.

Turkiye is an important crossroads between Western Europe, the Middle East and Asia, and its location has been a central feature of its history, culture and politics. Three waterways of great strategic importance lie in Turkiye: the Dardanelles, a strait 40 miles (64 km) long, the Sea of Marmara, and the Bosphorus, a strait 20 miles (32 km) long. Together, they form the only water route between the Black Sea and the Mediterranean Sea. Turkiye also flanks the principal land routes from the Caucasus to the Iranian and Arabian oil fields and to the Suez Canal.

The modern Turkish state with Ankara as its capital was created in 1923 and has 1,633 miles (2,628 km) of land frontiers and 4,454 miles (7,168 km) of coastline.

The European section of the country is bounded on the north by Bulgaria, on the east by the Black Sea and the Bosphorus, on the south by the Sea of Marmara and the Dardanelles, and on the west by Greece and the Aegean Sea.

Turkiye in Asia is bounded on the north by the Black Sea and Georgia; on the east by Armenia and Iran; on the south by Iraq, Syria and the Mediterranean Sea; and on the west by the Aegean Sea.

Turkiye is approximately 900 miles (1,450 km) long and 300 miles (480 km) wide and covers an area of 300,948 square miles (769,604 sq. km), of which 291,773 square miles (755,689 sq. km) are in Asia and 9,175 square miles (23,764 sq. km) are in Europe. About 90 percent of the population lives in the Asian part of Turkiye and 10 percent in the European part.

Turkiye is located on the Asia Minor tectonic plate intersected by the North Anatolian fault, which from time to time causes major earthquakes.

According to the figures released by the Republic of Turkiye State Statistical Institute (‘DIE’), it is estimated that Turkiye has a population of approximately 71,152 million people in 2005 (www.die.gov.tr ).

Although 99.8% of the Turkish population is Muslim, Turkiye is a secular country where everyone has freedom of religion and beliefs. Although 0,2 % non-Muslims include Greek Orthodox, Armenian Christian, Arab Christian, Jewish, and others.

The official language of Turkiye is the Turkish language.

Turkiye’s population is comparatively young (with an average age of 27 compared to 42 in the EU). The transformation of Turkiye’s economy from a largely agricultural economy to an industrial and service-oriented economy has led to an increasingly urban population.

Turkiye’s population is concentrated in the West and along the coastal areas. The major cities by population are Istanbul with approximately 10 million inhabitants, Ankara (the capital city) with 4 million inhabitants, Izmir with 3 million inhabitants, Bursa, Adana, and Antalya.

The life expectancy of Turkish people is, on average 72.08; 69.68 for males and 74.61 for females.

Turkiye was declared a Republic on October 29, 1923. Mustafa Kemal ATATÜRK was elected as the Republic’s first President and instituted a series of sweeping social reforms that have played a central role in the development of Modern Turkiye. A law abolishing the Caliphate was passed in March, 1924.

Turkiye’s original Constitution (‘Anayasa’) was adopted in 1924 and provided for an elected parliament to be the repository of sovereign power. Executive authority was vested in the Prime Minister and the Council of Ministers. Changes were made in the legal, political, social and economic structure of the country, and Islamic legal codes were replaced by Western ones. Turkiye became a Secular (‘Laic’) State in 1928, when the clause retaining Islam as the state religion was removed.

Republic of Turkiye President ATATÜRK’s reforms and Contemporary Modern orientation continue to be the dominant ideological forces in Turkiye today.

According to Article 2 of the Turkish Constitution; "The Republic of Turkiye is a democratic, secular (‘laic’) and Social State based on the ‘rule of law’ that is respectful of human rights in a spirit of social peace, national solidarity and justice, adheres to the nationalism of ATATURK and is underpinned by the fundamental principles set out in the Preamble."

Historically, the military has been an important factor in Turkish government and politics. President ATATÜRK mandated that the army protect Turkiye’s secular democracy and its 1982 Constitution as amended on October 17, 2001 and May 22, 2004 (www.tbmm.gov.tr/english/constitution.htm ).

The Turkish Military (‘TSK’), to accomplish these goals and to provide stability in the face of political and social factionalism, intervened in Turkish politics in 1960, 1971 and 1980. Each time, the military withdrew after the election of a new civilian government and the introduction of changes to the legal and political systems ( www.tsk.mil.tr ).

The current Turkish Constitution, which was revised and ratified by referendum in 1982, provides for a parliament, the Turkish Grand National Assembly ("TBMM"), a President and a Prime Minister. The President is elected for a seven-year term by a vote of the TBMM, and the Prime Minister is appointed by the President from the members of Parliament.

The Prime Minister, in turn, nominates other members of the Council of Ministers, who then must be approved by the President. The Council of Ministers, chaired by the Prime Minister, exercises the executive powers of the government under the authority of the TBMM.

The head of state in Turkiye is the President of the Republic of Turkiye. The current President, Mr. Ahmet Necdet Sezer, former head of the Constitutional Court, was elected in May 2000, and his term of office will terminate in May 2007. The members of the TBMM are elected for five (5) year terms. The Constitution provides for a system of proportional representation and forbids the formation of political parties on the basis of class, religion or secessionism. The Election Law (‘SK’) provides that parties that receive less than 10.0% of the votes in national elections are not eligible for seats in the TBMM.

In the last national elections, which took place on November 3, 2002, only two parties were able to win seats: the right-wing Justice & Development Party (‘AKP’), which became the government, and the left-wing Republic Populist Party (‘CHP’), which formed the opposition.

As three independents and one representative of the AKP in the TBMM joined the DYP, the number of parties represented in the TBMM increased to three: the AKP, the CHP and the DYP. Currently, the number of the parties represented in the TGNA is six (6): the AKP, the CHP, the True Path Party (‘DYP’), the People’s Ascent Party (‘HYP’), the Motherland Party (‘ANAP’), the Social Democratic and Populist Party (‘SHP’), and Independent Deputies.

A one-party government was interpreted as a positive development for Turkiye, which had previously suffered from volatile coalitions.

The parliamentary representations of the parties at the end of the November 2002 elections and the current situation are summarized below. In 2002 only those parties with more than 10% of the national vote were represented in the TBMM.

The establishment of an independent and efficient judiciary is of paramount importance. Impartiality, integrity, and high standards of adjudication by the Independent Turkish Courts are essential for safeguarding the ‘Rule of Law’ (‘Hukukun Üstünlüğü / Kanuni Hüküm’) and respect for Human Rights.

According to Article 9 of the Constitution; ‘‘Judicial power’ shall be exercised by independent Courts on behalf of the Turkish Nation’. According to Article 10 of the Constitution; ‘All individuals are equal without any discrimination before the law, irrespective of language, race, colour, sex, political opinion, philosophical belief, religion and sect, or any such considerations’.

The basic principles of ‘the independence of courts’ and ‘security of judges and public prosecutors’ are arranged and cited separately under the heading of "Judicial Power" of the Constitution. According to Article 138 of the Constitution; ‘Judges shall be independent in the discharge of their duties; they shall give judgment in accordance with the Constitution, law, and their personal conviction conforming with the law. No organ, authority, office or individual may give orders or instructions to courts or judges relating to the exercise of judicial power, send them circulars, or make recommendations or suggestions. No questions shall be asked, debates held, or statements made in the Legislative Assembly relating to the exercise of judicial power concerning a case under trial. Legislative and executive organs and the administration shall comply with court decisions; these organs and the administration shall neither alter them in any respect, nor delay their execution’.

In the Turkish legal system; civil, administrative and military justice are regulated separately. The Constitutional (or ‘Supreme’) Court’s (‘Anayasa Mahkemesi’) jurisdiction includes issues relating to the form and substance of laws, decrees, private statutes of the TBMM, other rules of TBMM, international treaties, constitutional amendments (only with respect to form) and matters relating to public officials and political parties. The Court of Cassation (‘Yargıtay’) is the court of last resort for most civil and criminal matters. The Court of State Council (‘Danıstay’) is the court of last resort for administrative matter. The Court of Military Appeal (‘Askeri Yargıtay’) is the court of last resort for military matter.

The Turkish judicial system has been further strengthened via the adoption of structural reforms during recent years. The TBMM has adopted several laws: The New Penal Code (‘TCK’), the Code of Criminal Procedure (‘CMK’), the Law on Enforcement of Sentences and Security Measures (‘TCIK’), and the Law on the Establishment of the Regional Courts of Appeal entered into force on June 1, 2005.

1. introduces the concept of cross examination of witnesses during trail;
2. establishes plea bargaining in order to reduce the number of unmeritorious prosecutions;
3. increases the discretion of Prosecutors in order to asses the strength of the evidence before preparing an indictment;
4. gives Judges the power to return an incomplete indictment;
5. means criminal investigations must be carried out by a judicial police force under the authority of the Republic Prosecutor;
6. makes the Chief Republic Prosecutor responsible for preparing annual evaluation reports on the judicial police under his command;
7. introduces the requirement for certain trials that are to be recorded on audio and video tape; and
8. provides that defendants and witnesses who cannot speak the Turkish language with an interpreter free of charge.

The Law on Enforcement of Sentences brings clarity to this area by replacing numerous regulations. This law is generally in line with EU practice.

The Law on the Establishment of the Regional Courts of Appeal will substantially reduce the case load of Court of Cassation and enable it to concentrate on its function of providing guidance to lower Courts.

The Ombudsman: There has been weak progress in establishing an Ombudsman. The Ombudsman office would be a key institution in improving the efficiency of public administration and detecting corruption in Turkiye.

Turkiye ratified the European Convention on Human Rights (‘ECHR’) in 1954 and the Protocols 1, 2, 3, 5, 6, 8, 11 and 13 to this Convention. Turkish Courts continue to apply ECHR and refer to the Convention ( www.echr.coe.int ).

Turkiye abolished the death penalty in August 2002, and in all circumstances in January 2004. Turkiye signed Protocol No.13 to the ECHR regarding ‘the abolition of the death penalty in all circumstances’ in January 2004. Any remaining references to the death penalty were removed from the Turkish Legislation (‘Acquis’) in constitutional amendments during May 2004.

In April 2004, the Turkish Medical Association ("TTB") issued guidelines stating that disciplinary penalties should be brought against medical doctors who discriminate on the basis of gender, nationality, race, or for any other reasons during medical checks and treatments. Pocket-sized cards setting out a suspect’s rights, including his right to see an Attorney, have been distributed to police officers and are displayed in police stations.

In September 2004, the TBMM approved a new Penal Code (‘TCK’) (Law No. 5237) which was published in the Official Gazette on October 12, 2004. The new TCK will have positive effects on a number of areas related to human rights, particularly women’s rights, discrimination and torture.

Under the 1923 Treaty of Lausanne, minorities in Turkiye consist ‘exclusively of non-Muslim communities’. The minorities usually associated by the Turkish Authorities with the Treaty of Lausanne are Greeks, Armenians and Jews.

The protection of cultural rights has progressed. Broadcasting in languages other than Turkish language, including Kurdish is ongoing.

According to Article 42 of the Turkish Constitution, the teaching of any language other than Turkish language as a mother tongue in state schools is prohibited.

Turkiye is one of the original member states of the United Nations ("UN"), and joined the Council of Europe ("CE") in 1949, the North Atlantic Treaty Organization (‘NATO’) in 1952 and the Organization for Economic Cooperation and Development ("OECD") in 1960.

In 1963, Turkiye became an ‘Associate Member’ of the European Economic Community (‘ECC’) by an Association Agreement aimed at full membership.

In addition, Turkiye is a member of the International Bank for Reconstruction and Development (‘IBRD’) and the European Bank for Reconstruction and Development ("EBRD"), the Black Sea Economic Cooperation ("BSEC") and the International Monetary Fund (‘IMF’), and is the ninth largest shareholder of the Asian Development Bank (‘ADB’).

In 1995, Turkiye became a member of the World Trade Organization ("WTO"). Turkiye is a member of the Organization of the Islamic Conference (‘OIC’) and of the Islamic Development Bank (‘IDB’), and the Central Bank of Republic of Turkiye (‘TCMB’) is a member of the Bank for International Settlements (‘IBS’).

Turkiye is a founding member of the Economic Cooperation Organization ("ECO"), a trade organization formed in 1985 between Turkiye, Iran and Pakistan. Since its formation, Afghanistan, Azerbaijan, Kyrgyzstan, Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan have joined the ECO.

Turkiye has had a long association with the project of European integration.

It made its first application to join what was then the European Economic Community (‘EEC’) in July 1959. Turkiye has sought full membership in the ECC since its Association Agreement (‘Ankara Agreement’) was signed in September 1963. The Ankara Agreement envisaged ‘the progressive establishment of a Customs Union (‘CU’) which would bring the two sides closer together in economic and trade matters’.

The Ankara Agreement was supplemented by an Additional Protocol signed in November 1970, which set out ‘a timetable for the abolition of tariffs and quotas on goods circulating between EEC and Turkiye’.

There was a temporary freeze in relations between Turkiye and the EEC, as a result of the military intervention in government in 1980. However, following the multiparty elections of 1983, relations were re-established.

In 1987, Turkiye submitted a formal application for full membership in the European Union (‘EU’). In late 1989, the EU Commission decided that Turkiye was eligible to become a full member and was inherently a European country in February 1990. However, the European Commission (‘EC’) deferred Turkiye’s application until the EU had finished working toward market integration.

In March 1995, Turkiye and the EU, as part of Turkiye’s efforts to integrate into the EU, agreed to form the Customs Union (‘CU’), which became effective on January 1, 1996.

At the EU Helsinki Summit in December 1999, Turkiye was accepted as a candidate for EU membership atat the Copenhagen Summit on December 12-13, 2002. The EU Council stated that, if, in December 2004, on the basis of a report and a recommendation from the EC, the EU decides that Turkiye fulfills the Copenhagen political criteria, the EU will open accession negotiations with Turkiye. In accordance with the EC’s recommendations in the 2002 Strategy Paper, it was also decided in Copenhagen that, in order to assist Turkiye towards EU membership, the Accession Strategy for Turkiye would be strengthened, the process of legislative scrutiny would be intensified, the Customs Union would be extended and deepened, and the EU would significantly increase its Pre-Accession Financial Assistance in Turkiye.

Turkiye has taken important steps to fulfill the Copenhagen criteria, including a significant amendment of thirty-four articles of the Turkish Constitution during recent years. The constitutional amendments covered various issues, such as the improvement of human rights, the strengthening of the ‘rule of law’ and the restructuring of democratic institutions.

The Turkish Parliament has also adopted three legislative packages to ensure the implementation of the political reform process, which began with the constitutional amendments. The current government, which was formed after the elections of November 2002, has continued to revise the laws of Turkiye to conform with the EU acquis.

In recent years, Turkiye has also enacted several economic reforms, made structural adjustments in the financial sector and public finance, and enhanced competition and efficiency in its economy, in accordance with the European Council decision of June 2004 and the Commission’s recommendations in the October 2004 Regular Report.

In December 15, the European Parliament accepted the report submitted by Dutch Democratic Christian Parliament Camiel Eurlings (Parliament Rapporteur) that advises the commencement of full membership negotiations with Turkiye by an affirmative majority of 402 to 262.

At the EU Brussels Summit (‘25 Member’) that was held on December 17, as it was foreseen and announced that the Accession Negotiations with Turkiye, EU Council opened accession negotiations with Turkiye on October 3, 2005. The Inter-Governmental Conference also started on the same date. Relations between the EU and Turkiye entered in a new phase. The European Council set out the framework and the requirements for starting accession negotiations with Turkiye.

The Prime-Minister appointed the State Minister for Economy, Ali Babacan, as Turkish Chief Negotiator for EU and also made him responsible for the Secretariat General for EU Affairs.

The main challenge facing Turkiye as a Candidate Country is the need to strengthen its administrative and judicial capacity to implement and enforce EU acquis.

The twinning process makes the vast body of EU Member States’ public sector expertise available to the Turkiye as a Candidate Country through the long-term secondment of civil servants and accompanying short- and mid-term expert missions and training.

Furthermore, Turkiye can draw on EU Member States’ expertise through ‘Twinning light’, an exchange of expertise mechanism to support projects of limited scope. Twinning projects are planned in the fields of the internal market, agriculture, environment, transport, finance control, and customs.

The EC presented a draft framework for accession negotiations, setting out the method and guiding principles of the negotiations in June 2005, in line with the EU Council conclusions of December 2004.

The framework was adopted by the Council of Ministers and the EU-Turkiye and the Inter-Governmental Conference (‘IGC’) met for the first time on October 3, 2005. In parallel, the EC has launched ‘the analytical examination (‘screening’) of the acquis which forms the first phase of accession negotiations.

This process allows Turkiye to familiarize itself with the EU acquis and allows the EC and EU-25 Member to evaluate the degree of preparedness, before deciding whether a chapter (there are 35 chapters) can be opened for negotiations.

Turkiye is the beneficiary of a dedicated pre-accession financial assistance instrument to help it meet the criteria for EU membership, as adopted by the European Council in December 2001. Prior to this, Turkiye was a beneficiary of the Euro-Mediterranean Partnership Program (‘MEDA’), which is the principal financial instrument for the implementation of the Euro-Mediterranean Partnership. EU pre-accession assistance provides ‘support for institution building, investment to strengthen the regulatory infrastructure needed to ensure compliance with the acquis, and investment in economic and social cohesion’. Accreditation for decentralised implementation of the programmes was granted at the end of 2003.

Around EUR1.15 billion of EU financing is currently being managed in Turkiye for projects committed between 1996 and 2004 inclusive. The budgetary allocation for 2005 is EUR300 million, and for 2006, EUR500 million. From 2007, Turkiye, along with other candidates and potential candidate countries, will be a beneficiary of the IPA instrument. It is expected that the average annual allocation for Turkiye in the period 2007-2013 will be in excess of EUR1 billion.

As mentioned above, a revised accession partnership will be discussed with the Turkish government and presented to the European Council in late 2005. Once adopted, this will serve as the basis for financial programming in future years.

Negotiations between the EC and the Turkish authorities on the 2005 programming started in September 2004. The priorities for the 2005 financial programme include supporting the implementation of the Copenhagen political criteria, including some closely-related subjects in the sector of justice, freedom and security, supporting economic and social cohesion by targeting the poorest regions in Turkiye, promoting the implementation of the EU acquis related to the Customs Union, the internal market, agriculture, environment, and promoting political and social dialogue between the EU and Turkiye.

The impact of EU assistance to Turkiye is increasingly positive. The EU has provided significant resources in a number of important areas; such as basic education, training, environmental infrastructure and economic adjustment.

EU assistance is not the only source of financial support to help Turkiye meet its Accession Partnership priorities. Turkiye is also a major beneficiary of assistance from the European Investment Bank (‘EIB’), with Turkiye receiving EIB loans worth EUR1,955 million from 1992 to 2002.

The EC also cooperates extensively with the World Bank (‘WB’), which is particularly active in Turkiye, occasionally co-financing projects. Cooperation between the World Bank and EC has taken place at all levels concerning the development of the former’s Turkiye Assistance Strategy from 2004 to 2006.

The 2005 Pre-Accession Financial Assistance Program (‘PHARE’) consists of a country program and associated expenditure on multi-country programs, such as TAIEX or SIGMA, communication and management bringing the overall total of EUR300 million as a grant assistance.

The key priorities for the 2005 program, reflecting the EC recommendation of October 2004, and the European Council Brussels Summit Conclusions in December 2004, are the political criteria, including:

• some closely-related subjects in the sector of justice, liberty and security;

• economic and social cohesion, targeted on the poorest regions in Turkiye, and focusing on strategic planning and support for the establishment of Regional Development Agencies in the priority NUTS II regions; and

• project preparation for the implementation of the EU Acquis, with projects being developed in the following sectors:

• Internal Market
• Agriculture (Veterinary control)
• Environment
• the ‘Network’ sectors (Energy, Telecommunications and Transport)
• Social policy
• Statistic
• EU - Turkiye Political and Social Dialogue.

The UN Secretary General submitted the final text of the Annan Plan for Cyprus in March 2004. The Annan plan (which calls for the eventual reunification of the island) was put to separate and simultaneous referendum in Cyprus on April 24, 2004. While the Greek Authority of Southern Cyprus (‘GASC/GKRY’) and Greek Cypriots rejected the Annan Plan (75.8% against), the Annan Plan was approved by 64.9% of Turkish Cypriots and the Turkish Republic of Northern Cyprus (‘TRNC/KKTC’).

Since the date of the referenda, numerous international organizations led by the UN and the International Community have applauded the Turkish Cypriot people’s affirmative vote and have called for the immediate restoration of their direct economic, trade and cultural activities internationally. Some developments in that direction have already taken place.

On July 29, 2005, Turkiye signed the Additional Protocol, adapting the EC Turkiye Association Agreement to the accession of ten (10) new countries on May 1, 2004. At the same time, Turkiye issued a declaration stating that signature of the Additional Protocol did not amount to recognition of the Republic of Cyprus. On September 21, 2005, the EU adopted a counter-declaration indicating that Turkiye’s declaration was unilateral, did not form part of the Protocol and had no effect on Turkiye’s obligations under the Protocol.

EU and Turkiye underlined the need for supporting the efforts of the Secretary General of the UN to bring about a comprehensive settlement of the Cyprus problem which would contribute to peace, stability, and harmonious relations in the region.

On February 4, 2002, the International Monetary Fund ("IMF") Executive Board and the Republic agreed on a Stand-by Arrangement for 2002-2004 which provides for international lending of up to Special Drawing Rights ("SDR’¹) 12.8 billion. During 2002, Turkiye drew SDR 9.9 billion under the facility.

On April 18, 2003, the IMF released the fourth trench, consisting of SDR 510.6 million, to Turkiye (at the time of the release, approximately US$701 million). The fifth trench of SDR 340.2 million (at the time of the release, approximately US$476 million) was released on August 1, 2003 following IMF Executive Board approval. At the time of the release of the fifth trench, the IMF also amended Turkiye’s principal repayment schedule and, as a result, a total of US$4.4 billion of scheduled repayments due in 2004 was deferred to 2005 and a total of US$7 billion due in 2005 was deferred to 2006. The sixth trench in the amount of SDR 340.2 (at the time of release, approximately US$502 million) was released by the IMF on December 18, 2003. The seventh trench in the amount of SDR 340.2 million (at the time of release, approximately US$495 million) was released by the IMF in April 2004.

The IMF Executive Board also approved the re-phasing of the remaining program reviews and an extension of the 2002-2004 Stand-By Arrangement through February 3, 2005.

On July 30, 2004, the IMF Executive Board completed the eighth review of Turkiye’s economic performance under the 2002-2004 Stand-By Arrangement and approved the immediate disbursement of the eighth trench in the amount of SDR 454 million (at the time of release, approximately US$661 million). Including the eighth trench, Turkiye has drawn SDR 11.9 billion (at the time of the release of the eighth trench, approximately US$17 billion) under the 2002-2004 Stand-By Arrangement.

On September 20, 2004, Turkiye and an IMF team began program discussions for a new Stand-by Arrangement. The first part of the discussions was completed on September 29, 2004, and the second part of the discussions was completed on October 25, 2004. On May 11, 2005, the Executive Board of the IMF approved the three-year SDR 6.66 billion (approximately US$10 billion) Stand-By Arrangement to support Turkiye’s economic and financial program until May 2008. An amount equivalent to SDR 555.17 million (approximately US$837.5 million) was to be made immediately available at the date of approval, with the remaining balance distributed in eleven equal installments. A one-year extension of Turkiye's repurchase expectations was resolved, totaling SDR 2.52 billion (approximately US$3.80 billion) arising in 2006 ( http://www.hazine.gov.tr/standby/imf_standbyeng.htm ).

In October 2003, the Government and the World Bank agreed on a new Country Assistance Strategy to define a strategic framework for the World Bank’s support to Turkiye. The Board of Directors of the World Bank approved the new Country Assistance Strategy for the 2002-2006 period on November 6, 2003.

The Country Assistance Strategy consists of a World Bank lending program of up to US$4.5 billion. The anticipated 2004 programs, for which the World Bank has committed US$1.75 billion, include, among others, the Third Programmatic Financial and Public Sector Adjustment Loan (‘PFPSAL-III’) in the amount of $1 billion and a $202.0 million Renewable Energy Loan. PFPSAL-III aims to provide support to the Government’s financial and public sector reform program while ensuring that social programs are adequately funded. The Board of Directors of the World Bank approved PFPSAL-III on June 17, 2004 and the first US$500 million trench of the loan was disbursed on July 5, 2004. The second trench of US$500 million is expected to be released in early 2005.

Standard and Poor’s raised Turkiye’s rating from B (stable outlook) to B+ (stable outlook) on October 16, 2003. On March 8, 2004, Standard and Poor’s outlook for its B+ rating for Turkiye was revised from stable to positive. On July 19, 2005, Standard and Poor’s again revised Turkiye’s long-term foreign currency sovereign credit rating from "BB-" to "B" (stable outlook) and its long-term local currency sovereign credit rating from "BB" to "B" (stable outlook).

Moody’s outlook for its ‘B1’ rating for bonds and debenture bonds, and ‘B2’ rating for banks deposits for Turkiye was upgraded from stable to positive on February 11, 2005. Turkiye continues to use the IMF loan program and has access to US-arranged loans on special conditions. Both financing facilities significantly helped bridge Turkish needs for rolling over outstanding debts. Nevertheless, even in such a case Turkiye remains unable to fully close the residual gap without additional borrowing and remains fully dependent on external loans. In this respect, Turkiye will need to obtain a new IMF loan program once the old one expires.

Economic growth was impressive for 2003 at 5.9% and this year should continue at a pace of 6-7%. Inflation has fallen below 10% temporarily, but a rebound to above 10% can be expected closer to the end of the year pursuant to a remarkable surge in domestic consumption and more social spending being planned by the government. Notwithstanding single digit inflation and appreciating the Turkish lira currency, Turkish real domestic interest rates continue to be high at around 9%, putting a significant pressure on the fiscal side and government refinancing costs on the domestic market. At the same time the trade balance and the current account, however, are deteriorating. The Turkish current account deficit is at 4.2% of GDP for 2004.

On October 25, 2005, during the IMF mission, the Turkish government submitted to parliament a budget for 2006 consistent with achieving an overall primary surplus of 6.5% of GNP (excluding the balances of two state enterprises undergoing privatization). In the IMF mission's view, this is a strong budget that will help contain the widening external current account deficit (www.imf.org/external/np/sec/pr/2005/pr05239.htm ).

"Other key topics for the IMF reviews included the Turkish government's policies to strengthen the finances of the Social Security System, plans for tax reform and improved tax administration, monetary policy and the Central Bank's preparations for the adoption of formal inflation targeting, the implementation of the new Banking Law, the strategy for the state banks, and the steps needed to complete the resolution of assets taken over by the Savings Deposit Insurance Fund (‘TMSF’). With regard to social security reform law, it was concluded that more time was needed for the approval process to run its course:

"In the period ahead, the Turkish government intends to submit to parliament legislation allowing integration of the three existing social security institutions and legislation aimed at strengthening collection of social security contributions. Provided that these steps are implemented as envisaged, it is expected that the IMF Executive Board will meet to consider the completion of the first and second reviews in early December 2005."

Imports are increasing at an alarming pace, owing to appreciation of the Turkish lira and robust domestic demand. Export growth is not compensating for this increase, leading to a growing gap in the trade and current accounts.

The development of a quarterly monitoring system for general government employment is underway, and the enactment of New Foreign Direct Investment (‘FDI’) legislation has been completed. In addition, a bill amending the Public Procurement Law was approved, bringing the real value of the relevant thresholds into line with international standards. 600 projects totaling TL4.9 quadrillion were cancelled in the Investment Program for 2003.

The Special Consumption Tax Law (implementing indirect tax changes) was approved by Parliament. The Parliament’s Budget and Planning Commission approved direct tax reform legislation. With this legislation, the government harmonized taxes on financial investment income at the declaration stage, reduced investment allowances and eliminated the withholding tax applied and the double taxation of corporate earnings and dividends.

The Turkish Parliament enacted changes to the Execution and Bankruptcy Act in mid-July 2003 and passed the Social Security Law, allowing the re-scheduling of debt owed to social security institutions. Arrears to the social security institutions stand at around TL14.5 quadrillion.

The government enacted legislation underpinning the necessary institutional and administrative reforms in Social Security Agency (‘SSK’), Employer Social Security Agency (‘Bag-Kur’) and Turkish Employment Agency (‘Is-Kur’). The government also committed to elimination of "excess" employees in state-owned companies. As of December 31, 2003, 31,200 of the 45,800 "excess" employees had retired.

The government also took steps toward achieving the IMF fiscal performance criteria that are required to be met for completion of the seventh and eighth reviews. As of April 2004, Turkiye had completed the seventh review and SDR340 million (approximately US$495 million) was released. Turkiye completed the eighth review in August 2004 and SDR450 million (approximately US$661 million) was released. Accordingly, Turkiye’s cumulative withdrawals under the existing 2002-2004 Stand-By Arrangement reached SDR11.9 billion (approximately US$17 billion).

It should be noted that the macroeconomic stabilization program now being pursued in Turkiye is the only IMF program currently on track globally. Given that, with continued international support, Turkiye’s institutional and macroeconomic transformation program appears to have the potential to achieve macroeconomic stability, the IMF seems much more willing to assist Turkiye than appeared to be the case in late 2001.

On September 22, 2003, the United States of America and Turkiye signed an agreement for a US$8.5 billion loan. According to the agreement, the loan will not begin to be repaid for four (4) years and its maturity will be in ten (10) years. The loan will be advanced in four equal trenches over a period of eighteen (18) months. The ability of Turkiye to obtain advances will be subject to Turkiye meeting specified conditions precedent. One of those conditions is that Turkiye follows sound economic policies and another is that Turkiye cooperates with the United States of America in respect of certain matters relating to Iraq.

The New Penal Code (‘TCK’) punishes corruption-related crimes more seriously and the statute of limitations for such offences has been extended.

The TCK also introduces the concept of liability of legal persons in cases of corruption and contains provisions concerning corruption in public procurement.

Two (2) Corruption-related Commissions were established in the TBMM to investigate gasoline smuggling, and illegal public offerings (money collection) and misuse of depositors in 2005.

The Law on Access to Information which was adopted in 2003 was an important step in enhancing transparency.

Turkiye has no specific law on financing and auditing of political parties. Although public officials are required to submit asset declarations, there is a need to ensure their proper verification. Currently, many public bodies are exempt from auditing requirements.

The Ethical Board for Public Servants has come into operation. A circular was issued in 2004, instructing public bodies to co-operate fully with the Board. A regulation on the Code of Ethics for public employees brought into force in April 2005. The regulation sets out ‘a detailed code of behavior for senior public officials and grants members of the public the right to petition the Ethical Board concerning contraventions of the code. It does not apply to other categories such as elected officials, academics, military personnel, or judiciary personnel.

The scope of parliamentary immunity has been identified as a significant problem in the context of corruption in Turkish public life. There is a progress concerning the transparency of the financing of political parties. Although public officials are required to submit asset declarations, there is a need to extend the scope and frequency of declarations.

The efficiency and effectiveness of governmental, parliamentary and other bodies established to combat corruption remains a matter of concern. The consistency of policies and the degree of coordination is progressing. Institutions relevant to the fight against corruption have been strengthened and an overhaul of the inspection system in particular is still necessary to increase efficiency in the fight against corruption.

In October 2004, the Turkish National Security Council (‘MGK’) convened for the first time under the chairmanship of the New Civilian Secretary General. This institution is currently composed of seven (7) civilian members and five (5) military members. The Secretary General does not have the right to veto. The MGK meets every two (2) months.

During recent years, the MGK discussed international and security issues, such as Iraq and terrorism, Cyprus, energy issues and EU-Turkiye relations.

Defense expenditure increased from EUR6.985 billion to EUR8.198 billion. As regards TBMM oversight of defense expenditure, the amendments to the Law on Public Financial Management and Control (‘PFMC’) which came into force in January 2005, have the potential to improve budgetary transparency concerning military and defense expenditure. Extra-budgetary funds have been included in the general defense budget and will be dissolved by December 31, 2007.

Legal regulations adopted in May 2004, including a Constitutional amendment, have enhanced the ex-post audit of defense expenditure. The Court of Accounts and Audit (‘Sayıstay’) has been authorized to audit defense expenditures on behalf of the TBMM. In addition to the reforms to the legal and institutional framework, it is important that the civilian authorities fully exercise their supervisory functions in practice.

With respect to the formulation of Security and Defense Policy, work has begun to prepare a New National Security Policy Document (‘MGKB’). The purpose of the document is:

• to identify threats to National Security,

• to determine the priority of threats, and

• to define strategies.

The MGKB is drafted by the Secretariat General of the MGK with contributions from the Presidency, the Ministry of the Interior, the Ministry of Foreign Affairs, and the National Intelligence Service (‘MIT’). The MGKB is subject to the approval of the Council of Ministers.

The Turkish Armed Forces (‘TSK’) Internal Service Law, which defines the role and duties of the Turkish Military and which contains articles granting the military a wide margin of manoeuvre, has been changed.

The Gendarmerie is connected to the General Staff in terms of its military functions, but affiliated to the Ministry of the Interior in terms of its law enforcement functions.

The security situation, which had been gradually improving since 1999, has become more precarious since the resumption of violence by the Kurdistan Worker’s Party (‘PKK’), a terrorist organization which appears on the EU list of terrorist organizations.

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