EX-99.D

FORWARD-LOOKING STATEMENTS

Turkey has made forward-looking statements in this prospectus supplement and the accompanying prospectus. Statements that are not historical facts are forward-looking statements. These statements are based on Turkey’s current plans, estimates, assumptions and projections. Therefore, you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, Turkey undertakes no obligation to update any of them in light of new information or future events.

Forward-looking statements involve inherent risks. Turkey cautions you that a number of factors could cause actual results to differ materially from those contained in any forward-looking statements. These factors include, but are not limited to:

•

External factors, such as:

	o		interest rates in financial markets outside Turkey;

	o		the impact of changes in the credit rating of Turkey;

	o		the impact of changes in the international prices of commodities;

	o		economic conditions in Turkey’s major export markets;

	o		the decisions of international financial institutions regarding the terms of their financial arrangements with Turkey;

	o		the impact of any delays or other adverse developments in Turkey’s accession to the European Union; and

	o		the impact of adverse developments in the region where Turkey is located.

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Internal factors, such as:

	o		general economic and business conditions in Turkey;

	o		present and future exchange rates of the Turkish currency;

	o		foreign currency reserves;

	o		the level of domestic debt;

	o		domestic inflation;

	o		the ability of Turkey to effect key economic reforms;

	o		the level of foreign direct and portfolio investment; and

	o		the level of Turkish domestic interest rates.

RECENT DEVELOPMENTS

GENERAL

On May 10, 2007, Fitch Ratings revised Turkey’s outlook for its BB- rating from positive to stable. Currently, Turkey’s rating from Standard & Poor’s has been BB- with stable outlook and rating from Moody’s has been Ba3 with stable outlook.

Regarding the new currency, known as New Turkish Lira or TRY, introduced in 2005, the Council of Ministers determined on April 4, 2007 that the word “new” would be eliminated from the name “New Turkish Lira” on and from January 1, 2009 and the currency of Turkey would again be called Turkish Lira. The Council of Ministers Decree was published in the Official Gazette dated May 5, 2007 (No. 26513).

As regards the Social Insurance and General Health Insurance Law (Law No. 5510) that brings gradual parametric changes to the pension system and also introduces universal health insurance, although the implementation of the Law had been postponed until July 1, 2007, work is still continuing to formulate solutions that preserve the main objectives of the Law while meeting the Constitutional Court’s objections. The objections of the Court included aspects of the pension reform pertaining to civil servants, changes in the valorization formulas for all workers (updating the past contributions using the index); and the introduction of medical co-payments for civil servants. In this regard, a white paper describing the main objectives of the Law and alternatives for new pension parameters is expected to be announced shortly. This revised legislation is intended to be submitted to the parliament soon after opening of the new parliamentary session and is intended to become effective within six months of its submission to parliament.

The social security system has recorded an increasing deficit in recent years. Social Security Institutions (“SSIs”) realized a deficit of 3.7% of GNP in 2002, 3.8% of GNP in 2003, 3.8% of GNP in 2004 and 4.1% of GNP in 2005. For 2006, the estimated deficit is 3.2% of GNP. The low premium collection rates and the increasing rate of health and insurance expenditures are the main factors for the increasing deficit of the social security system.

On February 21, 2007, the Assembly approved the Law regarding the Housing Finance System (the “Housing Finance Law”)(Law No. 5582). Law No. 5582 was approved by President Sezer and published in the Official Gazette on March 6, 2007. The Housing Finance Law aims to improve infrastructure in order to promote primary mortgage and housing finance markets and to establish a secondary mortgage market to provide alternative funding mechanisms to the primary lenders. The Housing Finance Law also contained amendments to the Execution and Bankruptcy Act (Law No. 2004), Capital Markets Law (Law No. 2499), Consumer Protection Law (Law No. 4077), Financial Leasing Law (Law No. 3226), Mass Housing Law (Law No. 2985) and various tax laws.

On March 28, 2007, the Assembly approved a new law (Law No. 5615) introducing amendments to the Income Tax Code (Law No. 193). Law No. 5615 introduces “Minimum Subsistence Allowance” for wage earners and annuls tax refunds. Tax refunds were used in such a way that when transactions were not subject to value added tax (VAT) then the VAT which could not be deducted during the transaction was refunded to those who perform such transactions. The implementation of the minimum subsistence allowance provisions of this law is expected to begin in 2008. Law No. 5615 was approved by President Sezer and published in the Official Gazette on April 4, 2007 (No. 26483).

On May 25, 2007, the Council of Ministers determined to reduce VAT on services in the tourism sector (including hotel accommodation and services in restaurants and cafes) from the current 18% to 8%. The VAT rate on many food items was also reduced to 8%. The Council of Ministers Decree was published in the Official Gazette dated May 30, 2007 (No. 26537). According to this Decree, some of the VAT reductions on food items will become effective this year, and others will become effective in 2008. The reduction in VAT on services in the tourism sector will become effective in 2008.

On June 3, 2007, the Assembly approved the Insurance Law (Law No. 5684) which is intended to bring the insurance sector in line with international practices and to provide the framework for monitoring of the quality of services provided by insurance companies. Law No. 5684 was approved by President Sezer and published in the Official Gazette on June 14, 2007 (No. 26552).

At the end of December 2005, a bird flu outbreak began in the eastern portion of the Republic and rapidly spread westward, affecting more than one-third of the Republic’s 81 provinces. As of September 20, 2007, at least 21 people have tested positive for the deadly H5N1 strain of the bird flu virus (12 of which have been confirmed by the World Health Organization) (the “WHO”)), including 4 children who died from the disease.

On February 8, 2007, a new H5N1 case was reported in poultry in a small village in the south eastern region of the Republic and on February 26, 2007, a new H5N1 case in poultry was also reported in the same region. The last human case of the H5N1 strain of the bird flu virus was observed on January 30, 2006.

POLITICAL CONDITIONS

On April 24, 2007, the ruling Justice and Development Party (AKP) nominated Foreign Minister Abdullah Gul as one of two candidates for the 11th president of Turkey. The first round of the presidential election was held on April 27, 2007. In the first round of voting, Mr. Gul failed to win the necessary two-thirds majority of the Assembly. After the vote, the Republican People’s Party (CHP) appealed to the Constitutional Court to annul the first round of presidential voting since the parliament did not have the necessary quorum of 367 votes. On May 1, 2007, the Constitutional Court annulled the first round of presidential voting by ruling that there were not enough members present at the parliamentary vote for it to be valid. On May 3, 2007, the Assembly approved July 22, 2007 as the date for early general elections. Following the Court’s decision, the first round of the presidential election was repeated on May 6, 2007. However, the necessary quorum was not reached again and the sole candidate, Mr. Gul, withdrew his candidacy.

On May 10, 2007, the Assembly approved a constitutional amendments package that would allow Turkish citizens to elect the president directly. The amendments package also reduces the presidential term of office from seven years to five years, allows the president to run for a second term, sets general elections for every four years instead of five, and reduces the number of lawmakers needed for a quorum from 367 to 184. On May 25, 2007, President Sezer vetoed the constitutional amendments package and returned the package back to the Parliament for another round of voting. On May 31, 2007, the constitutional amendments package was reapproved by the Assembly and sent to President Sezer. By law, President Sezer could not veto the amendments again. Instead, he was obliged to either approve them or hold a national referendum. On June 5, 2007, CHP applied to the Constitutional Court to annul the constitutional amendments package arguing that the first article of the package had been approved by one less than the required two-thirds majority. On June 15, 2007, President Sezer called for a referendum on the constitutional amendments package and, on June 18, 2007, he applied to the Constitutional Court to annul the legislation approving the constitutional amendments. On July 5, 2007, the Constitutional Court rejected appeals by CHP and President Sezer for invalidation of the constitutional amendments package.

On June 2, 2007, the Assembly, among other things, approved a proposal shortening the length of time needed for a referendum to be held on the reforms from 120 days to 45 days, which would have allowed the referendum to be combined with the general election on July 22, 2007. However, on June 18, 2007, President Sezer vetoed the proposed law and returned the law back to the Parliament for another round of voting making it impossible to schedule the referendum for the same date as the general election. On July 31, 2007, the Supreme Election Board announced that a referendum on the constitutional amendments package approved by the Assembly would be held on October 21, 2007.

On July 22, 2007, a general election was held in the Republic. Based on the final election results and subsequent moves by Assembly deputies, the following table sets forth the composition of the Assembly by total number of seats as of September 20, 2007:


Political Party	Number of Seats

Justice and Development Party (AKP)		340
Republican People’s Party (CHP)		98
Nationalist Action Party (MHP)		70
Democratic Society Party (DTP)		20
Democratic Socialist Party (DSP)		13
Independents		5
Great Union Party (BBP)		1
Freedom and Solidarity Party (ODP)		1
vacant		2	¹


¹	The two vacant seats belong to a recently deceased member of the Assembly and President Gul who resigned from his parliamentary duties following his election as the 11th president of the Republic.

On August 6, 2007, President Sezer gave Prime Minister Recep Tayyip Erdogan a mandate to form the cabinet following AKP winning a majority of the Assembly seats in the general elections. On August 9, 2007, AKP’s candidate, Koksal Toptan was elected as the new speaker of the Parliament. On August 28, 2007, Abdullah Gul was elected the 11th president of Turkey. On August 29, 2007, President Abdullah Gul approved the list of new cabinet members submitted by Prime Minister Recep Tayyip Erdogan. On August 30, 2007, Prime Minister Recep Tayyip Erdogan announced the new cabinet.

On May 22, 2007, a suicide bomber carried out an attack in a crowded shopping centre in Ankara. Ten people were killed and approximately 120 people were injured in the explosion.

KEY ECONOMIC INDICATORS

•		(All GNP figures are in real terms) In the second quarter of 2007, GNP grew by an estimated 3.9% compared to the same period of 2006. In the first quarter of 2007, GNP grew by an estimated 6.8% compared to the same period of 2006.

•		For the month of August 2007, the Consumer Price Index (“CPI”) increased by 0.02% and the Producer Price Index (“PPI”) increased by 0.85%.

		The Republic’s PPI and CPI for the August 2006 —August 2007 period was 3.72% and 7.39%, respectively. The official CPI year-end target for 2007 is 4%. Annual inflation remains at high levels in 2007 due to the rise in unprocessed food prices and increases in the prices of tobacco products. Moreover, the impact of monetary tightening on inflation has not become discernible and despite moderating, the lagged effects of the exchange rate pass-through still continue. (Pass-through effect is defined as the share of domestic currency depreciation, accumulated over a certain period of time, which translates into inflation). The Central Bank expects to respond with adjustments in monetary policy in order to be able to achieve and maintain price stability in the medium term.

•		On September 25, 2007, the Central Bank foreign exchange buying rate for U.S. dollars was TRY1.2278 per U.S. dollar, compared to an exchange buying rate of TRY1.5020 per U.S. dollar on September 25, 2006.

•		On September 11, 2007, the Government offered an interest rate of 18.21% for the 182-day Treasury Bill, compared to an interest rate of 21.81% for the 182-day Treasury Bill on September 11, 2006.

•		The industrial production index rose by 3.5% in July 2007, compared to an increase of 8.7% in July 2006.

•		The following table indicates figures for unemployment:


2007	Unemployment rate			Number of unemployed
January		11	%		2,675,000
February		11.4	%		2,760,000
March		10.4	%		2,562,000
April		9.8	%		2,450,000
May		8.9	%		2,265,000
June		8.8	%		2,285,000

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On May 16, 2007, it was announced that negotiations between the Government and the public sector workers’ union regarding wage increases for public sector workers were expected to be completed before general elections while negotiations on wage increases for civil servants would be postponed from August to October or November due to general elections held on July 22, 2007. On May 30, 2007, it was announced that wage increases for public sector workers would be based on the actual inflation rate instead of a targeted inflation rate of 4%. On June 26, 2007, it was announced that the wages of public sector workers were increased by 10% for the year 2007 and would be increased by 3% for each six-month period in 2008. Negotiations between public servants’ unions, union confederations and the government regarding wage increases for civil servants are ongoing.

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In its regular meeting, held on September 13, 2007, the MPC decided to cut its short-term interest rates (policy rates) 25 basis points (0.25%) to 17.25% at the Central Bank of the Republic of Turkey “CBRT” Interbank Money Market and the Istanbul Stock Exchange Repo-Reverse Repo Market. As of September 18, 2007, the CBRT overnight borrowing interest rate was 17.25%, and the CBRT overnight lending interest rate was 22.25%. In its previous meeting, held on August 14, 2007, MPC decided to keep policy interest rates unchanged at 17.50%. Moreover, considering the current levels of liquidity, the Central Bank began to issue liquidity bills in addition to the current tools used in open market operations to enhance the effectiveness of liquidity management when necessary. The first issuance was made on July 20, 2007.

TOURISM

•		From January to July 2007, net tourism revenues (according to the balance of payments presentation) increased by approximately 5.85% to approximately $6.73 billion from approximately $6.36 billion during the same period in 2006.

•		From January to July 2007, the number of foreign visitors visiting the Republic increased by approximately 16.6% to approximately 12,808,264 foreign visitors, as compared to approximately 10,985,880 foreign visitors during the same period in 2006.

FOREIGN TRADE AND BALANCE OF PAYMENTS

•		Between January and July 2007, the trade deficit increased by approximately 3.20% to approximately $25.5 billion, as compared to approximately $24.71 billion in the same period of 2006. Between January and July 2007, total goods imported (f.o.b.) increased by 16.3% to approximately $84.0 billion, as compared to approximately $72.2 billion during the same period of 2006. The increase in imports was primarily driven by the demand for capital goods (increased by approximately 8.2% over the same period of 2006), intermediate goods (increased by approximately 23.4% over the same period of 2006) and consumption goods (increased by approximately 1.4% over the same period 2006). During the period of January-July 2007, the current account deficit increased by approximately 2.1% over the same period in 2006, from approximately $21.3 billion to approximately $21.8 billion.

•		As of August 31, 2007, total gross international reserves were approximately $118.2 billion (compared to $101.2 billion as of December 29, 2006) and commercial bank and participation bank reserves were approximately $43.9 billion (compared to $38.0 billion as of December 29, 2006). As of September 7, 2007, gold reserves were approximately $2.42 billion (compared to $2.37 billion as of December 29, 2006) and Central Bank reserves were approximately $70.0 billion, compared to approximately $60.8 billion as of December 29, 2006.

•		As of September 19, 2007, the Central Bank held approximately TRY 569 million in public sector deposits.

PUBLIC FINANCE AND BUDGET

•		From January to August 2007, the central government budget expenditures were approximately TRY135.8 billion and central government budget revenues were approximately TRY127.4 billion, compared to a consolidated budget expenditure of approximately TRY115.1 billion and a consolidated budget revenue of TRY115.5 billion during the same period in 2006.

•		From January to August 2007, the central government budget deficit was approximately TRY 8.4 billion, compared to a consolidated budget surplus of TRY0.5 billion during the same period in 2006.

•		From January to August 2007, the central government budget primary surplus reached approximately TRY28.6 billion, compared to a consolidated budget primary surplus of TRY34.6 billion during the same period in 2006.

PRIVATIZATION

The Government’s plans for privatization include, among others, the remaining shares of Turk Telekom, Tekel, Turkish Airlines, sugar factories, electricity generators/distributors, toll roads and bridges and ports.

Regarding the privatization of Halkbank, on January 10, 2007, a new law (Law No. 5572) regarding the privatization of Halkbank was approved by the Parliament. Law No. 5572 was published in the Official Gazette on January 17, 2007 (No. 26406). According to the decision of PHC dated February 5, 2007, up to 25% of Halkbank was going to be privatized through an initial public offering

(“IPO”) in 2007. On April 19, 2007, the decision of PHC regarding the privatization of Halkbank and amendments to Halkbank’s articles of agreement (including changes to related articles to ensure the privatization of Halkbank through IPO) were approved at Halkbank’s annual general meeting. Between May 2 and 4, 2007, 24.98% of the shares of Halkbank were sold (including a greenshoe over-allotment option) through an IPO, which raised $1.85 billion. The publicly-held shares of Halkbank began to trade on the Istanbul Stock Exchange on May 10, 2007.

Regarding the block sale of 100% of the shares of three electricity distribution companies, namely, Baskent Elektrik Dagitim A.S., Sakarya Elektrik Dagitim A.S. and Istanbul Anadolu Yakasi Elektrik Dagitim A.S., each operating in a different region, the bidding deadline for the privatization was initially announced as December 15, 2006 but was then postponed to January 19, 2007. On January 9, 2007, it was announced that the tenders for the three electricity distribution companies was postponed to a future date for the purpose of dispelling uncertainties in post-privatization investments and completing ongoing investment projects in these companies. The privatization process of the remaining 17 electricity distribution companies is still continuing.

On February 8, 2007, it was announced that the PHC has decided to privatize 51% of the shares of Petkim through a block sale. On March 16, 2007, the Privatization Administration announced the tender for the block sale of 51% of the shares of Petkim. The bidding deadline for the privatization was announced as June 15, 2007. On June 7, 2007, it was announced that the bidding deadline for the privatization of Petkim was extended to June 25, 2007. On July 5, 2007, it was announced that the consortium of TransCentralAsia Petrochemical Holding made the highest bid of $2.1 billion for 51% of the shares of Petkim. The privatization of Petkim is currently at the contract stage.

On March 21, 2007, Sama Dubai Istanbul Real Estate, a unit of Dubai Holding, was the winner of the auction for a land plot in Levent owned by the Istanbul Transportation Authority (IETT) with the highest bid of $705.5 million. However, several legal actions (appeals to cancel the sale of the real estate) have been initiated in connection with this tender by non-governmental organizations. Sama Dubai Istanbul Real Estate did not pay the tender consideration citing legal actions as the reason. On July 13, 2007, the Istanbul Metropolitan Municipality announced that a legal investigation has been initiated against Sama Dubai Istanbul Real Estate because the tender consideration was not paid on the due date. In September, it was announced that the court rejected appeals to cancel the sale of the real estate.

On April 19, 2007, PHC’s decision on the privatization of certain highways and bridges was published in the Official Gazette. According to the PHC’s decision, highways and bridges will be privatized through “the transfer of operational rights” and the privatization process is envisaged to be finalized by December 31, 2008.

Regarding the privatization of motor vehicles inspection stations, on August 15, 2007, a concession agreement was signed between the Privatization Administration, the Ministry of Transport and AKFEN-Dogus-Tuvsud OGG. The consideration for the agreement was paid in cash. The sale of motor vehicles inspection stations Region I and Region II raised $300.25 million and $313.25 million, respectively.

Other significant privatizations completed in 2007 include the asset sale of Deveci Iron mine ($21.5 million), the transfer of operational rights of the Mersin Port ($755 million) and the sale of a land plot in Levent owned by the General Directorate of Highways in Istanbul ($800 million).

Other significant privatizations at the approval or contract stage include the transfer of operational rights of the Izmir Port ($1.3 billion) and the transfer of operational rights of the Derince Port owned by the Turkish State Railways (TCDD) ($195.25 million). On July 3, 2007, the PHC approved the transfer of operational rights of the Izmir Port and the related decision was published in the Official Gazette dated July 4, 2007 (No. 26572). On September 12, 2007 it was announced that Türkerler Group won the auction for rights to operate the Derince Port for 36 years bidding $195.3 million. This privatization is at the approval stage.

Other privatizations for which tenders were annulled include Iskenderun Port, an area for social facilities owned by Petkim and NITRO-MAK (a producer of emulsion type explosives) owned by Sumer Holding A.S.

Several privatizations that are currently in the approval stage are being challenged in Turkish courts. Such legal challenges can cause delays in the privatization process and may, on occasion, as in the case of the sale of 65.76% of the shares in Tupras to Efremov Kautschuk GmbH in 2003-2004, lead to the cancellation of the previous privatization decisions.

BANKING SYSTEM

As of September 19, 2007, the Savings and Deposit Insurance Fund (“SDIF”), had taken over 22 private banks since 1997.

The SDIF is continuing its efforts to recover claims and sell off assets inherited from banks taken over by the SDIF. As of September 19, 2007, the SDIF had already signed protocols with 14 former owners of failed banks (including Yasar Group) regarding the settlement of their debts to the SDIF. The SDIF has begun selling non-related party loans of failed banks through loan auctions and is also taking steps to dispose of its holdings of shares in companies and other assets taken over by the SDIF. On March 6, 2007, it was announced that a protocol was signed between SDIF, Joint Fund Bank (former Bayındırbank taken over by SDIF) and Suzer Group regarding the repayment of Suzer Group’s outstanding debt to SDIF and Joint Fund Bank. On March 29, 2007, it was announced that Suzer Group completed its repayment of debt to SDIF. On May 15, 2007, it was announced that Cingilli Group made early repayment of its debt to SDIF, thus satisfying its outstanding debt to SDIF. On May 25, 2007, Bayraktar Group paid $25 million to SDIF for the Egebank taken over by the SDIF. In addition, the parties (Bayraktar Group and SDIF) withdrew reciprocal lawsuits breaking all disputes between themselves. On June 6, 2007, it was announced that SDIF had taken over Bayındır Group’s active companies due to Group’s failure to meet its obligations to SDIF within the framework of a debt liquidation by the Bayındır Group. On August 29, 2007, it was announced that the SDIF had taken over Demirel Group’s nine companies to collect its losses. On September 4, 2007, it was announced that the SDIF signed a protocol with Park Group. With this protocol, the SDIF expects to collect its claims from Dinc Bilgin Group more rapidly and at a higher value.

Since December 2004, when Turkey received a date for the commencement of accession talks with the EU, foreign investors’ interests in the Turkish banking sector have strengthened. A number of foreign financial entities have bought or agreed to buy equity stakes in domestic banks, including (but not limited to): Fortis Bank (acquired 93.3% stake in Disbank), BNP Paribas (bought 50% stake of TEB Mali Yatirimlar A.S.), Dexia (bought 74.99% stake in Denizbank), General Electric Consumer Finance (bought 25.5% of the shares of Garanti Bankasi), National Bank of Greece (bought 46% of the shares of Finansbank), Citibank (bought 20% stake of Akbank), Alpha Bank (agreed to buy 50% of Anadolu Group’s shares in Alternatif Bank), Bank TuranAlem Group (agreed to buy 33.98% shares of Sekerbank) and Merrill Lynch European Asset Holdings Inc. (acquired 100% of the shares of Tat Yatirim Bankasi A.S.), Arab Bank PLC (bought 50% stake of MNG Bank) and BankMed Sal (bought 41% stake of MNG Bank), Eurobank EFG Holding (Luxemburg) S.A. (bought 70% stake of Tekfenbank).

Moreover, on June 19, 2007, it was announced that ING had reached an agreement with OYAK to acquire Oyak Bank for $2.67 billion in cash. The deal is expected to close in the second half of 2007.

On July 18, 2007, it was announced that Saudi National Commercial Bank (NCB) had reached an agreement with Boydak Group and Ülker Group to acquire 60 per cent of Turkiye Finans for $1.08bn. The transaction is expected to be completed by 2007 year end.

On July 31, 2007, it was announced that National Bank of Kuveyt (NBK) had signed an agreement with Turkish Bank to acquire 40 per cent of Turkish Bank for $160 million.

DEBT

The Central Government total domestic debt stock was approximately TRY256.1 billion as of July 2007, compared to TRY251.5 billion as of December 2006.

In August 2007, the average maturity of Turkish internal public debt was 36.0 months, compared to 27.3 months in August 2006. The average annual interest rate on internal public debt in local currency (including discounted treasury bills/government bonds and fixed rate government bonds) on a compounded basis was 18.9% as of August 2007, compared to 16.4% as of August 2006.

The total gross outstanding external debt of the Republic was approximately $213 billion at the end of the first quarter of 2007.

Since January 1, 2007, Turkey has issued the following external debt:

• $500 million of global notes on January 17, 2007, which mature on March 17, 2036 and have a 6.875% interest rate.

		• $500 million of global notes on January 17, 2007, which mature on September 26, 2016 and have a 7.00% interest rate.

		• EUR1.25 billion of Eurobonds on February 2, 2007, which mature on April 2, 2019, and have a 5.875% interest rate.

		• $750 million of global notes on February 23, 2007, which mature on June 5, 2020, and have a 7.00% interest rate.

		• $1.25 billion of global notes with a settlement date of October 3, 2007 which will mature on April 3, 2018, and will have a 6.75% interest rate.

INTERNATIONAL RELATIONS

As a result of the continuing violence and civil unrest in Iraq, neighboring countries, including the Republic, have experienced and may continue to experience certain negative economic effects, such as decreases in revenues from trade and tourism, increases in oil expenditures, decreases in capital inflow, increases in interest rates and increases in military expenditures. The Republic continues to be affected by the consequences of conflicts in other countries in the Middle East, including Iraq, and has been the victim of isolated terrorist attacks.

Furthermore, the relations between other countries in the Middle East and outside powers are often subject to tensions that could result in economic and/or diplomatic sanctions being imposed on one or more of the Republic’s neighbors. It is also possible that such tensions could lead to military action. Any such sanctions or military action could have a negative impact on the Republic’s economy and political stability.

Regarding the EU accession process, on March 29, 2007, negotiations on the “Enterprise and Industrial Policy” chapter (Chapter 20) were opened. This is the second chapter to be negotiated since the official opening of membership talks in October 2005. The conclusion of the chapter is subject to two benchmarks. Chapter 20 will not be provisionally closed unless Turkey meets its obligation to implement the customs union protocol and provides the EU Commission with a revised comprehensive industrial policy strategy aimed at strengthening Turkey’s industrial competitiveness. Moreover, Position Papers on the “Education and Culture” (Chapter 26), “Economic and Monetary Policy” (Chapter 17), “Statistics” (Chapter 18) and “Financial Control” (Chapter 32) were submitted and the Position of the EU regarding the “Education and Culture” chapter is being awaited. On June 26, 2007, negotiations on the “Statistics” (Chapter 18) and “Financial Control” (Chapter 32) chapters were opened. The conclusion of negotiations of these chapters is conditional on satisfying two and five benchmarks respectively. With these chapters, Turkey has four chapters opened for negotiation since the official opening of membership talks in October 2005. Furthermore, EU officials requested from Turkey a position paper on “Consumer and Health Protection” (Chapter 28) Recently, Position Paper on “Consumer and Health Protection” (Chapter 28) was submitted and the Position of the EU regarding this chapter is being awaited. This chapter is expected to be opened during the Intergovernmental Conference to be held in September 2007.

On January 22, 2007, the GAERC announced its conclusions on the implementation of the April 2004 Council conclusions on ending the isolation of the Turkish Republic of Northern Cyprus (“TRNC”) and facilitating the unification of the Cyprus by encouraging the economic development of the TRNC. The EU General Affairs and External Relations Council (“GAERC”) concluded that the work aiming at the adoption of the Commission proposal for a Council Regulation on special conditions for trade with the TRNC must resume without delay.

On April 17, 2007, the Government announced “Turkey’s Programme for Alignment with the EU Acquis 2007-2013”. This document is a comprehensive roadmap and aims to be in alignment with the acquis. It is structured on the basis of 33 negotiation chapters and lists 200 primary and 600 secondary legal arrangements to be made during the 2007-2013 period. It also includes a timetable on when the measures will be taken. The EU announced that it welcomed Turkey’s reform action plan aimed at bringing Turkey in line with the procedures needed to join the EU.

DESCRIPTION OF THE REPUBLIC

Turkey has a democratically elected parliamentary form of government. Since the founding of Turkey in 1923, Turkey has aligned itself with the West and is a member of numerous international organizations, including the North Atlantic Treaty Organization (“NATO”), the Council of Europe, the World Bank, the IMF and the Organization for Economic Cooperation and Development (the

“OECD”). Turkey is also an associate member of the EU and a founding member of the European Bank for Reconstruction and Development (the “EBRD”).

Beginning in 1980, the Government embarked upon a series of market-oriented reforms which, among other things, were designed to remove price controls and reduce subsidies, reduce the role of the public sector in the economy, emphasize growth in the industrial and service sectors, encourage private investment and savings, liberalize foreign trade, reduce tariffs and promote export growth, ease capital transfer and exchange controls and encourage foreign investment, increase the independence of the Central Bank and reform the tax system. Turkey moved towards full convertibility of the Turkish Lira by accepting the obligations of Article VIII of the IMF Articles of Agreement in March 1990. Turkey has developed a market-oriented, highly diversified economy with growing industrial and service sectors, while retaining a prominent agricultural sector that makes the country largely self-sufficient in foodstuffs. In 2006, the service sector, industrial sector and agricultural sector accounted for 6.1%, 7.4% and 2.9%, respectively, of Turkey’s gross domestic product. See “Economy-Services,” “Economy-Industry” and “Economy-Agriculture.”

LOCATION, AREA AND TOPOGRAPHY

Turkey, situated at the junction of Europe and Asia, is an important crossroads between Western Europe, the Middle East and Asia. Turkey’s location has been a central feature of its history, culture and politics. Turkey’s land borders extend for more than 2,600 kilometers and are shared with eight countries: Greece and Bulgaria in the west and northwest, Iran in the east, Armenia, Georgia and Azerbaijan in the northeast, and Iraq and Syria in the south.

Turkey’s coastline extends for approximately 7,200 kilometers along the Black Sea in the north, the Aegean Sea in the southwest and the Mediterranean Sea in the south, all of which are connected by the Bosphorus, the Sea of Marmara and the Dardanelles.

Turkey has an area of approximately 814,578 square kilometers (inclusive of its lakes), and its topography is varied. Most of the country consists of highland plateau surrounded by mountainous areas which rise toward the east. Climatic conditions differ widely among the regions.

POPULATION

According to estimates of the Turkish Statistical Institute (TURKSTAT) and the State Planning Organization (SPO), population growth averaged approximately 1.33% per annum between 2001 and 2006 and Turkey’s population as of June 2005 was estimated to be 73.0 million.

Turkey’s population is comparatively young, and the transformation of Turkey’s economy from a largely agricultural economy to an industrial and service-oriented economy has led to an increasingly urban population. According to the SIS and the SPO, in 2004, 60.3% of the population lived in urban areas and 39.7% lived in rural areas.

The largest cities in Turkey are Istanbul, the country’s commercial center, and Ankara, its capital, with populations of 11.6 million and 4.4 million, respectively. Other cities with populations in excess of one million are Adana, Antalya, Balikesir, Bursa, Diyarbakir, Gaziantep, Hatay, Izmir, Kayseri, Kocaeli, Konya, Manisa, Mersin, Samsun and Sanliurfa.

In 2006, total civilian employment was 22.330 million, of whom approximately 27.3% were employed in agriculture, 25.4% in industry (including construction) and 47.3% in services. See “Economy-Employment and Wages.” The unemployment rate was 9.9% in 2006.

According to the State Planning Organization, Turkey has made significant progress in improving social welfare over the last decade. Life expectancy increased from an average of 65 years in 1985-1990 to an average of 71.1 years in 2004. The infant mortality rate decreased from 65 per thousand for the period 1985-1990 to 29 per thousand for the period 1998-2003. The adult literacy rate increased sharply from 67.5% to 87.3% between 1980 and 2000.

Turkey is constitutionally a secular state. The vast majority of the Turkish population is Muslim. There are very small numbers of non-Muslims in Turkey, including Greek Orthodox, Armenian Christians and Jews. The official language of Turkey is Turkish.

GOVERNMENT ORGANIZATION AND POLITICAL BACKGROUND

A popular nationalist movement began in Turkey before the turn of the century and gathered momentum in the aftermath of World War I. Turkey was declared a republic on October 29, 1923, upon the abolition of the Sultanate. Mustafa Kemal Ataturk was elected as Turkey’s first President. Ataturk instituted a series of sweeping social reforms that have played a central role in the development of modern Turkey. The Constitution of Turkey (the “Constitution”) was adopted in 1924 and provided for an elected Grand National Assembly (the “Assembly”) to be the repository of sovereign power. Executive authority was vested in the Prime Minister and the Council of Ministers (the “Cabinet”). Changes were made in the legal, political, social and economic structure of Turkey, and Islamic legal codes were replaced by Western ones. Ataturk’s reforms and Western orientation continue to be the dominant ideological element in Turkey today.

The Turkish military establishment has historically been an important factor in Turkish government and politics, interfering with civilian authority three times since 1959 (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.

Turkey’s current Constitution, which was revised and ratified by popular referendum in 1982, contains a system of checks and balances aimed at ensuring a strong central government and reducing factionalism in the Assembly. The Constitution provides for the Assembly, a President and a Prime Minister. The President is elected for a seven-year term by a vote of the Assembly, and the Prime Minister is appointed by the President from the Assembly. The Prime Minister, in turn, nominates other members of the Cabinet, who are then approved by the President. The Cabinet, chaired by the Prime Minister, exercises the executive powers of the Government.

The members of the Assembly are elected for five-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 ethnic identity. The Election Law (Law No. 298) provides that parties whose nationwide vote in general elections is less than 10% are not eligible for seats in the Assembly. On the other hand, a party must have at least 35% of the nationwide vote in order to have a simple majority in the Assembly.

Judicial power in Turkey is exercised by courts whose independence is guaranteed by the Constitution. The Constitutional Court (the “Constitutional Court”) decides issues relating to the form and substance of laws, decrees and rules of the Assembly and matters relating to public officials and political parties. The Court of Appeal is the court of last resort for most civil and criminal matters, while military matters are referred to a separate system of courts.

In July 1995, a series of amendments to the Constitution were adopted. Among other things, the amendments brought into effect reforms related to the formation of political parties, membership in political parties and the involvement of unions and other organizations in political activities. The amendments also reduced the legal voting age from 20 to 18, increased the number of members of the Assembly from 450 to 550 and removed restrictions on the ability of academic personnel and university students to engage in political activities.

On June 22, 2001, the Virtue Party (FP), which had been the main opposition party, was banned by the Constitutional Court as a result of alleged anti-secular activities. Certain deputies of the former Virtue Party formed the Saadet Party, under the leadership of the head of the former Virtue Party, Recai Kutan. The remaining deputies of the Virtue Party formed AKP under the leadership of the former mayor of Istanbul, Recep Tayyip Erdogan.

In 2002, Turkey was challenged by a weakened government and political uncertainty about its future. In July 2002, Mr. Ecevit’s refusal to step down as Prime Minister resulted in the resignation of half of the members of the Democratic Left Party in the Assembly. As a result of the resignations, the three-party coalition, consisting of the Democratic Left Party, the Motherland Party and the Nationalist Action Party, lost its absolute majority, with the number of seats it held in the Assembly falling to 270 out of 550. Prime Minister Ecevit announced that general elections would be held in November 2002, approximately 17 months before the scheduled general elections, and on July 31, 2002, the Assembly voted to hold elections on November 3, 2002.

In the general elections that took place on November 3, 2002, AKP received 34.3% of the votes and was able to secure 363 out of 550 available seats in the Assembly. As a result of the elections, AKP won a simple majority in the Assembly. CHP was the only other political party in the new Assembly, having received 19.4% of the votes and 178 seats in the Assembly. Independent candidates (unaffiliated with political parties) gained 9 seats in the Assembly.

The official results of the November 3, 2002 elections were published in the Official Gazette on November 10, 2002. President Sezer appointed Mr. Abdullah Gül from AKP as the new Prime Minister on November 16, 2002. Prime Minister Gül’s cabinet was approved by President Sezer on November 18, 2002. The number of ministries comprising the cabinet was reduced from 35 to 25. Mr.

Ali Babacan was appointed as the Minister in charge of the Undersecretariat of Treasury. Mr. Abdullatif Sener was appointed as the Deputy Prime Minister in charge of the Privatization Administration and the State Planning Organization. Mr. Kemal Unakitan was appointed as the Finance Minister. The list of the new council of ministers was published in the Official Gazette on November 19, 2002 and the new Government’s program was approved by the Assembly on November 28, 2002.

In December 2002, parliamentary elections in the province of Siirt were invalidated due to alleged election irregularities. The High Electoral Board reset the election date for the general elections to March 9, 2003. In February 2003, Mr. Recep Tayyip Erdogan, the leader of AKP announced his intention to run for the Siirt parliamentary post. In the election on March 9, 2003, Mr. Erdogan won the election for the Siirt parliamentary post and was later appointed by President Sezer as the Prime Minister of Turkey. On March 23, 2003, Prime Minister Erdogan formed the 59th Government of Turkey, which received a vote of confidence from the Assembly.

On February 15, 2005, the Minister of Culture and Tourism, Mr. Erkan Mumcu resigned from both the Cabinet and the ruling AKP. On April 2, 2005, Mr. Mumcu was elected as the leader of the ANAP. On June 2, 2005, three ministers of the Cabinet (the Minister of Agriculture, the Minister of Public Works and the Minister Responsible for the Status of Women) resigned from the Cabinet. Their respective replacements were appointed on the same day.

The most recent local elections for municipalities were held on March 28, 2004 and the next local elections for municipalities are expected to be held in 2009. AKP received 41.7% of the votes cast for the seats in city councils of the municipalities and was able to secure the mayoral position in 57 out of 81 cities. CHP received 18.2% of the votes cast for the seats in city councils and won mayoral positions in 9 cities. The Nationalist Action Party (MHP) and the True Path Party (DYP) received 10.5% and 10.0% of the votes, respectively.

On October 12, 2006, The Assembly approved a new law (Law No. 5550) which sets the next general election date as November 4, 2007.

INTERNATIONAL ORGANIZATIONS

Since its establishment in 1923, The Republic of Turkey has closely aligned itself with the West. It is a founding member of the United Nations (“UN”), has been a member of NATO since 1952, and is an accession candidate country to the EU. Turkey is in the process of accession negotiations and is an associate member of the Western European Union (“WEU”) since 1992. Turkey supports NATO enlargement on the basis of the standards set by the Alliance and believes that it will contribute to promoting peace and security in the region, in line with the principle of indivisibility of security in the Euro-Atlantic area. Furthermore, Turkey is a party to several international treaties relating to disarmament and arms control.

In addition, Turkey is a founding member of the Council of Europe, the European Bank for Reconstruction and Development and the Organization for Security and Cooperation in Europe (“OSCE”) and Turkey belongs to the World Bank, the IMF, the European Resettlement Fund, the Asian Development Bank, the Multilateral Investment Guarantee Agency (“MIGA”), the Bank for International Settlements (“BIS”) and the OECD. Furthermore, Turkey is a member of the World Trade Organization (“WTO”) and is a participant in the International Convention on the Harmonized Commodity Description and Coding System. Turkey is also a member of the Organization of the Islamic Conference and of the Islamic Development Bank.

Turkey launched the Organization of the Black Sea Economic Cooperation, which brings together 12 countries (Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldavia, Romania, the Russian Federation, Serbia, Turkey and Ukraine) within a framework of regional economic cooperation. Turkey is also a founding member of the Economic Cooperation Organization (“ECO”), which was initially composed of Turkey, Iran and Pakistan in 1985. In 1992, the ECO was expanded to include Afghanistan, Azerbaijan, Kyrgyzstan, Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan.

In 1963, Turkey signed an association agreement (the “Ankara Agreement”) with the European Economic Community (“EEC”), which is now the EU. In 1970, an additional protocol to the association agreement was signed which established the framework and conditions of the transitional stage of the association. In April 1987, Turkey submitted its formal application for full membership. In late 1989, the EEC declared that Turkey was eligible to become a full member. The EEC further decided to defer accession negotiations due to changes in the EU and Turkey’s economic situation at the time.

In 1995, Turkey and the EU concluded a Customs Union, pursuant to which Turkey and the EU eliminated all customs duties and equivalent charges on imports of industrial goods and processed agricultural products. The EU’s quotas on Turkish textile products were also eliminated. Turkey assumed the obligation to harmonize its tariffs and equivalent charges on the importation of goods from

specific third countries with the EU’s common external tariff (from approximately 15% in 1995 to 4.4% in 2004) and to progressively adapt itself to the EU’s commercial policy and preferential trade arrangements with third countries. Although basic agricultural products were excluded from the initial package, a preferential trade regime for basic agricultural products was adopted as of January 1, 1998. Turkey is also progressively adopting many aspects of the Common Agricultural Policy of the EU and has taken substantial steps to harmonize its legislation relating to competition, consumer protection, intellectual property and standardization of foreign trade with those of the EU.

To adapt itself to the EU’s commercial policy and preferential trade arrangements with specific third countries, Turkey has signed free trade agreements with all of the Central and Eastern European Countries (Romania, Hungary, Lithuania, Estonia, the Czech Republic, Slovakia, Bulgaria, Latvia, Slovenia and Poland), Israel, The Palestinian National Authority, Tunisia, Morocco, Bosnia-Herzegovina, Croatia, Macedonia, Egypt, Syria and the EFTA States (Norway, Iceland, Switzerland and Liechtenstein). The agreement with Albania is pending ratification. Negotiations are underway with Lebanon, Jordan, Georgia, Montenegro and the Gulf Cooperation Council. In addition negotiations are expected to commence with Mexico, Chile, South Africa, the Mercado Comun del Sur (Argentina, Brazil, Paraguay and Uruguay, collectively MERCOSUR), Ukraine, South Korea and ASEAN countries (Thailand, Indonesia, Malaysia, Singapore, Philippines, Brunei Darussalam, Cambodia, Laos, Myanmar, Vietnam). With the enlargement of the EU in May 2004 and January 2007, Turkey’s free trade agreements with acceding countries have been terminated.

With the completion of the Customs Union, the association between Turkey and the EU, as stipulated by the Ankara Agreement, had entered its final stage. At the European Council held in Helsinki, in December 1999, the EU granted candidate status to Turkey. The recognition of Turkey as a candidate country ushered in a new era in Turkey-EU relations. The EU Commission prepared an Accession Partnership for Turkey, which was issued on November 8, 2000, and was formally approved by the Council on February 26, 2001. In response, the Turkish Government adopted its National Program for the Adoption of the Acquis (“NPAA”) on March 19, 2001. The Accession Partnership has since been revised twice on May 19, 2003 and January 23, 2006. Accordingly, Turkey’s NPAA was also revised on July 23, 2003. The Turkish Government is currently preparing a new National Program in response to the latest revision of the Accession Partnership. Both the Accession Partnership and the NPAA are revised on a regular basis to take account of progress made and to allow for new priorities to be set.

In accordance with the Commission’s recommendations in the 2002 Strategy Paper for Turkey, the Copenhagen European Council held in 2002 decided to strengthen the accession strategy for Turkey, intensify the process of legislative scrutiny, extend and enhance the Customs Union and significantly increased the EU’s pre-accession financial assistance to Turkey. Beginning in 2004, financial assistance to Turkey began to be financed under the budget heading of “instrument for pre-accession-IPA”.

The EU has allocated financial assistance in the range of €1.15 billion to Turkey between 1996 and 2004. In 2003, the EU Commission proposed a substantial increase in financial pre-accession assistance to Turkey for the period 2004-2006, €235 million of which has already been allocated. The budgetary allocation for 2005 is €300 million and for 2006 is €500 million. Starting in 2007, Turkey, along with other candidate and potential candidate countries, is expected to be the beneficiary of pre-accession assistance from the IPA. It is expected that the average annual allocation for Turkey in the period 2007-2013 will be in excess of 1 billion €’s.

The European Investment Bank has allocated credit loans to Turkey totaling €835 million during the period of 1963-1995, €463 million during the period of 1996-1999 and €3.96 billion during the period of 2000-2005 inclusive. The European Investment Bank has also pledged a total amount of €2.3 billion in credit loans during the period of 2004-2006 (€700 million in 2004, €800 million for both 2005 and 2006).

Turkey has undergone a period of major reforms and transformation since 1999. Between February 2002 and July 2004, eight harmonization packages were enacted. The Constitution of Turkey has been amended twice, revising nearly 1/3 of the articles of the Constitution. The amendments cover a wide range of issues related to improving human rights, strengthening the rule of law and restructuring democratic institutions. The Constitutional amendments have been followed by legislative and administrative measures to ensure the proper implementation of the amendments. A new civil code and penal code have been adopted. Reforms with respect to freedom of thought and expression, freedom of association and peaceful assembly and freedom of religion have been implemented. There have also been reforms related to the judicial system, civil-military relations and anti-corruption measures. Relevant legislation has been changed so as to enable the teaching of and broadcasting in languages and dialects which are used traditionally by Turkish citizens in their daily lives. In addition, the death penalty has been abolished and the prison system has been reformed. The right to property of community foundations belonging to minorities in Turkey has been ensured and the legal basis needed for the activities of foreign foundations in Turkey has been established. New definitions and measures to deal with illegal immigration have been introduced.

On September 26, 2004, the Assembly passed the new Turkish Penal Code which is intended to bring the Turkish penal code in line with EU standards. On October 12, 2004, the new Penal Code (Law No. 5237) was published in the Official Gazette, and, on December 17, 2004, the new Code of Penal Procedure (Law No. 5271) was published in the Official Gazette. The new Penal Code has been in effect since June 1, 2005. On June 29, 2005, the Turkish Penal Code was amended by the Assembly with the Law No. 5377. Such amendment has been published in the Official Gazette dated July 8, 2005 (No. 25869).

Within the framework of the reform process, the Ninth Harmonization Package was introduced by Minister of Foreign Affairs Abdullah Gül on the April 12, 2006. The harmonization package contains pieces of legislation, in the fields of transparency, ethics and civil-military relations, as well as international conventions on human rights and fundamental freedoms. The draft laws within the Ninth Reform Package are the Law on Ombudsman, the Law on Court of Audit, the Law amending the Law on Private Education Institutions The Law on Foundations, the Law on Ombudsman and the Law on Settlement. The international conventions to be adopted in the context of the package are namely; the UN Convention on Fight Against Corruption; Protocol No. 14 to the Convention for the Protection of Human Rights and Fundamental Freedoms, amending the control system of the Convention; and the Revised European Social Charter and the Protocol amending the European Social Charter.

In accordance with the National Program and in response to Turkey’s serious economic crisis in 2001, numerous economic reform measures have been adopted. Turkey has restructured its financial sector, ensured transparency in public finance and enhanced competitiveness and efficiency in the economy. Such structural reforms have already begun to yield tangible results.

A Reform Monitoring Group (“RMG”) was established in September 2003 to ensure effective implementation of the reforms. Chaired by the Minister of Foreign Affairs and Deputy Prime Minister, the RMG convenes with the participation of the Ministers of Justice and Interior as well as State Minister and Chief Negotiator Mr. Ali Babacan. In addition, a process of legislative scrutiny has also been conducted to assess progress in Turkey’s alignment with the EU Acquis. Eight sub-committees which were formed according to the Acquis chapters periodically convene to review the developments that Turkey has achieved in related areas. To date, the eight sub-committees have completed six rounds of meetings.

On December 1, 2004, Turkey announced its Pre-Accession Economic Program for the 2005-2007 period. The goals of the program are, among other things, to sustain Turkey’s current growth performance, maintain Turkey’s single digit inflation and further reduce interest rates, further decrease the ratio of net public debt to GNP and bring the budget into balance by the end of the program.

The European Council’s Parliamentary Assembly removed Turkey from its human rights monitoring list on June 22, 2004. Turkey’s level of progress towards alignment with the Accession Partnership in the context of National Program has been welcomed by the EU. On October 6, 2004, the European Commission, the EU’s executive arm, published a progress report on Turkey’s eligibility to begin EU accession negotiations. The report concluded that Turkey had sufficiently fulfilled the Copenhagen political criteria and recommended that accession negotiations be opened, provided that certain conditions, including the enactment of key legislation, are satisfied. Consequently, on December 17, 2004, the European Council announced its decision to start accession negotiations with Turkey on October 3, 2005.

In December 2004, following the European Union’s decision to start accession negotiations with Turkey, on October 3, 2005, the Turkish Government confirmed that it was ready to sign the Protocol on the adaptation of the 1963 Ankara Agreement extending it to all the members of the Union prior to the actual start of accession negotiations. However, Turkey also placed on record that this would in no way imply a formal legal recognition of the Greek Cypriot Administration by Turkey. The Protocol was signed on July 29, 2005, on which occasion Turkey also issued a declaration to the effect that the signature of the Protocol would not in any form constitute recognition of the “Republic of Cyprus” referred to in the said Protocol. Accordingly, Turkey stated that, pending a comprehensive settlement, her position on Cyprus would remain unchanged and expressed her readiness to establish relations with the new partnership State which would emerge following a comprehensive settlement in Cyprus. Turkey also reaffirmed her commitment to finding a political settlement to the Cyprus issue within the parameters of the good offices mission of the UN Secretary General. The said Protocol is yet to be ratified both by the Turkish Grand National Assembly and the European Parliament.

On June 29, 2005 the Commission presented a draft framework for accession negotiations, setting out the method and the guiding principles of the negotiations, in line with the December 2004 European Council conclusions. The framework was adopted by the Council of Ministers on October 3, 2005. The EU-Turkey Intergovernmental Conference met for the first time on October 3, 2005 whereby the accession process was officially initiated. On October 20, 2005, the analytical examination of the Acquis (screening process) was launched. This stage forms the first phase of accession negotiations where candidate countries familiarize themselves with the Acquis while the Commission and the Member States evaluate the degree of preparedness of candidate countries before deciding whether a chapter can be opened for negotiations.

During Turkey’s screening process State Minister and Chief Negotiator Mr. Babacan is assisted by a special committee called the “Monitoring and Steering Committee” which is composed of members from the Prime Ministry, the Ministry of Foreign Affairs, the State Planning Organization, the Secretariat General for EU Affairs and the Turkish Permanent Representation to the EU in Brussels.

Turkey finished the screening exercise on October 13, 2006 on all 33 negotiation chapters subject to screening.

On June 12, 2006, negotiations on chapter 25 “Science and Research” were opened and provisionally closed by the Turkey-EU Intergovernmental Conference. The process of exchanging negotiation documentation has begun on the “Education and Culture”, “Statistics” and “Enterprise and Industrial Policy” chapters. On December 20, 2006, The Finnish Presidency of the EU sent a letter inviting Turkey to submit its Negotiating Position Document on the chapter “Enterprises and Industrial Policy” with a view to open negotiations on this chapter.

On November 8, 2006, the European Commission released a Progress Report on Turkey’s course of accession into the EU. On November 29, 2006, the European Commission announced its recommendation on Turkey’s accession negotiations. The Commission recommended that the Intergovernmental Conference on Accession with Turkey should not open negotiations on chapters covering policy areas relevant to Turkey’s restrictions on the Greek Cypriot Administration and no chapter be provisionally closed until the Commission confirms that Turkey has fulfilled its commitments related to the Additional Protocol.

These chapters are: Chapter 1 — Free movement of goods, Chapter 3 — Right of establishment and freedom to provide services, Chapter 9 — Financial services, Chapter 11 — Agriculture and rural development, Chapter 13 — Fisheries, Chapter 14 — Transport policy, Chapter 29 — Customs union, and Chapter 30 — External relations.

On December 11, 2006, it was announced that the EU General Affairs and External Relations Council (“GAERC”) welcomed the Commission’s recommendations and findings in the November 8, 2006 Progress Report and the November 29, 2006 announcement. The GAERC also invited the Commission to report on the progress made on the issues covered by the declaration of September 21, 2005 in its forthcoming annual reports in 2007, 2008 and 2009. On December 15, 2006, the European Council endorsed the conclusions on Turkey adopted by the GAERC on December 11, 2006 and decided to suspend negotiations on the eight chapters referred to above.

The EU decided not to close the other 27 chapters until Turkey fulfills its commitments under the Additional Protocol to the EU-Turkey Association Agreement, which extended the EU-Turkey customs union to the ten member states of the EU, including the Greek Cypriot Administration, that joined the EU in May 2004. The Additional Protocol requires, among other things, that Turkey open its ports and airports to traffic from the Greek Cypriot Administration.

On November 30, 2006, the High Planning Board of Turkey approved the Pre-Accession Economic Program for the 2007- 2009 period. The main goals of the program are, among other things, to sustain Turkey’s current growth performance and continue the convergence process of per capita income to EU average, ensure price stability, further decrease the ratio of public debt stock and the public deficit to GDP to be able to meet the Maastricht criteria and to continue the structural reform process.

Before the end of 2006 Turkey started drafting “Turkey’s Programme for Alignment with the EU Acquis 2007-2013” which was envisaged to serve as a road map for Turkey’s reform process for the next 7 years.

FOREIGN RELATIONS

Turkey, as a country located between the Balkans, the Caucasus and the Middle East at the convergence of Europe, Africa and Asia, has played and continues to play a key role in the peaceful resolution of conflicts in the region, including, in particular, those in Bosnia and Kosovo, and actively participates in the Minsk Group of the Organization for Security and Cooperation in Europe, which is working to settle the Azerbaijan-Armenia dispute. Turkey supported the implementation of the Dayton Peace agreement for Bosnia and was instrumental in the establishment of the Bosnian-Croatian Federation.

Turkey pledged approximately $80 million, including $26 million in grants, for the reconstruction of Bosnia and Herzegovina. Turkey was also involved in a program with the United States to train and equip the Bosnian army and participated in the Multinational Protection Force deployed in Albania in accordance with the UN Security Council Resolution No. 1101. Turkey also took part in NATO’s peacekeeping force in Kosovo and accepted several thousand Kosovo refugees during NATO’s military campaign.

Turkey places great importance on maintaining long-term, comprehensive stability in the Balkans. Turkey has provided substantial assistance to the Balkan nations to help them with reconstruction and rehabilitation efforts. Turkey continues to monitor and contribute to peace and stability in the region through its participation in Kosova Force and the UN police mission in Kosovo, as well as in EUFOR-ALTHEA and the EU police mission in Bosnia-Herzegovina. Turkey launched the Southeastern European Countries Cooperation Process in February 1999 among Turkey, Albania, Bosnia and Herzegovina, Bulgaria, Greece, Croatia, Macedonia, Romania and the Federal Republic of Yugoslavia to create a regional platform for issues of common interest in the region. Turkey has also actively promoted the creation of the Multinational Peace Force for South East Europe. In addition, Turkey is participating in the Stability Pact initiated by the EU, which strives to develop a comprehensive framework for dealing with problems in the region, and the Southeast European Cooperative Initiative. Turkey has further contributed to security in the region through its participation in the Regional Arms Control Verification and Implementation Assistance Center in Southeastern Europe.

In an effort to contribute to the creation of a stable and peaceful environment in its region, Turkey has played a leading role in the formation of the Black Sea Naval Cooperation Task Group an on-call force initiated in 2001 among the Black Sea littoral States, whose objective is to contribute to the further strengthening of friendship, good neighborly relations and mutual understanding among the littoral States, through the enhancement of cooperation and interoperability among the naval forces of the regional states. Furthermore, Turkey has launched Operation Black Sea Harmony (OBSH) in 2004 in order to promote security in the Black Sea by deterring illegal activities at sea, including terrorism and proliferation of weapons of mass destruction. All Black Sea littoral States are invited to participate in OBSH. As of December 2006, the Russian Federation has joined the Operation.

Turkey continues to develop political and economic relations with the countries of Southern Caucasus and Central Asia. Maintaining the stability, promoting democracy and reform process, enhancing welfare and prosperity, and facilitating the integration of these regions with the rest of the world are the main elements of Turkish foreign policy pertaining to the area. Close historical, linguistic and cultural ties have served as a valuable foundation for the rapid development of relations with these countries. The Turkish Export-Import Bank has extended credits totaling $1.275 billion. The total trade volume between Turkey and the Central Asian Countries increased from $1.7 billion in 2004 to more than $ 3 billion in 2006. Turkey has extended 18,000 scholarships to students from Central Asian countries since 1992 and also provided significant military assistance and training in order to enhance the capabilities of these countries to tackle security issues and terrorist threats. The summits of Turkish-Speaking Countries serve as an important platform for high-level exchanges among Turkey, Turkmenistan, Uzbekistan, Kazakhstan, Kyrgyzstan and Azerbaijan.

Peace, security, stability and prosperity in the South Caucasus are priority themes in the Turkish foreign policy agenda. Turkey maintains close political, economic, social and cultural ties with the peoples of the region. The strategic position of the South Caucasus highlights its significance for the stability of the Eurasian area.

Turkey promptly recognized the independence of Armenia, Azerbaijan and Georgia in 1991, following the dissolution of the Soviet Union. Since then, Turkey has developed close relations with Azerbaijan and Georgia. Reciprocal and frequent high level visits between Turkey and these countries have deepened our cooperation by facilitating region-wide interaction. As part of this regional cooperation, Turkey, Georgia and Azerbaijan have jointly undertaken the construction of a modern railway linking the city of Kars in Turkey with Tbilisi and Baku. The “Baku-Tbilisi-Kars New Railway Connection” (BTK) project, aims primarily to offer a new transport line in order to respond to increasing trade flows in the region and thus contribute to the regional economic development and cooperation. In addition to the regional BTK railway, when linked with the China-Aktau railway through the Caspian Sea, and with the “Marmaray” railway tunnel to be constructed under the Bosphorus, should also provide reliable transport between Asia and Europe. Works on the “Marmaray” railway tunnel are ongoing and are expected to be finalized in the second half of 2011.

Turkey supports the vocation of the countries of the Southern Caucasus towards international organizations and institutions.

Diplomatic relations between Turkey and Armenia are yet to be established. The relations between the two neighbors are complicated by the occupation of more than 20% of Azerbaijan’s territory in violation of international law, and Armenia’s claims against Turkey. This exacerbates Armenia’s relations with both its neighbors, and hampers regional co-operation schemes realized conjointly by Turkey, Azerbaijan and Georgia. Nevertheless, Turkey and Armenia maintain social, cultural and indirect commercial ties. The indirect trade turnover stands at the level of $130 million as of 2006.

Persistent “frozen” conflicts in the Southern Caucasus, namely Nagorno-Karabagh, Abkhazia and South Ossetia, remain major obstacles before all-inclusive regional peace and stability. Turkey is actively involved in contributing to the peaceful resolution of these conflicts. Turkey is a member of the OSCE Minsk Group, a mechanism that facilitates direct and indirect bilateral talks

regarding Nagorno-Karabakh between Azerbaijan and Armenia. Turkey has been participating in the United Nations Observer Mission in Georgia (UNOMIG) with five military observers since its deployment in Georgia on October 21, 1994. The peaceful settlement of these conflicts, respecting the territorial integrity of Azerbaijan and Georgia, as well as the basic principles of international law, would contribute to the stability and economic welfare of the region.

Russia is an important neighbor and an influential global player. Enhanced cooperation between Turkey and Russia positively contributes to security and stability both at the regional and global levels. Reciprocal visits between Turkey and the Russian Federation have strengthened bilateral ties and enhanced understanding and cooperation between the two countries. The “Joint Action Plan for Cooperation in Eurasia” which was signed by the Ministers of Foreign Affairs of the two countries in New York on November 16, 2001 gave a new impetus to bilateral relations.

During the official visit of Mr. Abdullah Gül, Deputy Prime Minister and Minister of Foreign Affairs, to Russia in February 2004, the “2004-2005 Consultations Program” was signed. The Consultations Program envisages regular bilateral consultations between the countries in order to enable an exchange of views on all aspects of bilateral relations as well as regional and international issues of mutual interest. This program was renewed at the beginning of 2006.

President Putin’s official visit to Turkey in December 2004 was the first official visit at the presidential level from the Russian Federation to Turkey. During this visit, the “Joint Declaration on Deepening Friendship and Multilateral Cooperation between the Republic of Turkey and the Russian Federation” was signed. The declaration calls for the continuation of regular contacts and dialogue and for increased cooperation in the areas of bilateral trade, energy, tourism, culture, and joint action against terrorism and organized crime.

Additionally, in 2005, Prime Minister Mr. Tayyip Erdogan paid three working visits to the Russian Federation. In November, President Putin came to Samsun for the inauguration ceremony of the Blue Stream Pipeline, which was built on the floor of the Black Sea to export Russian natural gas directly to Turkey. Turkish President Ahmet Necdet Sezer paid an official visit to the Russian Federation on June 28-30, 2006, which was a first after the foundation of the Russian Federation. These and other high level visits strengthened bilateral political dialogue and have provided an opportunity to discuss at the highest level bilateral issues as well as to exchange views on current regional and international topics of mutual interest.

Trade volume between Turkey and the Russian Federation reached $15.2 billion in 2005 and $21 billion in 2006. It was $10.9 billion in 2004. Turkish contractors have consolidated their position in the Russian construction market by attaining to date aggregate business volume of $23.5 billion. The number of Russians visiting Turkey in 2006 was approximately 1.9 million. Enhanced cooperation and concrete achievements in the energy sector such as the construction of the Blue Stream Project are prominent features of successful Turkish-Russian partnership.

The regions surrounding Turkey hold three-quarters of the proven oil and gas resources of the world. Given its unique geographical location, Turkey is focused on establishing an energy corridor between the energy-rich countries of the region and the energy consuming markets in the United States and Europe, in particular. To this end, the “East-West Energy Corridor” has been developed in close cooperation with the countries of the region as well as the United States and the United Kingdom. The Baku-Tbilisi-Ceyhan (“BTC”) oil pipeline project constitutes the backbone of the Corridor. The BTC project aims to develop an economical, safe and environmentally sound means to transport the prominent hydrocarbon reserves of the Caspian Basin to the western markets. By creating the first direct pipeline link between the landlocked Caspian Sea and the Mediterranean, the BTC project is expected to bring positive economic advantage to the region and avoid increasing oil traffic through the vulnerable Turkish Straits. On June 4, 2006, the first cargo of oil transported through the pipeline from Azerbaijan was exported from the Ceyhan marine terminal on the Turkish Mediterranean coast. The official opening of BTC pipeline occurred on July 13, 2006. Moreover, the construction of the Trans-Anatolian (Samsun-Ceyhan) oil pipeline would contribute to the transformation of the Ceyhan Terminal into an “energy supermarket”. The Baku-Tbilisi-Erzurum (BTE) natural gas pipeline has become operational in July 2007. The Intergovernmental Agreement for the Development of the Turkey-Greece-Italy Gas Transportation Project has been signed in Rome on July 26, 2007. The Turkey-Greece Interconnector will become operational in August 2007. Other major projects, such as the Arab Natural Gas Pipeline, the Nabucco (Turkey-Bulgaria-Romania-Hungary-Austria) Natural Gas Pipeline and the Trans-Caspian natural gas pipeline, would contribute to Turkey’s efforts to become a major artery of the European Union for natural gas in the years to come. Moreover, Turkey and Iraq signed a memorandum of understanding on August 7, 2007 to devise a feasibility study for the export of Iraqi gas to Europe through Turkey.

Turkey seeks to establish and maintain good relations with all countries, in particular with its neighbors. Turkish-Greek relations have reached a level of solid cooperation thanks to the momentum provided through the established mechanisms since 1999. Legal

framework of bilateral relations has been mostly completed with the signing of 30 Agreements/Protocols/MoU’s covering various areas of cooperation. The ongoing developments in bilateral relations have benefited both countries and the region as a whole.

Visible progress has been made also in the fields of economy/trade, energy and transport. The trade volume between Turkey and Greece reached 2 billion Euros last year, with an increase of 42 % as compared to 2005. The total investment of Greece in Turkey has reached 4.3 billion Euros. Banking is the leading sector in attracting Greek investments. In the field of energy for instance, Karacabey-Komotini Natural Gas Pipeline Project, which has turned into a tripartite cooperation with the participation of Italy, proves the potential to diversify the energy supply routes to Europe. The Karacabey-Komotini Natural Gas Pipeline is expected to become operational in 2007.

There are a number of inter-related issues between Turkey and Greece that need to be addressed over the Aegean Sea. The resolution of these issues requires patience and good will on both sides. A just and durable settlement on all Aegean problems can be reached by taking into account the legitimate rights and vital interests of both countries under international law. In this context, the continuation of exploratory contacts between Turkey and Greece is of particular significance. The two countries have held 36 rounds of talks as of March 2007 in the form of exploratory contacts since their first start in March 2002. In addition, the number of Confidence Building Measures (“CBM”) adopted between Turkey and Greece has increased to nineteen and they also contribute to the furtherance of good neighborly relations.

As for the Cyprus issue, Turkey wants a freely negotiated, mutually acceptable, comprehensive and viable settlement in the Island on the basis of the established UN parameters which are bi-zonality, political equality, equal status and a new partnership state. Cyprus is the home of two politically equal parties; Turkish Cypriots and Greek Cypriots which are two distinct peoples of different religion, culture and ethnicity. Turkey, from the outset, has been supporting the efforts carried out under the good offices mission of the UN Secretary General towards finding a just and lasting settlement in the Island. Turkey and the Turkish Republic of Northern Cyprus (“TRNC”) were critical of the EU’s decision in December 1997 to start accession negotiations with the Greek Cypriots which led to their adhesion to the Union in May 2004. Through separate press statements, Turkey and the Turkish Republic of Northern Cyprus declared their belief that the Greek Cypriot side has no authority to negotiate on behalf of the whole island and that the EU’s decision was in contravention of the 1959-60 Treaty of Guarantee relating to Cyprus. The said Treaty, signed by Turkey, Greece and Great Britain, precludes Cyprus from joining any international organization (such as the EU), unless Turkey and Greece are both members of such international organization. Turkey is currently not a member of the EU.

In late 2003, the UN negotiation process to find a comprehensive settlement to the issue was re-launched. The aim of the subsequent round of negotiations held under UN auspices first on the Island in February and March 2004 between the two parties and then in Burgenstock, Switzerland with the participation of both Turkey and Greece, was to finalize the “Annan Plan” for submission to simultaneous but separate referenda on both sides of the Island prior to May 1st so that, depending on the outcome of the referenda, the opportunity could be seized for a united Cyprus to join the European Union. The final revised version of the Annan Plan for a comprehensive settlement was presented to the parties on March 31st by the Secretary General and then submitted to simultaneous separate referenda in the North and South of Cyprus on April 24, 2004. The Turkish Cypriots voted in favor of the Plan by casting 67% of their votes for a settlement. The Greek Cypriots, however, rejected a solution with a ‘No’ vote of 76% and still became a full member of EU on May 1st.

Following the referenda, the Cyprus issue has taken a new turn and a new state of affairs has emerged in the island. The UN Secretary General Kofi Annan issued a report on his mission of good-offices in Cyprus in May 2004. In his report, the Secretary General stressing that “the Turkish Cypriot vote has undone any rationale for pressuring and isolating them”, called on the members of the Security Council to give a strong lead to all States to cooperate both bilaterally and in international bodies to eliminate unnecessary restrictions and barriers that have the effect of isolating the Turkish Cypriots and impeding their development. International organizations such as the Organization of the Islamic Conference praised the Turkish Cypriot people’s affirmative vote and, in the light of the understanding that ways and means should be found to end the isolation of the Turkish Cypriots, they called for the immediate restoration of their economic, trade and cultural activities internationally. However the commitments of the international community in general and EU in particular are yet to be realized.

On January 24, 2006, Turkey proposed a new action plan to achieve a comprehensive settlement of the Cyprus problem and invited the UN Secretary General to consider the plan. The action plan seeks to eliminate all restrictions for both sides in Cyprus, provide substantial benefits to all parties and promote socio-economic development by reducing disparities. On July 8, 2006, UN Undersecretary General for Political Affairs, Ibrahim Gambari, announced that Turkish and Greek Cypriot Leaders “have committed to proceed by the end of July with technical talks on issues affecting the day-to-day life of people on both sides and concurrently those

that concern substantive issues, both of which will contribute to a comprehensive settlement”. The agreement of the two leaders on reviving the talks for comprehensive settlement of the Cyprus problem has been welcomed by the international community.

However, to date, this process which did not contain any specific time table and pre-determined topics has not been productive and the Greek Cypriot side has resisted the Turkish Cypriot efforts to establish a well-defined agenda, terms of reference and specific timetable.

Turkey and the Turkish Cypriot side have supported the process from the outset with the expectation that it would lead to meaningful and full-fledged negotiations towards a comprehensive settlement. The Turkish Cypriot side has also kept reiterating for months that the solutions of the problems encountered during this process require the meeting of the two leaders of both sides on a regular basis. The Turkish Cypriot side believes that in the absence of a well-defined agenda, terms of reference and specific time-tables, the 8th of July process bears the risk of turning into a “talk shop” by means of which the Greek Cypriot side avoids meaningful negotiations.

In December 2004, following the European Union’s decision to start accession negotiations with Turkey, on October 3rd, 2005, the Turkish Government confirmed that it was ready to sign the Protocol on the adaptation of the 1963 Ankara Agreement extending it to all the members of the Union prior to the actual start of accession negotiations. However, Turkey also placed on record that this would in no way imply a formal legal recognition of the Greek Cypriot Administration by Turkey. The Protocol was signed on July 29, 2005, on which occasion Turkey also issued a declaration to the effect that the signature of the Protocol would not in any form constitute recognition of the “Republic of Cyprus” referred to in the said Protocol. Accordingly, Turkey stated that, pending a comprehensive settlement, her position on Cyprus would remain unchanged and expressed her readiness to establish relations with the new partnership State which would emerge following a comprehensive settlement in Cyprus. Turkey also reaffirmed her commitment to finding a political settlement to the Cyprus issue within the parameters of the good offices mission of the UN Secretary General. The said Protocol is yet to be ratified both by the Turkish Grand National Assembly and the European Parliament.

Turkey also enjoys close economic, political and cultural relations with the countries in the Middle East. Total trade volume between Turkey and Saudi Arabia, Syria and Jordan has been increasing annually, and increased Turkish investment and construction activity by Turkish companies in the region should enable this trend to continue.

Turkey has actively supported the Middle East Peace Process since its inception and enjoys good relations with both Israel and Palestine. Turkey’s relations with Israel have gradually expanded to include economic, military, scientific and cultural cooperation. The Free Trade Agreement enacted between Turkey and Israel has helped boost bilateral trade volume to its current level of $2.3 billion. Turkey seeks to further its technological and scientific cooperation with Israel. Turkey also assists the Palestinian people in various forms. In this regard, the total amount of financial and humanitarian aid extended to Palestine between 1995-2006 reached almost $23 million. Turkey also provided grants of $900,000 and $1,000,000 to Palestine in 2005 and 2006 respectively to be utilized for developing small and medium sized enterprises. Turkey actively contributes to the search for peace in the Middle East as a facilitator and participates in the Temporary International Presence in Hebron at the request of both Israeli and Palestinian sides. Furthermore, with a view to contributing to efforts aimed at building confidence and a spirit of cooperation in the region, a tripartite business forum called Ankara Forum has been established upon the initiative of the Turkish private sector, with the participation of Israeli and the Palestinian counterparts.

In recent years relations between Turkey and Syria became increasingly stabilized. Mutual contacts in the recent period at both technical and political level, together with the implementation of Free Trade Agreement since January 1, 2007, have helped revitalize bilateral cooperation.

Turkey and Iran have been living side by side for centuries in the same region. Today, Turkey’s relations with Iran which are based on the principles of non-interference in internal relations and good-neighborliness, have been developing gradually in recent years. Turkey has also been supporting various efforts, from the outset, to solve the problem of Iran’s nuclear program through diplomatic means.

Turkey and the United States have consolidated their relations, defined as a “strategic partnership”, since the visit of the US President Clinton in 1999, which involves close cooperation on a wide range of political and economic issues concerning Europe and the Balkans, the Caucasus, Central Asia, Afghanistan and the Middle East. The two countries have been working together to maintain peace, prevent or contain regional conflicts, curb the proliferation of weapons of mass destruction, combat international terrorism and combat illegal drug trafficking and other organized transnational crime.

In the aftermath of the terrorist attacks of September 11, 2001, the US and Turkey increased their cooperation in the fight against terrorism. Turkey contributes actively to the Greater Middle East and North Africa initiative aiming at bringing democracy to the region.

In September 2003, the United States and Turkey agreed upon the terms of up to $1.0 billion in grants for Turkey, which could be used to support up to $8.5 billion in direct loans or loan guarantees. On March 24, 2005, Turkey announced that it did not intend to make use of the loan package for the 2005-2007 period.

As a sign of the importance that both countries attach to bilateral relations, more than 40 mutual high level visits have been realized in 2006, including the visit of Secretary of State Rice to Turkey in April and the visit of Foreign Minister Gül to Washington in July. On July 5, 2006 Foreign Minister Gül and Secretary Dr. Rice have adopted the “Shared Vision and Structured Dialogue to Advance the Turkish-American Strategic Partnership Document” providing an overall strategic vision and a structured framework aiming at enhancing cooperation not only at bilateral level but on issues in the regional and international agenda as well.

The US is among the major trade partners of Turkey. The trade volume between the United States and Turkey exceeded $11 billion in 2006. In the context of a new strategy launched in year 2006 and aiming at fostering trade relations with the US, the Undersecretariat of Foreign Trade identified California, Illinois, Georgia, New York, Florida and Texas as target states.

Turkey attributes great importance to attracting more US investors. The US ranks in the fourth place for foreign direct investments in Turkey. The Baku-Tblisi-Ceyhan oil pipeline is one of the examples for major US investments in Turkey and offers a regional cooperation dimension. In 2006 US companies have invested around $5 billion in the Turkish banking sector and the total amount of US investments in Turkey exceeded $16 billion.

While Turkey experienced certain negative economic effects as a result of the situation in Iraq, Turkey continues to support the efforts aiming at bringing peace and stability to Iraq and allowed US troops to use the 10th Tanker Base Command in Incirlik as a logistic hub for Iraq and Afghanistan. The ongoing reconstruction efforts in Iraq and Afghanistan provide great opportunities for Turkish-American joint ventures in the region.

Prior to the start of Operation Iraqi Freedom in March 2003, Turkey initiated high-level exchanges with a number of neighboring countries (beginning in January 2003) to explore the possibility of a joint effort for peace in Iraq. Turkey’s policy with regard to Iraq remains unchanged following the US-led operation. In order for Iraq to achieve lasting peace, Turkey has advocated the necessity to maintain the territorial integrity and the national unity of this country. Turkey believes Iraqi political system should be more inclusive, and all components of Iraqi society including Sunni Arabs and Turkomans should have the chance to actively participate in the political process. Therefore, permanent contacts have been held with all Iraqi groups regardless of their ethnic and religious origin and all of them have been advised to pursue a non-ethnic and non-sectarian policy through this end. Turkey is also actively committed to the reconstruction efforts in Iraq. Turkey’s aid plans are shaped up progressively according to the requirements on the ground and security developments. Turkey anticipates contributing to the areas of health and education in Iraq’s reconstruction, as well. To date, Turkey has pledged $50 million to Iraq, to be utilized through bilateral projects, and deposited $1.2 million to the World Bank and UNDG trust funds. Turkey also supports the efforts toward restoration of security and stability in Iraq and the establishment of representative democratic government in Iraq. Turkey furthermore extended $5.4 million in humanitarian assistance and $2.3 million in technical-vocational assistance to the Iraqi people since the beginning of the US-led operation in Iraq. Turkey’s humanitarian assistance activities continue also through the Turkish Red Crescent Society and the NGO’s.

Turkey, as a neighbor to Iraq, was one of the countries hardest hit by the United Nations sanctions against this country during and following 1991 with a calculable loss of over $100 billion. The US-led coalition’s military operation in 2003 against Iraq added extra economic and financial pressure on Turkey. Since the beginning of the military operation in March 2003, the operations of the Kirkuk-Yumurtalık Oil Pipeline have not fully resumed. Turkey is presently trying to restore strong commercial ties with Iraq.

Turkey has traditional ties of close friendship with Afghanistan which date back to several centuries. In this context, Turkey attaches utmost importance to the sovereignty, independence, territorial integrity and national unity of Afghanistan.

Turkey participated in the International Security Assistance Force (ISAF) in Afghanistan since its inception and assumed the command of ISAF-II (June 2002-February 2003) and ISAF-VII (February-August 2003). Turkey continues its active participation in ISAF by assuming the joint leadership of the Regional Command in Kabul together with France and Italy. Turkey took over its command on April 6, 2007 for eight months. Thus, Turkey’s military presence in Afghanistan has increased to about 1,200. Turkey’s

contributions to the training and equipping of the Afghan National Army and the Police Force also continue. The value of Turkish military aid and donations to Afghanistan between 2001-2007 has reached almost $100 million.

Turkey has similarly undertaken a multi-dimensional aid programme for the reconstruction of Afghanistan which encompasses education, health, agriculture and human resource development. Between 2002-2006, $42 million worth of economic and technical assistance has been provided to Afghanistan by Turkey. In January 2006, at the London Donors’ Conference, Turkey increased its total pledge to Afghanistan to $100 million for the period of 2002-2010.

To date, Turkey has built and renovated 3 hospitals, 6 medical clinics and 2 mobile medical clinics. Turkish-built, equipped and operated health centers in Afghanistan provide free medical treatment to some 900 patients a day. The number of Afghans who received such medical treatment in these health centers has exceeded 650,000 so far. Turkey has also built and equipped 27 schools in various parts of Afghanistan which provide proper education to almost 37,000 Afghan students.

The Turkish Provincial Reconstruction Team (PRT) established in Wardak became operational in November 2006. The Wardak PRT carries out significant projects in order to contribute to the economic development and reconstruction of the province. It also provides training to the Afghan national police and auxiliary police forces in Wardak, organizes literacy courses for women and carries out capacity building projects and some humanitarian aid programs.

Consistent with its view towards enhancing and diversifying its relations and cooperation on a global scale, Turkey is exploring the ways and means to improve bilateral economic, cultural and political relations with Asian countries, particularly with China, India, Japan, South Korea and Australia.

On the basis of a “African Outreach Program”, Turkey has been intensifying its economic relations with African countries through new agreements, participation in African development projects and financial cooperation. In this spirit, Turkey became an observer country to the African Union in 2005. Turkey, under various cooperation schemes, is trying to share her experience in the fields of agriculture, health and environment from which African countries would benefit. The total trade volume between Turkey and African countries has amounted to nearly $12 billion in 2006, one third of which is with Sub-Saharan African countries. The total amount of direct investments by more than 350 Turkish companies in Africa have reached $400 million. Turkish construction firms have undertaken nearly $17.3 billion worth of projects most of which are in various North African countries. The Turkish Eximbank, under certain conditions, supports these projects with special credit programmes directed towards Africa. The Turkish Airlines (THY) is flying to Khartum, Addis Ababa and Dakar which is encouraging for the further development of economic and commercial relations between Turkey and African countries. TIKA (the Turkish International Cooperation Agency), the leading governmental agency in carrying out humanitarian and development aids abroad have opened offices in Addis Ababa, Khartum, and recently in Dakar. Turkey’s technical preparations for the non-regional membership of Turkey to the African Development Bank (ADB) are under way. Turkey is working closely with the Organization of the Islamic Conference (OIC) and the Islamic Development Bank (IDB) with a view to diversifying international support to Africa. Both the OIC and the IDB have given full support to this strategy. Turkey has signed a MoU with the IDB in May 2006 to devise and implement various social and economic projects in Africa and to support the financing of such projects to be undertaken by Turkish investors. Turkey is planning to organize an event in the shape of a high level gathering in the summer of 2008, to which Heads of State or Ministers of Foreign Affairs from Africa will be invited, to crown a long term Turkish action plan for Africa. Turkey also intends to work closely with intra-continental organizations such as the New Partnership for Africa’s Development

Since the late 1990’s, Turkey has been implementing an action plan for Latin America in order to foster closer relations with the Latin American and Caribbean states. In the preparation of this plan, special emphasis has been placed to develop economic and trade relations as well as to enhance political dialogue and diversify cultural and consular relations with the countries in the region.

The action plan, which has been implemented in close collaboration with the relevant public authorities and private organizations since then is regularly revised and updated in accordance with the changes in circumstances as well as achievements in this regard.

In implementing this plan, Turkey has concluded several bilateral agreements with the countries of the region in preparation of the legal framework of our relations in various fields and managed to enhance political, economic and cultural ties as well as defence cooperation with them. Turkey’s economic and trade relations with the countries of the region also displayed a remarkable increase and overall trade volume reached $3.2 billion in 2006.

In line with the action plan to foster bilateral relations with the countries in the hemisphere, Turkey has also obtained permanent nation status at the Organization of American States as well as the Association of Caribbean States, two outstanding political and

economic bodies in the region and signed framework cooperation agreements with these organizations with a view to identifying concrete cooperation areas in the future. Since then, Turkey has been participating in the Annual General Assemblies of these two organizations and contributes financially to their activities, especially in the fight against terrorism and the establishment of disaster relief operations as well as cultural programs.

Turkey is also in the process of establishing an organic relationship with CARICOM – The Caribbean Community- and to that effect Turkey recently submitted a draft framework cooperation text to the Secretariat of that organization for approval by member nations.

Turkey declared the year 2006 as the “Year of Latin America”, manifesting her growing interest in Latin American region. A new “Action Plan” was prepared and put into action, implementation of which will be effected in the following years for further enhancing and diversifying the relations between Turkey and the Latin American countries in various fields.

ECONOMY

BACKGROUND

After the 1980s, significant progress was made in Turkey towards establishing a full-fledged market economy. In this respect, a radical policy shift from government intervention and import substitution towards a greater reliance on market forces and trade liberalization became apparent. In order to complete this process, international capital markets were entirely liberalized in 1989. In addition, a Customs Union covering Turkey’s industrial product and the last stage of the association agreement between Turkey and the European Community both began in 1996. These reforms contributed significantly to the dynamic growth of the private sector and underpinned the flexibility of the Turkish economy to adapt to both internal and external factors. The success of those reforms implemented in Turkey is also reflected by the strong performance of the Turkish economy in the last decade despite the existence of an unfavorable international environment.

Turkey’s real GNP growth rate averaged approximately 4.4% during the period from 1995 to 2006. Over this period, the Turkish economy became more diversified. In particular, the industrial base was broadened, and exports of goods and services grew rapidly. In addition, financial markets expanded and became more sophisticated. Turkey’s external debt levels rose in absolute terms from $79.4 billion in 1996 to approximately $206.5 billion in 2006. See “Debt-External Debt and Debt Management.”

In addition to the registered economy, Turkey has an unregistered economy, which is substantial, though by definition unquantifiable, and has historically not been reflected in the statistics of the Republic. The unregistered economy, which is referred to as “shuttle trade”, includes significant amounts of activity in the agricultural sector and in trade with the Republic consisting of the Commonwealth of Independent States (“CIS”) (Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan and Ukraine). Consequently, trade and other figures may under-report the actual level of economic activity intended to be measured. The Government has been working with the World Bank to bring more untaxed economic activities within the scope of the registered economy, and therefore within the tax base of Turkey. Since 1996, the Government has developed a methodology to account for the portion of the unregistered economy relating to “shuttle trade” with the CIS republics. See “Foreign Trade and Balance of Payments-Current Account.”

At the end of December 2005, a bird flu outbreak began in the eastern portion of Turkey and rapidly spread westward, affecting more than one-third of Turkey’s 81 provinces. The Government has taken necessary actions, including the culling of poultry kept at small farms and by villagers, in an attempt to contain the outbreak and prevent the spread of the bird flu virus from suspected areas. The culling has not been extended to commercial poultry farms since there have been no cases of bird flu among poultry at such farms. The Government has launched an educational campaign urging people to avoid contact with domestic or wild birds and established a Bird Flu Coordination Centre, co-headed by the undersecretaries of the health and agriculture ministries, as part of Turkey’s efforts to deal with the outbreak. Turkey expects that these efforts will help reduce the number of new human cases of bird flu.

GROSS NATIONAL PRODUCT

After two consecutive financial crises in November 2000 and February 2001, GNP and GDP declined by 9.5% and 7.5% in real terms (at 1987 prices), respectively, in 2001. In 2001, total domestic demand decreased by 15.1% as net exports (exports minus

imports) increased by 12.3% in real terms (at 1987 prices) . The decline in GDP was partially offset by increases in net exports despite deep domestic demand deficiencies.

Following the severe financial recession in 2001, the economy recovered in 2002 and GDP increased 7.9%. In 2002, value added increased 6.9% in the agriculture sector, 9.4% in the industrial sector and 7.5% in the services sector. Economic growth was mainly in stock building and foreign demand. Domestic demand increased 1.7% and the contribution of stock building to GDP growth was 7.1% in 2002. Private consumption increased 2.1% in 2002, but private fixed investment declined by 5.3% in 2002. The growth of the Turkish economy since 2002 demonstrates Turkey’s increasing economic stability.

Economic growth was robust in 2003 as the GDP growth rate was 5.8%, which exceeded the target. Economic growth was driven by exports, improved consumer and business confidence and reduced interest rates. As a result of severe weather conditions and drought, agricultural value added declined by 2.5% in 2003. Value added in the industry and service sectors increased by 7.8% and 6.7%, respectively, in 2003. Export growth fueled confidence and induced private consumption and investment. Reductions in government consumption and investment and the net negative contribution of foreign trade as a result of growing imports did not hinder the economic recovery. In 2003, private consumption and private fixed investment increased by 6.6% and 20.3%, respectively.

In 2004, GDP increased by 8.9%, surpassing the program target level. GDP growth was spurred by increases in private sector fixed investments and consumption expenditures, respectively caused by a 60.3% increase in machinery equipment investment and rises in durable and semi-durable goods from delayed demand. Due to high domestic demand for imported goods and services, growth was negative in net exports of goods and services. Also, due to a tight fiscal policy in 2004, neither public investments nor public consumption contributed positively to GDP growth.

In 2005, GDP increased by 7.4% which is above the program target level of 5%. Private sector fixed investments and consumption expenditures play an important role in this GDP growth, particularly the 21.4% increase in machinery equipment investment, 29.9% increase in building construction and 15% increase in durable goods. Similar to 2004, due to high domestic demand for imported goods and services, the contribution of net exports of goods and services is negative.

In 2006, GDP increased by 6.1% which is exceeding the program target level of 5%. Private sector fixed investments and exports of goods and services play an important role in this GDP growth, particularly the 13.9% increase in machinery equipment investment and 26.4% increase in building construction. In 2006, for the first time since 2002, the contribution of net exports of goods and services realized as positive.

The following table presents the components of real GNP and related figures for the years indicated:

Table No. 2

Gross National Product
(in thousands of YTL unless otherwise indicated)


	2002			2003		2004		2005		2006(1)
At constant 1998 prices²
GNP		52,188			55,251		60,698		65,338		69,258
Foreign balance		(734	)		675		2,692		3,495		4,447

Total domestic demand		51,454			55,926		63,390		68,833		73,705

Allocation of Domestic Demand
Fixed Investment
Public		3,227			2,949		2,816		3,866		3,914
Private		5,323			6,514		9,429		11,519		13,137

Total fixed investment		8,550			9,463		12,245		15,385		17,051
Consumption
Public		6,474			6,415		6,529		6,721		7,391
Private		34,286			36,329		40,302		43,975		47,331

Total consumption		40,760			42,744		46,831		50,696		54,722


²		Price set for 1998 for GNP figures was developed by the SPO and is used the in national program. Price set for GDP figures is not available.


GNP (at current prices)	275,032,366	356,680,888	428,932,343	486,401,032		575,783,962
Turkish Lira/U.S. dollar (annual average)	1,504,598	1,495,307	1,422,511	1.3408	(2)	1.4311
GNP (at current prices, millions of dollars)	182,795	238,534	301,532	362,769		402,337
Population (mid-year, in thousands)	69,302	70,231	71,152	72,065		72,974
Per capita GNP (at current prices, in dollars)	2,634	3,390	4,227	5,034		5,513


(1)		Estimate.

(2)		YTL. Since 2005, a new Turkish lira has been used. 1YTL=1 million TL

Source: SPO.

GROSS DOMESTIC PRODUCT

There has been a significant change in the structure of economic activity in Turkey since the 1980s. The share of the industrial sector in GDP rose in the 1980s and has remained relatively stable in the 1990s. The share of the agricultural sector in GDP fell throughout the 1980s but has been relatively stable in the 1990s. The share of the services sector has continued to increase in the 1980s and 1990s.

In 2006, GDP increased by 6.1%, compared with an increase of 7.4% in 2005. The industrial sector, which includes mining, manufacturing and energy, accounted for 25.6% of GDP in 2006, compared with 25.4% in 2005. In 2006, the agricultural sector’s share of GDP was 9.2%, compared with 10.3% in 2005, and the services sector was 65.2% of GDP in 2006, compared with 64.4% in 2005. GDP was YTL 576.3 billion ($400 billion) in 2006 at current prices.

The following table presents changes in the composition of GDP at current prices for the periods indicated:

Table No. 3

Composition of GDP by Sector
(at current prices)


	2001		2002		2003		2004		2005		2006
	*(percentage of total)*
Agriculture		12.1		11.6		11.7		11.2		10.3		9.2
Industry		25.7		25.2		24.7		24.9		25.4		25.6
Mining		1.2		1.0		1.1		1.2		1.4		1.2
Manufacturing		20.6		20.1		20.0		20.4		20.8		21.1
Energy		3.9		4.1		3.6		3.3		3.2		3.3
Services		62.2		63.2		63.6		63.9		64.4		65.2
Construction		5.2		4.1		3.5		3.6		4.4		5.3
Trade		21.0		20.2		19.8		20.6		20.5		20.4


	2001		2002		2003		2004		2005		2006
	*(percentage of total)*
Transportation and communications		15.8		15.1		15.0		14.4		14.7		14.0
Government		10.4		10.0		10.2		9.9		9.8		9.5
Other		9.8		13.8		15.1		15.4		15.0		15.2
GDP Total		100.0		100.0		100.0		100.0		100.0		100.0


Source: TURKSTAT.

The following table presents real growth in output for GDP for the periods indicated:

Table No. 4

GDP Growth by Sector
(at 1987 prices)


	2001			2002			2003			2004		2005		2006
	*(by percentage)*
Agriculture		(6.5	)		6.9			(2.5	)		2.0		5.6		2.9
Industry		(7.5	)		9.4			7.8			9.4		6.5		7.4
Mining		(8.8	)		(4.4	)		(2.9	)		2.6		12,8		4.8
Manufacturing		(8.1	)		10.4			8.6			10.1		6.1		7.4
Energy		(2.1	)		8.0			5.7			6.1		7,5		8.7
Services		(7.7	)		7.5			6.7			10.2		8.2		6.1
Construction		(5.5	)		(5.6	)		(9.0	)		4.6		21.5		19.4
Trade		(9.4	)		11.0			8.1			12.8		7.4		5.9
Transportation and communications		(5.3	)		6.0			8.4			6.8		8.8		3.1
Government		1.6			0.7			0.8			1.2		0,8		2.0
Other		(11.0	)		10.7			10.1			—		—		—
GDP Total		(7.5	)		7.9			5.8			8.9		7.4		6.1


Source: TURKSTAT.

PRINCIPAL INDUSTRIES

Turkey has a well-developed and increasingly diversified industrial sector. Since 1995, industrial production has increased primarily as a result of the expansion of domestic demand since the second quarter of 1995. In addition, decreased import costs as a result of the Customs Union with the EU and an increase in investment contributed to the rapid growth of industrial production.

In February 2001, Turkey entered into a deep recession. Capacity utilization rates in private manufacturing industry decreased to 66.7%, compared to 74.4% in 2000. In 2001, the industrial sector value added decreased by 7.5%. This decline in industrial production stemmed primarily from the contraction in domestic demand and a decrease in imports. As a result, private sector industrial production declined by 10.7% in 2001. In the same year, the industrial sector accounted for 25.7% of GDP and 17.5% of total civilian employment.

In 2002, the economy began another growth period. The industrial sector value added increased by 9.4%, resulting mainly from the 13.4% increase in private sector industrial production. The industrial sector accounted for 25.2% of GDP and 18.5% of total civilian employment in 2002.

In 2003, the industrial sector value added increased by 7.8%. In the same year, value added increased by 8.6% in the manufacturing industry, resulting mainly from the 13.3% increase in production in private sector manufacturing. In 2003, the industrial sector accounted for 24.7% of GDP and 18.2% of total civilian employment.

In 2004, total industrial production and manufacturing industry production increased by 9.8% and 10.4%, respectively, compared to the same period in 2003. The capacity utilization rate for Turkey’s private manufacturing sector rose to 79.9% and the industrial sector value added increased by 9.4%. In the same year, value added increased by 10.1% in the manufacturing industry, resulting mainly from the 12.8% increase in production in the private manufacturing sector. The industrial sector accounted for 24.9% of GDP and 18.4% of total civilian employment in 2004.

The industrial sector value added increased by 6.5% in 2005. Total industrial production increased by 5.4% and the private sector capacity utilization ratio was approximately 78.9%. In the same year, value added increased by 6.1% in the manufacturing industry, resulting mainly from the 5.3% increase in production in the private manufacturing sector. The industrial sector accounted for 25.4% of GDP and 19.4% of total civilian employment (excluding construction) in 2005.

The industrial sector value added increased by 7.4% in 2006. Total industrial production increased by 5.8% and the private sector capacity utilization ratio was approximately 79.7%. In the same year, value added increased by 7.4% in the manufacturing industry, resulting mainly from the 5.5% increase in production in the private manufacturing sector.

The following table presents industrial output for selected products for the periods indicated:

Table No. 5

Industrial Output


	Years								% Change
	2002		2003		2004		2005		2006		2003/02			2004/03			2005/04			2006/05
	*(in thousands of metric tons, unless otherwise indicated)*
Mining
Hard Coal(1)		3,132		2,998		2,843		3,050		3,071		(9.5	)		(5.2	)		7.3			0.7
Lignite(1)		48,187		42,938		39,223		55,626		61,006		(10.9	)		(8.7	)		41.8			9.7
Crude Oil		2,440		2,375		2,276		2,281		2,175		(2.7	)		(4.2	)		0.2			(4.6	)
Manufacturing
Filtered Cigarette (tons)		131,366		111,859		106,738		104,106		128,278		(14.8	)		(4.6	)		(2.5	)		23.2
Raki & Beer (Milliters)		796		841		867		938		944		5.7			3.0			8.2			0.7
Sulfuric Acid		630		546		283		165		174		(13.3	)		(48.2	)		(41.7	)		5.6
Polyethylene (tons)		201,380		191,034		191,683		273,588		384,565		(5.1	)		0.3			42.7			40.6
PVC+PCC Comp (tons)		156,539		139,974		156,584		133,266		135,097		(10.6	)		11.9			(14.9	)		1.4
LPG (Liquified Petroleum Gas)		758		774		775		767		801		2.1			0.2			(1.0	)		4.4
Naphtha		1,525		1,378		1,638		1467		1,528		(9.6	)		18.9			(10.4	)		4.1
Gasoline		3,831		3,621		3,575		3,734		3,761		(5.5	)		(1.3	)		4.4			0.7
Gas Oil		7,736		8,086		7,673		7,549		7,617		4.5			(5.1	)		(1.6	)		0.9
Fuel-Oil		6,835		6,888		6,979		6,389		6,192		0.8			1.3			(8.5	)		(3.1	)
Bottles & Glass Articles		1,242		1,315		1,229		1,058		—		5.9			(6.6	)		(13.9	)		—
Crude Iron		5,012		5,694		5,836		—		—		13.6			2.5			—			—
Steel Ingot		16,046		17,644		19,859		0		—		10.0			12.6			—			—
Blistered Copper (tons)		19,375		14,425		11,860		0		—		(25.5	)		(17.8	)		—			—
Alumina (tons)		152,869		162,174		169,991		112,558		140,089		6.1			4.8			(33.8	)		24.5
Cement		32,577		35,077		38,019		41,669		47,935		7.7			8.4			9.6			15.0
Tractor (No.)		10,371		29,288		38,240		38,155		42,496		182.4			30.6			(0.2	)		11.4
Automobile (No.)		259,812		425,409		617,771		635,137		755,743		63.7			45.2			2.8			19.0
Truck (No.)		12,223		18,707		31,125		39.324		35,142		53.0			66.4			26.3			(10.6	)
Bus and Minibus (No.)		15,506		43,458		64,006		64,230		52,347		180.3			47.3			0.3			(18.5	)
Energy
Electrical Energy (Millions of Kwh)		129,367		140,129		149,881		161,741		175,405		8.3			7.0			7.9			8.4
Value Added in Industry (At 1987 Prices) (Billions of TL)		34,142		36,793		40,234		42,840		46,027		7.8			9.4			6.5			7.4


(1)		Pithead production.

		Sources: TURKSTAT, SPO.

ENERGY

Geographically, Turkey is in close proximity to 70% of the world’s energy resources. In 2006, Turkey imported 72% of its total energy requirements. In 2006, petroleum imports constituted 38.5% of total energy consumption. In addition, in 2005, Turkey imported 13.5 million metric tons oil equivalent of coal and 24.3 million metric tons oil equivalent of natural gas.

In 1989, approximately 64% of Turkey’s crude oil imports came from Iraq. Following the UN’s embargo on Iraq, Turkey met its oil import needs from other sources, principally Saudi Arabia and Iran, although the cost (including transportation costs) of such imports increased substantially. After 1995 and until the US-led invasion in 2003, Iraq was permitted to sell a limited amount of oil in exchange for food, medicine and other humanitarian products. In 2006, 2.8% of Turkey’s crude oil imports originated from Iraq, compared to 4.2% in 2005.

The following table presents Turkey’s oil imports by sources for the years indicated:

Table No. 6

Oil Imports (million tonnes)


	2001		2002		2003		2004		2005		2006
Iraq		563		1,238		1,255		1,389		976		539
Iran		4,894		4,539		7,029		5,968		6,887		8,535
Libya		4,414		3,900		4,580		4,906		4,540		4,310
Saudi Arabia		3,525		3,865		3,868		3,450		3,494		3,488
Russia		4,582		3,927		4,565		6,334		6,997		6,800
Syria		2,432		2,404		1,430		1,029		324		—
Algeria		80		267		240		397		—		—
Egypt		—		103		74		—		—		—
United Arab Emirates		—		—		—		—		—		—
Tunisia		71		65		43		—		—		—
Azerbaijan		—		—		33		28		141		85
Georgia		141		—		—		29		31		—
Kazakhstan		43		—		22		150		—		—
Italy		—		504		395		150		—		30
Others		2,497		2,850		563		—		—		—

Total Crude Oil Imports		23,243		23,662		24,096		23,830		23,390		23,787
Petroleum Products Imports		5,792		7,534		8,111		9,715		10,404		11,811


Source: Ministry of Energy and Natural Resources (MENR)

Energy development and power generation have been priority areas for public investment. In particular, Turkey is developing hydroelectric sources and embarked on a power and irrigation project (known as “GAP”) in Southeastern Anatolia in the early 1980s. The project region covers an area of 27,340 square miles, which corresponds to 9.5% of the total area of Turkey. GAP is a combination of 13 major installations primarily for irrigation and hydroelectric power generation. The project includes the construction of 22 dams and 19 hydroelectric power plants on the Euphrates and the Tigris rivers and their tributaries. It is planned that upon completion of GAP, approximately 1.8 million hectares (4.5 million acres) of land will be irrigated, and its power generating capacity will be approximately 7,500 MW (megawatt). The total cost of GAP is expected to be $24.5 billion (excluding expropriation and overhead costs). The installed capacity of GAP hydropower plants in operation was 5537 MW as of December 31, 2006 (74% of the total installed capacity of GAP). In addition, as of December 31, 2005, approximately 13% of the total irrigation was completed, 8% was under construction and 79% was at the planning and final design level.

Market Reform and Restructuring

Turkey has achieved significant progress in establishing competitive market structures in the energy sector by increasing overall economic efficiency and encouraging new entry and investments since 2001. The Energy Market Regulatory Authority (EMRA), established in 2001, regulates the electricity, natural gas, petroleum and LPG markets as per the provisions of the Market Laws. Independent market regulation and supervision, as provided by EMRA, is intended to ensure a sufficient supply of quality, low cost energy in a reliable manner.

Natural Gas

Natural gas has been used extensively for power generation in Turkey since the late 1980s. Turkey is utilizing natural gas to an increasing extent, both from its own reserves and from abroad, having established long-term purchase contracts with the Russian Federation, Algeria, Nigeria, Iran and Azerbaijan. Turkey has very limited domestic gas reserves and national gas production represents approximately 3% of the total domestic demand. Consequently, nearly 97% of natural gas demand is satisfied by the Petroleum Pipeline Corporation of Turkey (BOTAŞ), which is Turkey’s sole natural gas importer. At present, BOTAŞ has 8 long-term sale and purchase contracts with 6 different supply sources.

In 2006, primary natural gas supply amounted to 30,8 bcm (billion cube meters) or approximately 27% of Turkey’s total energy supply. By the end of 2006, plants fired by natural gas represented 34% of the total installed capacity and 44% of Turkey’s total power generation. Distribution is carried out by local distribution companies. At present, six major cities are supplied with natural gas (Ankara, Istanbul, Bursa, Izmit, Eskisehir and Adapazari).

Turkey began importing 6 bcm of natural gas from the former Soviet Union in 1987 under a contract signed in 1986. Another contract was signed in 1998 for the supply of 8 bcm of natural gas from the Russian Federation through the western pipeline. Also, in 1997 a Natural Gas Sale and Purchase Contracts were signed for the supply of 16 bcma (billion cube meters per annum) of Russian gas to Turkey through the Black Sea.

In order to diversify the natural gas supply sources and increase the supply security of Turkey, Turkey and Algeria entered into a 20-year term LNG (liquified natural gas) Purchase Agreement in 1988. In 1995, an amendment to the agreement with Algeria was signed to increase the import volume from Algeria from 2 bcma to 4 bcma. In addition, BOTAŞ and Nigeria signed an LNG Sale and Purchase Contract in 1995 for 1.2 bcma of natural gas equivalent of LNG. Turkey and Iran entered into a Natural Gas Sale and Purchase Agreement in 1996 for the supply of 10 bcma of Iranian natural gas to Turkey. Turkey has also entered into a Natural Gas Sale and Purchase Contract with Turkmenistan in 1999 for the supply of 16 bcm of Turkmen gas to Turkey but the project has not been put into operation yet. A Natural Gas Sales and Purchase Contract between Turkey and Azerbaijan was signed in 2001 for the supply of 6.6 bcm of Azeri gas to Turkey

A Natural Gas Sales and Purchase Agreement for the delivery of 4 bcma Egyptian natural gas to Turkey by an offshore pipeline was initiated with Egypt in 2001. Currently, The Egyptian Government plans to supply natural gas to Turkey under “The Arab Natural Gas Pipeline Project”. Turkey also has an agreement for transporting 10 BCMA of Iraqi natural gas to Turkey after the development of the gas fields in Iraq. Due to the UN embargo on Iraq and prevailing political uncertainties in Iraq, it was not possible to attain desired progress in the Project. Currently, the Project is being evaluated in order to supply natural gas to Europe via Turkey.

In 2006, Turkey imported 19.7 bcm of natural gas from the Russian Federation and 5.7 bcm of natural gas from Iran. Turkey also imported 4.2 bcm and 1.2 bcm of natural gas equivalent of LNG from Algeria and Nigeria, respectively.

Recent analyses suggest that natural gas demand will increase parallel to the growth expected in primary energy demand. Forecasts currently indicate that natural gas demand will reach 44.5 bcm in 2010 and 66.6 bcm in 2020.

Turkey’s domestic natural gas transmission system is approximately 9,301 km in length. The length of national transmission network is planned to reach approximately 11,875 km, enabling the delivery of natural gas to all city centers in the following five years.

The Natural Gas Market Law was enacted on May 2, 2001 to foster competition in natural gas sector. Pursuant to the Law, the BOTAŞ monopoly structure will be gradually decreased, supply, transmission and distribution activities in the natural gas market will be organized and current legislation and applications will be harmonized with EU regulations. According to the law, companies are able to import, export, wholesale, transmit, distribute and store natural gas after obtaining a license from EMRA. Free entry in all segments of the market began in November 2002. See “Restructuring the Electricity Sector” below.

In the framework of the Natural Gas Market Law, six separate tenders for partial transfer of the existing natural gas sale and purchase contracts with all its rights and obligations were realized on November 30, 2005. BOTAŞ is currently conducting studies to finalize partial transfer of the natural gas sale and purchase contract dated February 18, 1998 whose delivery point is at the Bulgarian border and the seller of which is Gazprom Export Limited Liability Company.

Restructuring the Electricity Sector

Significant steps have been made recently towards a fundamental restructuring of the electricity sector. The new Electricity Market Law came into effect in March 2001, with the objective of developing a transparent and competitive electricity market, achieving stability of supply, and ensuring high quality and inexpensive electricity. The most important aspect of the restructuring is the central role of competition in ordering the market. The law provides a framework for the establishment of institutions and addresses the following structural regulations:

	•		Creates a new independent EMRA, governed by the Energy Market Regulatory Board, which is responsible for regulatory functions such as licensing, tariff setting and market monitoring.

	•		Requires participants in defined market segments (generation, transmission, distribution, wholesale (trading) and retail) to be licensed by EMRA. It also requires that separate accounts be maintained for each licensed activity and location, each with specific rights and obligations.

	•		Requires bilateral contracting between market participants, thus implying a residual balancing mechanism to operate the transmission system; a compulsory pool type wholesale market is excluded.

	•		Provides competition, which began in March 2003, for consumers directly connected to the transmission system or with annual consumption of more than 9 GWh (Gigawatt Hour). This eligibility threshold was redetermined in January 2005 as 6 GWh and in January 2007 as 3 GWh, which corresponds to approximately 39 % of the market at present. A 100% threshold is expected by 2011.

	•		Provides for non-discriminatory and regulated third party access to the electricity grid and distribution system.

Since September 3, 2002, the electricity market has been active and several regulations have been enacted as secondary legislation by EMRA.

The electricity sector in Turkey was dominated by two state-owned companies, the Turkish Electricity Generation and Transmission Company (“TEAS”) and the Turkish Electricity Distribution Company (“TEDAS”). Further structural separation of TEAS into three separate companies covering generation, trading and transmission activities was implemented on October 1, 2001. The companies, Turkish Electricity Transmission Corp. (“TEIAS”), Electricity Generation Corp. (“EUAS”) and Turkish Electricity Trading and Contracting Corp. (“TETAS”) are now legally in operation.

Several models such as the Build-Operate-Transfer (the “BOT Model”), the Build-Own-Operate (the “BOO Model”) and, the Transfer of Operating Rights (the “TOOR Model”) were developed previously to provide effective means to attract foreign and domestic investment. There are 24 plants in operation based on the BOT Model with total capacity of 2449 MW, whereas approximately 6102 MW of capacity was built through the BOO Model. Two plants comprising a total of 650 MW of capacity are producing electricity based on the TOOR Model. However, the desired outcome was not obtained through application of these models and they were abolished pursuant to the provisions of the new Electricity Market Law, which envisages a competitive electricity market.

Auto-production (is related to Law No. 3096 by Decree No. 85/9799) which allows the MENR to grant permission for industrial plants, residential complexes with more than 5000 dwellings, five star hotels, industrial zones, universities and municipal institutions to generate their own electricity. At present, approximately 185 auto-producer plants generate an annual power output corresponding to approximately 8.2% of Turkey’s total electricity generation and 79 Independent Power Producers (‘IPP’) generating 3145 MW which constitutes approximately 8.6 % of Turkey’s total electricity generation.

Turkey consumed 174 billion kilowatt-hours (kWh) of electricity in 2006. Installed capacity has reached approximately 40.9 GW (Gigawatt). According to the demand forecast for the short to medium term, significant growth rates in demand (7-8% per annum) is expected in the coming years, which implies the need for substantial new capacity to ensure security of supply.

According to forecasts, Turkey will need 53 GW of new capacity by 2020 according to the high demand scenario. The low demand scenario will necessitate 37 GW of new capacity addition. Turkey attaches utmost importance to utilization of the remaining lignite and hydro potential in a cost-effective manner. Further diversification in electricity supply in fuel types and technologies is a priority in this context.

With the enactment of the Electricity Market Law, incentives for the development of renewable energy have been promoted. In this context, a separate Law was enacted in May 2005 to promote renewable-based electricity generation within the market. The Law introduces feed-in tariffs and purchase obligations for distribution companies from certified renewable energy producers. However, the feed-in tariff system is only a transition scheme and market-based mechanisms are expected to be used eventually. Furthermore, a $200 million Renewable Energy Project Loan provided by the World Bank was signed in May 2004 and is available for investors seeking to generate electricity from renewable energy sources.

The current structure resulting from efforts to increase private sector participation in the power sector is a critical issue at the current stage of the transition to a fully competitive market framework. Studies on privatization are underway and the privatization process is expected to begin in the distribution sector, followed by the generation sector. Transmission ownership and market operation functions is expected to remain under Government control through the Turkish Electricity Transmission Co. (“TEİAŞ”), as a result of the monopolistic nature of the transmission activity.

Electricity Interconnections

Turkey already has the following existing interconnections with neighboring countries:

	•		Bulgaria: two interconnections, each 400 kV (kilovolt)

	•		Azerbaijan (Nahcievan): one interconnection 154 kV

	•		Iran: two interconnections, one at 400 kV and the other at 154 kV

	•		Georgia: one interconnection at 220 kV and a 400 kV Tie Line and DC Back to Back Station at Akhaltskhe SS is under consideration.

	•		Armenia: one interconnection at 220 kV (which is not currently functioning because the 220/154 kV transformer in Kars (Turkey) has been removed)

	•		Syria: one interconnection at 400 kV

	•		Iraq: one interconnection at 400 kV (currently energized at 154 kV)

	•		Greece: one interconnection at 400 kV (Greek side is in under construction phase) Turkish side has been finished. In the existing situation it is energized at 154 kV.)

Although Turkey is connected to all these countries, none of the interconnectors can be operated with a synchronous parallel mode of operation. The synchronization of the Turkish power system with neighboring countries in the East and Southeast is not possible at this time for technical reasons. However, technical studies for the synchronization of the Turkish power system with Union for the Coordination of Transmission of Electricity (“UCTE”) through interconnectors with Bulgaria are at the first stage and studies relating to the Greece interconnectors are at the second stage.

In addition to technical problems, it is unlikely that the Turkish power system will synchronize with any of its Eastern and Southeastern neighbors except Syria because the UCTE has very strict rules for the extension of the interconnected network. The synchronization of the Turkish and Syrian power systems is within the scope of the Mediterranean Electric Ring (“MEDRING”) study, which is being undertaken with the financial support of the EU, and is designed to investigate the synchronization of all power systems in the vicinity of the Mediterranean.

If the outcome of the MEDRING study is positive and UCTE approves it, synchronization in Turkey may be possible in the future.

Because of the lack of synchronicity among the Turkish Power System and the Neighboring Countries Power Systems, according to Import-Export Regulation, as far as the technical aspects are concerned, it is only possible to operate the Turkish electricity system together with the electricity systems of the other countries as follows:

Import:

Synchronized parallel operation, or

	o		Directed unit mechanism is in compliance with the Grid Code and/or Distribution Regulation

	o		A synchronized parallel (DC) operation

Export (in addition to the above conditions):

Isolated Region Operation

Currently:

	•		500 million kWh/year of energy is imported at 70 MW peak power from Turkmenistan to Turkey via Iran through the 400 kV Iran (Khoy)-Baskale (Turkey) interconnection line;

	•		400 million kWh/year of energy is exported at 30-40 MW peak power from Turkey to Nahcievan through the 154 kV Igdir (Turkey)-Babek (Nahcievan) interconnection line; and

	•		Approximately 1,700 million kWh/year of energy is exported at 100 MW peak power from Turkey to Iraq through the 400kV Turkey (PS3)-Iraq (Zakho) interconnection line which is energized at 154 kV.

Crude oil and natural gas pipeline projects

As the energy bridge between the East and West, Turkey participates in various regional and inter-regional interconnection projects to meet its own energy demand and to act as an important actor in transportation of hydrocarbons

As an economically feasible and environmentally sound project for the transportation of crude oil produced mainly in the Azeri-Chirag-Guneshli offshore fields of Azerbaijan developed by AIOC, the Baku-Tbilisi-Ceyhan Crude Oil Pipeline is under the sponsorship of a group of petroleum companies (currently BTC Co., formerly known as MEP Participants) led by BP Exploration (Caspian Sea) Ltd. Other current shareholders are SOCAR, Unocal BTC Pipeline Ltd, Statoil BTC Caspian As, TPAO, ENI, TotalFinaElf, Itochu Oil Exploration (Azerbaijan) Inc., INPEX, ConocoPhillips, and Amerada-Hess (“BTC”) Ltd. The Intergovernmental Agreement among the The Azerbaijan Republic, Georgia and the Republic of Turkey and the Host Government Agreements between the governments of Azerbaijan, Georgia, Turkey and the MEP Participants, constitute the legal framework for the project.

BOTAS, as a lump sum turn-key contractor, undertook the basic engineering studies, the detailed engineering stage and the Land Acquisition and Construction phase of the project.

The Basic Engineering studies, which began on June 15, 2000, were completed successfully on May 15, 2001. The Detailed Engineering studies began on June 19, 2001 and were officially completed on August 28, 2002. The Land Acquisition and Construction phase of the Project was initiated on August 29, 2002. All contracts relating to pipeline, pump stations, export terminal, scada and telecommunications and all main supply contracts (Line Pipe, Line Valves, Pumps & Drivers, Metering Systems, etc.) were awarded on September 20, 2002. The construction of the Baku-Tbilisi-Ceyhan Pipeline has already been completed. Since June 4, 2006, the BTC pipeline has been in commercial operation. As a result of tremendous efforts exerted to complete the pipeline, initial oil supplies reached Ceyhan Marine Terminal (CMT) on May 28, 2006 and the line was commercially commissioned the first tanker was lifted on June 4, 2006. Moreover, BTC is ready to provide its transport infrastructure for the delivery of the Kazakh oil to world markets. The negotiations between Azerbaijan and Kazakhstan were concluded with an agreement signed by the parties on June 17, 2006.

The Provisional Acceptance of the Project was given on July 28, 2006 and 245 tankers which amounts to 201,965,000 barrels of oil will be loaded by September 6, 2007. The BTC Pipeline, as the pioneer of the east-west hub to connect energy supplies in the Caspian region and Central Asia to Western markets, has a capacity of 50 million tons of crude oil per annum and is expected to remain operational for 40 years with possible extensions of two subsequent 10 years periods. Between the 1^st and 16^th years of operation, the expected revenues from “transit fees and operational services” are estimated to be around $ 140 — 200 million whereas these revenues are estimated to increase to $200-300 million. As the capacity of BTC reaches 50 million tonnes a year, the revenues from BTC will surpass the revenues of the Kirkuk-Yumurtalik pipeline. Apart from the direct economical gains, the project has increased employment opportunities for the indigenous people. More importantly, with the realization of BTC, risks surrounding the overcrowded Turkish straits are diminishing.

The South Caucasus Natural Gas Pipeline (SCP) in parallel with BTC is expected to carry the first non-Russian gas from the region to Europe. SCP represents the opening of the fourth natural gas artery for continental Europe and beyond. The construction of

the Baku-Tbilisi- Erzurum BTE (South Caucasus Pipeline) Natural Gas Pipeline Project will be completed in July 2007. In this respect, 6.6 bcm of natural gas is expected to be transported to Turkey over 15 years.

The EU Commission has assessed the strategic potential of Turkey in transporting oil and gas to European markets. The framework of the EU program is anticipated to initiate activities for a gas pipeline between Turkey and Greece with the objective of establishing the South European Gas Ring which would allow for the resources of the Caspian basin, Russia, the Middle East, Southern Mediterranean countries and other international sources to flow through Turkey to European markets.

As the first step of the South European Gas Ring Project, the Interconnector Turkey-Greece (“ITG”) project was started in July 2000. The economic feasibility study of the Project was completed in March 2002. The EU Commission agreed to finance 50% of the cost of engineering and studies of the Interconnector Turkey-Greece Project. The Grant Agreement was signed in December 2002. The Intergovernmental Agreement was signed on 23 February 2003 and the Natural Gas Sale and Purchase Agreement was signed on 23 December 2003. Engineering studies of the Turkish section were completed at the end of 2003. The land acquisition and construction phase started on July 3, 2005. Following the completion of the pipeline, the first gas delivery to Greece is due start in late September 2007. The interconnection line between the two countries is expected to be extended to Europe through multiple routes.

The studies between BOTAŞ, the Italian firm EDİSON and DEPA have been started in order to expand the Turkey-Greece Natural Gas Pipeline Project to Italy, by a pipeline passing through the Adriatic Sea. The Interconnector Turkey-Greece Project will likely become the Interconnector Turkey-Greece-Italy Project in the near future. The feasibility studies regarding the connection to Italy were completed. The agreement was signed on December 31, 2006 by DEPA and EDISON for the investment of Adriatic cross of the line. Trilateral intergovernmental agreement (IGA) is signed for the Interconnector Turkey-Greece-Italy (ITGI) on July 26, 2007.The line is expected to be operational in 2012 with a natural gas flow of 6 bcm. Such gas flow is expected to be increased to 11.6 bcm in 2014.

In addition to that, the intergovernmental agreement “Among the Republic of Turkey, the Hellenic Republic and the Italian Republic Concerning the Development of The Turkey-Greece-Italy Gas Transportation Corridor” was signed among the Governments of the three Countries on July 26, 2007. With this key agreement, further studies on extension of the Turkey-Greece natural gas interconnector pipeline to Italy has gained momentum under the full support of the involved governments. In the plateau period, the pipeline is expected to deliver 3.6 and 8 bcma of gas to Greece and Italy, respectively.

As an additional corridor, in April 2003, BOTAS and DEPA signed protocols with the gas companies of Bosnia-Herzegovina, Croatia, Slovenia, Serbia-Montenegro, Macedonia and Albania.

A route, which is planned to pass through Bulgaria, Romania, Hungary and Austria (the NABUCCO Project), will be another of Turkey’s transport routes to Europe. To this end, BOTAS is cooperating with OMV Gas of Austria, MOL of Hungary, Transgaz of Romania and Bulgargaz of Bulgaria. In October 2002, the Cooperation Agreement was signed by the five companies in Vienna to start technical and financial studies. Technical and economical feasibility studies of the NABBUCO Project were completed at the end of 2004 with the financial support of EU TEN Funds. The project is expected to ultimately transport up to 25.5 to 31 bcma of natural gas from sources to the east of Turkey especially Caspian Region and the Middle East through the transit countries of Bulgaria, Romania and Hungary. Total length of pipeline is expected to be approximately 3,300 km. The pipeline is expected to be operational by 2012.

Upon the realization of the Turkey-Greece-Italy and NABUCCO natural gas pipeline projects, Turkey will become the fourth artery in EU gas supplies.

In addition to the current oil pipeline, in order to transport oil extracted from the Black Sea, Caucasus and Caspian region to the Mediterranean a new oil pipeline, named Samsun – Ceyhan is planned for construction. This pipeline includes achieving activities defined below:

	o		To charge the oil transported by tankers to the pipeline via a new terminal constructed in Samsun;

	o		To transport oil from Samsun to the current terminal in Ceyhan by a long pipeline;

	o		To charge oil coming from pipeline to new tanks constructed adjacent to current tanks field in Ceyhan terminal; and

	o		To load the oil in tanks to oil tankers.

The certificate of Samsun-Ceyhan Oil Pipeline has been granted to Çalık Energy Cooperation. The certificate was approved by Council of Ministers on April 10, 2006. Eni International B.V. became a partner to 50% of the pipeline on November 17, 2006. The pipeline has 55 million ton/year capacity, (maximum 70 million ton/year)and its length is 660 km.

In Ceyhan Region where the pipeline specified above ends, studies on the construction of the refinery, LNG, Petrochemical industry facilities under the framework of the pipeline are currently ongoing.

The following table presents Turkey’s energy supply (by resource) for the years indicated:

Table No. 7


	Energy Supply
	2001				2002						2003						2004				2005				2006 (3)
	MTOE		% of		MTOE			% of			MTOE			% of			MTOE		% of		MTOE		% of		MTOE			% of
	(1)		total		(1)			total			(1)			total			(1)		total		(1)		total		(1)			total
Domestic Production
Petroleum		2.7		3.5		2.5			3.2			2.5			3.0			2.3		2.6		2.2		2.3		2.2			2.4
Coal		12.9		17.0		11.8			15.0			11.0			13.1			10.6		12.1		13.4		14.4		13.0			14.0
Hydroelectric		2.1		2.7		2.9			3.7			3.0			3.6			4.0		4.6		3.6		3.9		3.8			4.1
Natural Gas		0.3		0.4		0.3			0.4			0.5			0.6			0.6		0.7		0.4		0.4		0.7			0.7
Other		7.3		9.6		7.2			9.1			7.0			8.3			6.9		7.9		7.3		7.8		6.9			7.4
		25.3		33.2		24.7			31.4			24.0			28.6			24.4		27.9		26.9		28.8		26.6			28.6

Imports
Petroleum		30.7		40.4		32.9			41.8			34.0			40.5			35.3		40.3		33.8		36.3		35.6			38.5
Coal		6.7		8.9		9.6			12.2			12.2			14.5			12.3		14.1		13.5		14.5		10.6			11.4
Electricity		0.4		0.5		0.3			0.4			0.1			0.1			0.0		0.0		0.1		0.1		0.5			0.5
Natural gas		14.9		19.6		15.8			20.0			18.9			22.5			19.8		19.8		24.3		26.1		26.7			28.8
		52.7		69.4		58.6			74.4			65.2			77.6			67.4		77.1		71.7		77.0		73.4			79.2

Exports
Petroleum(2)		3.2		4.2		4.4			5.6			4.7			5.6			4.5		5.1		5.5		5.9		6.8			7.4
Electricity		0.0		0.0		0.0			0.0			0.0			0.0			0.1		0.1		0.2		0.2		0.2			0.2
		3.2		4.2		4.4			5.6			4.7			5.6			4.6		5.2		5.7		6.1		7.0			7.6
Stock changes		1.1		1.4		(0.1	)		(0.1	)		(0.6	)		(0.7	)		0.1		0.1		-0.3		-0.3		(0.1	)		0.1
Statistical error		0.2		0.3		(0.1	)		(0.1	)		0.1			0.1			0.1		0.1		0.1		0.1		0.1			0.1
Total Supply		76.0		100.0		78.7			100.0			84.0			100.0			87.5		100.0		93.0		100.0		92.6			100


(1)		Million metric tons of oil equivalent. Calorific unit of energy is taken as 860 kcal/10 kwh.

(2)		Includes marine bunkers.

(3)		Preliminary data.

Source: MENR

AGRICULTURE

Although the relative role of agriculture in Turkey’s economy has declined over the last decade, it remains an important sector. Moreover, agriculture plays an important role in supplying products to, and creating demand for, products of other sectors. Turkey’s principal agricultural products include wheat, sugar beet, barley, tobacco, grapes, figs, citrus fruits, olives and hazelnuts and tea.

Agriculture is one of the sectors that is targeted for structural reform under the Stand-By Agreement with the IMF and assistance from the World Bank. Agricultural sector changes in 1999 significantly affected pricing policy, support purchases and subsidies. Within this framework, indirect support policies (price and input subsidies) were phased out at the end of 2002 and replaced with direct income support. Wheat prices were set closer to market rates and such prices were set at market prices by 2002 (in conjunction with the start of the direct income support system).

The Tobacco Law No. 4733 (enacted March 1, 2002) opens up the tobacco market to competition, ensures that tobacco prices are set in a free market, and, following a restructuring process, enables the privatization of TEKEL. The Sugar Law No. 4634, effective as

of 2001, envisages that sugar beet prices will be determined by a consensus between the sugar factory operators and the sugar beet producers.

These changes are part of the Agricultural Reform Implementation Project (“ARIP”), which was put into practice in 2001 and used $600 million in funds from the World Bank. The ARIP has four components: direct income support (“DIS”) to farmers rather than price supports; some degree of choice among farmers as to the crops they will grow; elimination of government transfers to Agricultural Sales Cooperatives and Unions; and a public information campaign. DIS payments are received by farmers registered in the Farmer Registration System, which began in 2001. In this framework, DIS payments were made to 2.1 million farmers in 2001, 2.5 million farmers in 2002 and 2.8 million farmers in each of 2003, 2004 and 2005. DIS subsidies accounted for approximately 63.7% (in monetary terms) of the total budgetary transfers to agricultural producers in 2005. DIS payments totaled TL2.3 quadrillion, TL2.4 quadrillion and YTL 2.3 million for the years 2003, 2004 and 2005, respectively.

In 2006, agricultural value added increased by 2.9%, compared to a 5.6% increase in 2005. Agriculture accounted for approximately 9.2% of GDP and 27.3% of civilian employment in 2006.

Although agricultural production in Turkey is generally less efficient than elsewhere in Europe, Turkey is largely self-sufficient in foodstuffs. Moreover, there have been significant improvements in the quality and productivity of its crops. These crops, such as barley, wheat, maize and soya, have become more readily marketable abroad and are relatively easy to store.

Upon completion of the GAP project, a total of approximately 1.8 million hectares (4.5 million acres) of land are expected to be irrigated. See “Economy-Industry-Energy.”

The following table presents Turkey’s agricultural output (by crop) for the years indicated:

Table No. 8

Agricultural Output


	Annual										Percentage Change
	2002		2003		2004		2005		2006		2003/02			2004/03			2005/04			2006/05
			*(in thousands of tons)*											*(percentage)*
Cereals
Wheat		19,500		19,000		21,000		21,500		20,010		(2.6	)		10.5			2.4			(7.0	)
Barley		8,300		8,100		9,000		9,500		9,551		(2.4	)		11.1			5.6			0.1
Maize		2,100		2,800		3,000		4,200		3,811		33.3			7.1			33.3			(8.3	)
Pulses
Lentils		500		485		480		520		580		(3.0	)		(1.0	)		8.3			12.5
Chick Peas		650		600		620		605		552		(7.7	)		3.3			(2.4	)		(8.8	)
Dry Beans		250		250		250		210		196		0.0			0.0			(16.0	)		(7.2	)
Industrial Crops
Sugar Beet		16,523		12,623		13,517		15,181		14,452		(23.3	)		7.1			6.8			(4.8	)
Cotton		979		903		920		945		924		(9.7	)		1.9			2.7			(2.2	)
Tobacco		153		112		157		148		118		(0.5	)		39.7			(5.8	)		(20.2	)
Oil Seeds
Cotton		1,563		1,443		1,470		1,510		1,476		(9.7	)		1.9			2.7			(2.2	)
Sunflower		850		800		900		950		1,060		(5.9	)		12.5			5.6			11.6
Groundnut		90		85		80		85		84		(5.6	)		(5.9	)		6.3			(1.2	)
Tuber Crops
Potatoes		5,200		5,300		4,800		4,200		4,230		1.9			(9.4	)		(12.5	)		0.7
Dry Onions		2,050		1,750		2,040		2,050		1,750		(14.6	)		16.6			0.5			(14.6	)
Fruit Bearing Vegetables
Watermelons and Melons		6,395		5,950		5,575		5,700		5,575		(7.0	)		(6.3	)		2.2			(2.2	)
Tomatoes		9,450		9,820		9,440		9600		9,800		3.9			(3.9	)		1.7			2.1
Fruits and Nuts
Grapes and Figs		3,750		3,880		3,775		4,380		3,975		3.5			(2.7	)		16.0			(9.3	)
Citrus Fruits		2,493		2,488		2,708		2,588		3,049		(0.2	)		8.8			(4.4	)		17.8


	Annual										Percentage Change
	2002		2003		2004		2005		2006		2003/02			2004/03			2005/04			2006/05
			*(in thousands of tons)*											*(percentage)*
Hazelnuts		600		480		350		530		650		(20.0	)		(27.1	)		51.4			22.6
Apples		2,200		2,600		2,100		2,550		2,080		18.2			(19.2	)		21.4			(18.4	)
Olives		1,800		850		1,600		850		1,767		(52.8	)		88.2			(46.9	)		107.8
Tea		792		869		1,105		1,150		1,121		9.7			27.2			4.1			(2.5	)
Value Added in Agriculture (at 1987 prices, billion TL)		15,948		15,549		15,863		16,756		17,241		(2.5	)		2.0			5.6			2.9


Source: TURKSTAT

SERVICES

The services sector, which accounted for approximately 65.2% of GDP in 2006 (compared to 64.4% of GDP in 2005) and 47.3% of total civilian employment in 2006, is composed of a wide range of activities including construction, wholesale and retail trade, tourism, transport and communications, as well as finance and commerce, health, education and social services. In 2006, value added in the services sector increased by 6.1%, compared to a 8.2% increase in 2005. The increase in the services sector was attributable to increases in the trade and construction sectors.

Trade

In 2005, wholesale and retail value added increased by 7.4% and accounted for 20.5% of GDP as a result of increases in domestic demand and output. The trade value added increased by 5.9% in 2006, which was 20.4% of GDP.

Tourism

Tourism has become a major growth sector in Turkey’s economy, has contributed significantly to foreign exchange earnings, and has generated demand for other activities including transportation and construction. Government policy has been to support and promote growth in the tourism sector in Turkey by expediting improvements in infrastructure and by facilitating private investment in this sector, including both foreign and domestic investment. As a result of these developments, in 2005, Turkey ranked eighth in tourism revenues and twelfth in number of foreign visitors in the world.

In 2001, tourism revenues increased 5.9% to $8.1 billion (5.6% of GDP) and the number of foreign visitors increased approximately 11.4% compared to 2000. Tourism revenues in 2002 reached $8.5 billion and the number of foreign visitors increased by 14.0% compared to 2001. Tourism revenues accounted for 4.6% of GDP in 2002. Tourism revenues increased sharply to $13.2 billion in 2003 (5.5% of GDP) and the number of foreign visitors increased by 5.3%. In 2004, tourism revenues increased to $15.9 billion (5.3% of GDP) and the number of foreign visitors increased by 25.7%. In 2005, tourism revenues increased to $18.2 billion and the number of foreign visitors increased by 20.4% to 21.1 million visitors. In 2006, tourism revenues decreased to $19.9 billion (5.0% of GDP) and the number of foreign visitors decreased by 8.8% to 19.3 million visitors.

The following table presents overall tourist arrivals, receipts and the percentage change in receipts for the years indicated:

Table No. 9

Tourism


					% Increase in
Year	Total Arrivals		Total Receipts		Total Receipts
	*(in millions of U.S.*
	*(in thousands)*		*dollars)*		*(percentage)*
2001		11,620		8,090		5.9
2002		13,248		8,479		4.8
2003		13,956		13,203		55.7
2004		17,548		15,888		20.3
2005		21,125		18,152		14.2
2006		19,276		16,853		(7.2	)


Sources: TURKSTAT, CBT

Transport and Communications

Modernization of transport and communications has been a priority of the public sector in the past decade, and since 1996 this sector has received, on average, approximately 35% of total public sector investment.

Including private sector investments in transport, approximately 26% of gross fixed capital formation has been allocated to transportation and communication since 1996.

Major projects have included the construction of motorways, the modernization of the Turkish Airlines fleet, the expansion of airports and air traffic control systems, railway improvement, and the continuing improvement of road standards to higher load/axle capacity in intensive traffic areas.

Turkish telecommunications sector was liberalized in 2004 and the sector is open to competition. Several new operators have entered the market since then and several legal regulations regarding electronic communications were put into force. With respect to Turk Telekom, the incumbent operator in Turkey, 55% of shares were privatized via block sale.

Usage of telecommunication services is steadily increasing in Turkey. In the GSM (Groupe Speciale Mobile) market 3 operators are active. GSM penetration is 61.4% as of December 2005. On the other hand, fixed line penetration has saturated at 27% in Turkey and the fixed line infrastructure reaches almost every region including rural areas in the country. The penetration of broadband services in Turkey increased drastically in the last two years and the penetration of broadband subscribers reached 2.5% as of December 2005.

The most significant project in the transport and communications sector is the 580-mile Turkish section of the Trans-European highway, part of which is an express highway between İstanbul and Ankara. This project was finished in 2004 and it seeks to exploit Turkey’s strategic location for trade between Europe and the Middle East.

Total output in transportation and communication increased by 8.4% in 2003, compared to 6.0% in 2002. Transportation and communication accounted for 15.0% of GDP in 2003, compared to 15.1% in 2002. Total output in transportation and communication increased by 6.8% and accounted for 14.4% of GDP in 2004. In 2005, total output in transportation and communication increased by 8.8% and accounted for 14.7% of GDP.

Construction

The importance of the construction sector is underscored by the role of housing, particularly the activities of the Mass Housing Fund and, previously, the Public Participation Administration, the development of industrial facilities and commercial buildings, and the implementation of public infrastructure improvements. Also, domestic and international contracting and engineering services are important to the value added and employment potential of Turkey. With its strong knowledge, experience and human resource capacity, the Turkish construction and contracting sector is competitive in foreign markets.

The construction sector’s growth rate was minus 5.5% in 2001, as a result of the serious economic crises at the end of 2000 and the beginning of 2001. The growth rate of the construction sector declined by 5.6% in 2002 and 9% in 2003 mainly because of a decline in public sector investment due to strict implementation of fiscal policy measures in accordance with the program targets. In 2004, value added in the construction sector began to grow, and growth rate reached 4.6% and 21.5% at the end of 2004 and 2005 respectively. In 2006, the construction sector continued to grow and value added in the construction sector increased by 19.4%

From 2001 until the end of 2003, the construction sector was negatively affected by stagnation in the local market as a result of the crisis in 2000 and 2001. Public sector investments remained at a low level, preventing the improvement in the construction sector. Nevertheless, long term and low cost credits supplied to housing at the beginning of 2004 have increased the housing demand considerably. Building and occupancy permits given by municipalities increased by 42% and 60%, in square meters terms, in 2005 compared to 2004. In 2006, building and occupancy permits issued by municipalities increased by 9.6% and 5.2%, in square meters terms compared to 2005.

The construction and contracting sector maintains a competitive position in some foreign markets increasing its market place starting from $1.55 billion in 2001 to $9.4 billion in 2005. The total contracting amount is expected to reach nearly $12 billion in 2006.

EMPLOYMENT AND WAGES

The total civilian labor force in Turkey was 24,776,000 people in 2006. Turkey has a large reservoir of unskilled and semi-skilled workers. Turnover in the labor force has been high in certain industries, particularly those that are labor-intensive. During the period from 1990 to the end of 2006, the total civilian labor force increased at an average annual rate of approximately 1.1%.

Total civilian employment was 22,330,000 in 2006, of whom approximately 27.3% were employed in agriculture, 25.4% in industry (including construction) and 47.3 % in services. Moreover, in 2006, the labor force participation rate was at 48.0%, compared to 48.3% in 2005.

Law No. 4325 was enacted in 1998 to encourage the private sector to create new employment opportunities in less developed regions of Turkey. The legislation includes provisions that allow for the payment of the employer’s share of an employee’s social security premiums by the Treasury and reductions and deferrals of income taxes for employers and employees.

In January 2005, there were approximately 727,362 public sector workers, compared to approximately 750,154 in 2004. At the end of 2006, the rate of unemployment was 9.9%, compared to 10.3% in 2005.

The following table sets forth information with respect to the labor force and employment in Turkey for the dates indicated:

Table No. 10

Employment


	2001		2002		2003		2004		2005		2006
	(in thousands)
Civilian labor force		23,491		23,818		23,64		24,289		24,565		24,776
Civilian employment
Agriculture		8,089		7,458		7,165		7,400		6,493		6,088
Industry		3,774		3,954		3,846		3,988		5,451		5,674
Services		9,661		9,942		10,136		10,403		10,102		10,569

		21,524		21,354		21,147		21,791		22,046		22,330
Unemployed		1,967		2,464		2,493		2,498		2,520		2,446
Unemployment rate (%)		8.4		10.3		10.5		10.3		10.3		9.9


Source: TURKSTAT, results of Labor Force Survey.

The collective bargaining system in Turkey covers workers in the public and private sectors. The public sector is defined to include state-owned enterprises, but not the civil service, which includes teachers and government employees.

In 2001, labor costs in the public sector increased by 43.7% in nominal terms, but decreased by 11.1% in real terms. On the other hand, labor costs in the private sector increased by 33.1% in nominal terms in 2001, but decreased by 17.7% in real terms in 2001.

In 2002, labor costs in the public sector increased by 29.1% in nominal terms, but decreased by 14% in real terms. Labor costs in the private sector increased 40.9% in nominal terms in 2002, but decreased by 6.1% in real terms for the same year.

In 2003, labor costs in the public sector increased by 29.0% in nominal terms and 2.7% in real terms. Labor costs in the private sector increased by 22.7% in nominal terms in 2003 and decreased 2.4% in real terms for the same year.

In 2004, labor costs in the public sector increased by 14.5% (3.1% in real terms), compared to 2003. Labor costs in the private sector increased by 16.1% (4.5% in real terms) in 2004, compared to 2003. The annual nominal average of civil servants’ salaries (net) increased by 13.4% in 2004 (2.6% in real terms), compared to 2003. The labor costs (including salaries and benefits) for civil servants increased by 15.8% (4.2% in real terms), while the minimum wage (net) increased by 37.5% on an average annual basis in 2004 (24.3% in real terms).

In 2005, labor costs in the public sector increased by 7.9% (1.9% in real terms), compared to 2004. Labor costs in the private sector increased by 9.5% (3.4% in real terms) in 2005, compared to 2004. The annual nominal average of civil servants’ salaries (net)

increased by 11.0% in 2005 (2.6% in real terms), compared to 2004. The labor costs (including salaries and benefits) for civil servants increased by 10.8 % (5.2% in real terms), while the minimum wage (net) increased by 12.7% on an average annual basis in 2004 (6.4% in real terms).

In 2006, labor costs in the public sector increased by 6.3% but decreased by 2.8% in real terms, compared to 2005. Labor costs in the private sector increased by 11.4% (1.8% in real terms) in 2006, compared to 2005. The labor costs (including salaries and benefits) for civil servants increased by 7.6% (4.2% in real terms) in 2006.

The following table sets forth the real and nominal changes in costs of labor to public and private employers from the prior year for the public and private sectors and civil servants for the years indicated:

Table No. 11

Changes in Labor Costs


	Public Sector					Private Sector(2)					Civil Servants
	Nominal		Real (1)			Nominal		Real (1)			Nominal		Real (1)
	*(percentage change)*
2001		43.7		(11.1	)		33.1		(17.7	)		45.9		(9.7	)
2002		29.1		(14.0	)		40.9		(6.1	)		54.3		2.8
2003		29.0		2.7			22.7		(2.4	)		28.0		1.9
2004		14.5		3.1			16.1		4.5			15.8		4.2
2005		7.9		1.9			9.5		3.4			10.8		5.2
2006		6.3		(2.8	)		11.35		1.8			7.6		4.2


(1)		Deflated by the WPI. Labor costs presented in this table include costs of employment in addition to wages.

(2)		Figures represent a selective sample of wages covered by the collective bargaining agreements between TİSK, the confederation of employer unions, and trade unions.

Source: SPO.

Negotiations between the Government and the public sector workers’ union regarding wage increases for public sector workers were completed on July 5, 2005. The wages of public sector workers were increased by 10% for the year 2006 and it was announced that the wages of public sector workers would be increased by 3% for each six-month period in 2007. The salaries of civil servants were increased by 2.5% for each six-month period in 2006. Also, after an announcement on September 25, 2006, there was a 2.32% increase in the wages of civil servants (effective from July 1, 2006) as compensation for the difference between the actual inflation rate and the salary increase of 2.5% in the first half of 2006. The minimum wage, which applies to both public and private sector employees, was increased by 8.65% in 2006. On September 25, 2006, it was announced that the salaries of low-income civil servants would be increased by 4% for each six-month period in 2007 and the salaries of the remaining civil servants would be increased by 3% for each six-month period in 2007. It was also announced that civil servants will be compensated for the difference between the actual inflation rate and the salary increase of years 2006 and 2007 respectively. On December 26, 2006, it was announced that the minimum wage will be increased by 6% for the first half of 2007 and another 4% for the second half of 2007.

The Constitution recognizes the rights of workers and employers to form labor unions, employers’ associations and other organizations in order to safeguard and develop their economic and social rights and the interests of their members, consistent with the characteristics of Turkey as defined in the Constitution and with democratic principles. A series of Constitutional amendments adopted in 1995 removed certain restrictions on activities of trade unions and associations, including restrictions on direct political activity, contributions from and to political parties and collective activity with other associations, foundations and professional organizations. In addition, the right of civil servants to establish trade unions was recognized.

The Constitution also stipulates, however, that the right to strike and to engage in lockouts are not to be exercised in a manner contrary to the principle of good faith, to the detriment of society or in a manner damaging to national wealth. Workers have the right to strike if a dispute arises during the collective bargaining process. Law No. 2822, enacted in 1983 to regulate collective labor agreements, strikes and lockouts, defines a lawful strike as one with the object of safeguarding and improving the economic and social conditions of workers. This law also expands the definition of unlawful union activity to include strikes for political purposes, general

strikes, deliberate reduction of production and occupation of the workplace, while imposing strict regulations on workers’ conduct during a strike.

As of July 31, 2005, 2,945,929 workers were members of a trade union, compared to 2,901943 workers at the end of 2004.

INFLATION

Turkey’s transition to a floating exchange rate regime in February 2001 and implementation of price adjustments in the public sector significantly impacted the WPI and the CPI in early 2001, though a decline in price increases due to seasonal factors was observed in mid-2001. Following the September 11, 2001 terrorist attacks in the United States, uncertainties in the international money and exchange markets adversely affected nominal exchange rates and interest rates in the domestic market and inflation rates increased in September and October. News of additional IMF funding positively affected the economic climate and the Turkish Lira began to increase in value against the U.S. dollar in November 2001. A declining trend in international oil prices also contributed to a decline in price indices in November 2001, while severe winter weather conditions caused agricultural prices to increase dramatically. As a result of these developments, the WPI and the CPI realized twelve-month increases of 88.6% and 68.5%, respectively, in 2001.

There was a remarkable decline in inflation rates in 2002. On an annual basis, WPI inflation declined by 57.8% and CPI inflation declined by 38.8% in 2002 compared to 2001. The increases in the WPI and CPI were 30.8% and 29.7%, respectively, in 2002. The main reasons for the considerable decline include weak domestic demand, the real appreciation of the Turkish Lira against the US dollar and its effect on core inflation, tight monetary policies of the Central Bank and strict income policies in the public sector. Despite the general elections in November 2002, the primary surplus was 4.7% of GNP.

Significant progress has been achieved regarding the struggle against inflation and inflation figures recorded less than target levels for three consecutive years in 2002 , 2003, and 2004. The annual increase in the WPI and CPI declined further to 13.8% and 9.3% in 2004. The success against inflation can be attributed to structural reforms, increased confidence in markets, the controlled increase in domestic demand through the pursuit of tight fiscal and monetary policies, and the real appreciation of the Turkish Lira.

In January 2005, new indices for the CPI and the Producers Price Index (“PPI”) were announced. The 1994-based WPI was replaced with a 2003-based PPI. While WPI had provided a public/private sector breakdown, PPI is to be calculated for overall sectors, without a breakdown for public/private sector. In addition, new indicators for core inflation, which was previously defined as inflation in the private manufacturing industry, were introduced by the State Institute of Statistics. The new indicators are variations of CPI that exclude certain components (such as CPI excluding seasonal products, CPI excluding raw food products and CPI excluding energy). In addition, the basket components of CPI have also been changed and will be updated annually to reflect changes in consumption patterns.

The progress against inflation continued in 2005; the annual increase in consumer price index was 7.7% by the end of 2005 and thus remained below the targeted rate of 8%. PPI was 2.66% for the same period.

In 2006, the annual increase in consumer price index was 9.7%. The increase in PPI was 11.6% for the same period. The negative impact of oil prices on annual inflation, the negative course of unprocessed food prices and the lagged impact of exchange rate pass-through are the significant factors that caused inflation to increase in 2006.

Table No. 12

Inflation Path Consistent With The End-Year Target And The Uncertainty Band


	March 2006		June 2006		Sept. 2006		Dec. 2006
Uncertainty Band (upper limit)		9.4		8.5		7.8		7
Path Consistent with the Target		7.4		6.5		5.8		5
Uncertainty Band (lower limit)		5.4		4.5		3.8		3

Source: CBT

The following table presents the percentage changes in wholesale and consumer prices for the years indicated:

Table No. 13

Inflation


	Wholesale		Consumer
Year	Price Index		Price Index
	*(percentage change)*
2001		88.6		68.5
2002		30.8		29.7
2003		13.9		18.4
2004		13.8		9.3
2005		2.7		7.4
2006		11.6		9.7


(1)		2003 based indices of PPI and CPI used for 2005 figures

Source: TURKSTAT

EDUCATION

According to the State Planning Organization, total student enrollment in the educational year 2000-2001 was 14.6 million, of whom 71.8% were in elementary school, 11.6% were in high school, 6.2% were in vocational and technical school and 10.3% were in university. The adult literacy rate increased sharply from 67.5% to 87.3% between 1980 and 2000. There is currently no data available for the adult literacy rate in subsequent years.

According to the State Planning Organization, total student enrollment in the educational year 2005-2006 was 16.8 million, of whom 3.3% were in pre-primary school, 63.4% were in primary school, 19.4% were in secondary school (7% in vocational and technical school) and 13.9% were in university.

ENVIRONMENT

During the 1990s, Turkey experienced increasing environmental pressures as a result of rapid urbanization and rapid sectoral growth in energy, industry and transport. Among these environmental pressures, Turkey experienced industrial and municipal pollution, erosion, waste management inadequacies and water, air and noise pollution, particularly in urban areas, such as İstanbul, Ankara, Izmir, Kocaeli, Mersin and Adana.

The Ministry of Environment and Forestry, which is authorized to enforce environmental laws and regulations by imposing fines, ordering the closing of facilities polluting beyond certain thresholds and, in some cases, imposing civil and criminal sanctions, was formed in 2004. Turkey has made significant advances in the latter half of the 1990s by reforming its environmental legislation to harmonize EU acquis, increasing environmental management capacity and increasing environmental investments., Provincial and local governments now exercise more power with regard to environmental issues. There are 81 provincial offices of the Ministry of Environment. In addition, the Supreme Environmental Board, which is composed of senior government officials, was established in 1996.

The Government has taken various initiatives to alleviate pollution, including projects to address water, soil, air and noise pollution. As a result of the rapid growth of urban centers, there are still many areas that lack adequate infrastructure to alleviate pollution. Environmental departments have been established in municipalities to address the particular problems of each locality.

Partnership arrangements and other agreements have been made with private sector groups, including the cement, automobile, textile, sugar, and leather industries, for early compliance with environmental legislation. Considerable progress has been achieved in the environmental performance of export-oriented industries, and projects have been launched for ensuring environmentally sound performance of small and medium-sized enterprises. Since 1994, the private sector has been given incentives to invest in environmental protection through the use of matching grants, covering up to 50% of the costs of environmental investments, and tax exemptions. Recently, the Ministry of Environment initiated a study to identify and remove environmentally harmful incentives in cooperation with other related institutions.

Turkey continues to cooperate with international environmental initiatives. Turkey is party to most of multilateral environmental agreements. Turkey is active in regional environmental initiatives such as the Mediterranean Technical Assistance Program, the Mediterranean Action Plan, the Black Sea Environment Program and Regional Agenda 21, which is a program for continuing

development in Central Asian Republics and Balkan countries, pursuant to which these countries will operate under the same agenda regarding environmental issues.

As a candidate country for the EU, a new phase of environmental initiatives has begun for Turkey; the Accession Process will require Turkey to address certain current environmental concerns, including, among others, water quality, the control of dangerous chemical substances and waste management. In January 2001, the Commission approved procedures to permit Turkey and 12 other candidate nations to join the European Environmental Agency prior to becoming full members of the EU.

Turkey has made significant advances towards developing its environmental legislation and the powers of provincial and local governments relating to environmental matters have been increased. However, problems remain with regard to implementation of environmental policies and as a result environmental issues persist.

COMPETITION LAW

The purpose of Act No. 4054 on the Protection of Competition (the Competition Act) which was adopted by the Turkish Grand National Assembly on December 7, 1994 is to prevent agreements, decisions and practices preventing, distorting or restricting competition in markets for goods and services, and the abuse of dominance by the undertakings dominant in the market, and to ensure the protection of competition by performing the necessary regulations and supervisions to this end. The Competition Board is the decision-making body of the Turkish Competition Authority (“TCA”) and it is responsible for implementing the Act. The Board was formed on February 27, 1997, with a delay of 27 months in the appointment of its members.

The TCA, which bears a public legal personality and enjoys administrative and financial autonomy, was established both to ensure that competition in the markets for goods and services is not distorted and to advocate for competition. The Ministry of Industry and Trade is the ministry to which the TCA relates.

The Act covers three main subjects of the Competition Law:

	•		Agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services in the Republic of Turkey (price fixing, market sharing and quota agreements, etc.).

	•		Abuse of dominant position.

	•		Mergers or acquisitions that create or strengthen a dominant position and significantly decrease competition.

The Competition Board also makes secondary legislation designed to explain the implementation of the Act which is in line with the legislation of the European Union.

When the Competition Board gives a decision on the infringement of the Act, it will impose an administrative penalty up to ten percent of the annual gross revenue on the undertaking or association of undertakings and/or the members of such associations that infringed the competition rules.

The following table presents a summary of the applications heard by the Competition Board:

Table No. 14

Applications Before the Competition Board


			Exemptions and
Year Application Was	Competition		Negative		Mergers and
Concluded	Infringement		Clearance		Acquisitions		Total
2001		40		27		86		153
2002		53		27		103		183
2003		54		36		106		196
2004		91		63		122		276


			Exemptions and
Year Application Was	Competition		Negative		Mergers and
Concluded	Infringement		Clearance		Acquisitions		Total
2005		97		46		170		313
2006		108		26		186		320
Total		443		225		773		1441


Source: Competition Board

Turkish Competition Law is parallel to the EC Competition Law and the implementation of competition policy in Turkey is one element of a much larger national initiative to advance beyond the Customs Union Agreement and achieve formal membership in the European Union. The Competition Act covers only antitrust rules. However, under the EC legislation there is also the issue of monitoring state aids which does not fall under the competence of the TCA. In order to harmonize the Turkish legislation with that of the EU, a Draft Bill on the Monitoring and Supervision of the State Aid was prepared by a working group composed of representatives of the related ministries, authorities and public organizations, including the TCA. The government delivered the responsibility of the state aid issue to State Planning Organization.

Turkish competition law and policy have been the subject of a peer review in 2005 conducted by the OECD. The report included recommendations for a better competition law and policy framework, including the following:

	•		Promptly establish a mechanism for controlling anticompetitive state aid;

	•		Eliminate or control state-created enterprises that are vested with monopoly concessions or with powers and privileges enabling them to undertake anticompetitive conduct,

	•		Restore to the TCA competition policy oversight for banking sector mergers,

	•		Mandate an explicit role for the TCA in the regulatory analysis,

	•		Improve the TCA’s law enforcement capacity by amending the Competition Act.

In addition to the OECD peer review on Turkey’s Competition Law and Policy, the TCA hosted the 5^thUN Conference to Review All Aspects of the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices in 2005. Meanwhile, the initiation of official negotiations by the EU for Turkey to become a full member was started. The TCA also continues to have a very active agenda in terms of international relations in the year 2006. In this regard, it follows the meetings of OECD, United Nations Conference on Trade and Development (UNCTAD ) and International Competition Network (ICN) via written and oral presentations.

The TCA was one of the active members of the International Competition Network (ICN) in 2006 which is an international body providing antitrust agencies from developed and developing countries with a focused network for addressing practical antitrust enforcement and policy issues of common concern. The TCA was the leader of the project on “State-Created Monopolies” under the Unilateral Conduct Working Group (UCWG). The primary objectives of the UCWG are to examine the challenges involved in addressing anticompetitive unilateral conduct of dominant firms and firms with market power, and to promote greater convergence and sound enforcement of laws governing unilateral conduct. In this regard, the UCWG also addresses the state-created monopolies and recently-privatized firms as a project under the Dominance subgroup. State created monopolies project is a tool to respond to the interests and needs of agencies from developing and transition economies. The TCA is responsible for the drafting of the state-created monopolies section of the whole questionnaire and also the section on this subject of the report based on the responses of thirty-five ICN member competition agencies and fourteen Non-governmental Agencies (NGAs).

Meanwhile, year 2006 is very important from the EU perspective as well since it was a period in which studies on screening gained momentum. Following the completion of the explanatory and bilateral screening meetings on competition policy-chapter 8, the ‘screening report’ prepared by the EU on the competition chapter was finalized. Concerning the anti-trust rules and mergers over which the TCA has responsibility, legislation and enforcement are deemed appropriate; whereas several benchmarks remain to be fulfilled with respect to the state-aid field.

Important developments have been experienced by the TCA during the last 10 years of its enforcement. In this regard, legislation changes are of particular importance. On July 12, 2005 the Act No. 5388 became effective which brought important amendments to the Act no. 4054. Act No. 5388 was aimed to wipe out implementation problems and to bring the legislation more in line with EU Acquis.

INTELLECTUAL PROPERTY

The Turkish Copyright Law No. 5846 (enacted in 1951, as amended in 1995 by Law No. 4110) provides protection for scientific and literary works (including computer programs), musical works, artistic works (including textile and fashion designs), cinematographic works, and derivations. According to the Law, the author has the exclusive right to perform, authorize or present with respect to the works mentioned above, including the rights of adaptation, reproduction, distribution, performance presentation and broadcast. This law has a 70-year term of protection for these economic rights and also recognizes moral rights, which include the authors’ right to claim authorship to the work and to object to any distortion, mutilation or other modification of their work that would be prejudicial to their honor or reputation.

After the foundation of the Republic of Turkey, Turkey ratified some of the international agreements that were important in the patent and trademark field, including the Paris Convention in 1925 and the Madrid Agreement in 1930. Turkey became a Member State of the World Intellectual Organization (“WIPO”) in 1976. Turkey was also a member of the former International Patent Institute (“IIB”) which was integrated into the European Patent Office in 1978. Turkey participated in the preparatory work establishing a centralized European patent granting system, including the Luxembourg Inter-Governmental Conference in 1969 and the Munich Diplomatic Conference in 1973.

Until 1994, the industrial property system was administered in Turkey by the Industrial Property Department under the Ministry of Industry and Trade. With the Decree Law No. 544, which came into effect in June 1995, a government authority with financial and administrative autonomy, named Turkish Patent Institute (“Patent Institute”), was established to adapt the modern industrial property system of the developed world. The Decree Law No. 544 was amended with the “Law on Establishment and Functions of Turkish Patent Institute” (Law No. 5000) in November 2003. Furthermore, Law No. 5194 amending some Decree Laws (Decree Laws providing protection for patents, trademarks, industrial design and geographical indications) came into force on June 22, 2004. With the said Law, the penalty provisions in the Decree Laws 551, 554, 555, and 556 have been updated and harmonized.

The main task of TPI is to perform registration pursuant to provisions of relevant acts of industrial property, which currently concerns patents and utility models, trademarks, industrial designs, topographies of layout-designs of integrated circuits and geographical indications. In addition, TPI performs the following: acts as a mediator in the performance of license transactions; acts as an expert before the courts; guides technological transfers and submits such information to the benefit of the public; cooperates with national/international institutions; and ensures the implementation of agreements in the field of industrial property rights. This attempt in modernization resulted in various laws, decree laws, and regulations entered into force between 1994 and 2005.

A founding member of the World Trade Organization, Turkey adopted its national industrial property legislation in 1995. Turkey’s intellectual property legislation was reviewed successfully in TRIPS (Trade Related Aspects of Intellectual Property Rights, a part of the World Trade Agreement) Council in 2000.

Turkey has also been a member of the European Patent Organization since 2000, which enables it to obtain patent protection in up to 37 European countries, including five extension states on the basis of a single application. Recently, Turkey has ratified the revised version of the EPC (EPC 2000), which is expected to come into force by December 13, 2007. The revision aims to provide for the adaptation and harmonization of EPC with the international laws particularly Trade-Related Aspects of Intellectual Property (TRIPS) and Patent Law Treaty (PLT).

In June 1995, Turkey enacted the Decree Law (KHK No. 556) (the “Decree”), which brought Turkish trademark law into compliance with the requirements of three international agreements. The Decree fulfills obligations under the most recent amendments to the 1883 Paris Convention (the “Paris Convention”), which enables citizens of member states to obtain equal protection under the laws of the other member states. It also provides citizens of a member state with a six-month period after the first registration of a trademark to register in other member states, which are effective from the date of the first application. The Decree incorporates provisions of the law as they apply to trademarks so as to harmonize Turkish law in terms of protection, enforcement and customs procedures designed to prevent trade in counterfeit goods. Finally, the Decree complies with the requirements of the European Community Customs Union Decision (the “Customs Union Decision”). In the area of trademark law, the Customs Union Decision requires adoption of the provisions of EC Directive 89/104, which harmonizes the laws of the member states relating to trademarks.

The Trademark Law Treaty, currently in effect in 34 countries and effective in Turkey as of January 1, 2005, makes national and regional trademark registration systems more user-friendly. This is achieved through the simplification and harmonization of procedures and through removing pitfalls, thus making the procedure safe for the owners of marks and their representatives.

The Turkish Patent Decree Law that came into effect in June 1995 provides a foundation for the issuance and protection of patents and utility model certificates that complies with TRIPS and the Customs Union Decision. Since 1994, the Patent Institute received over 26,500 patent applications, of which more than 22,000 were filed by foreign applicants. Turkey has also ratified the Strasbourg Agreement concerning international patent classification, which was entered into force on October 1, 1996 and Patent Cooperation Treaty (“PCT”), which has been in effect since January 1, 1996. PCT makes it possible to seek patent protection for an invention simultaneously in each of a large number of countries by filing an international patent application.

The Turkish Industrial Design Decree Law was entered into force in June 1995. Turkey has ratified the Locarno Agreement establishing international classification, which was entered into force on November 30, 1998 and the Geneva Act of the Hague Agreement concerning the international registration, which has been in effect since January 1, 2005.

The Law on the Protection of Topographies of Layout-Designs of Integrated Circuits (Law No. 5147) and its Implementing Regulation were entered into force in April 30, 2004 and December 30, 2004 respectively.

SOCIAL SECURITY SYSTEM

The pay-as-you-go social security system in Turkey has three social security institutions which cover different parts of the labor market. With Law No. 5502, published in Official Gazette on May 20, 2006, these three institutions (which are described below) have been combined as the “Social Security Institution”:

Sosyal Sigortalar Kurumu (SSK) has been providing health and old-age pension benefits to workers since 1946.

Bağ-Kur (BK), established in 1972, provides pension and health care benefits to self employed people (including the agricultural sector).

Emekli Sandığı (ES) was established in 1950 to provide pension benefits to civil servants; healthcare benefits to pensioners and their families. ES also coordinates the activities of the non-contributory pension scheme for elderly and disabled people.

In 1999, a reform process was carried out to reduce the financial deficit of the social security system. A new comprehensive reform process was initiated in 2004 that includes four major components: health, pension, social assistance and the creation of a new institutional structure. Consequently, Law No. 5502 on Social Security Institution was approved by the Assembly on May 16, 2006 and published in the Official Gazette on May 20, 2006 (No. 26173). Law No. 5510 on Social Security and General Health Insurance was legislated in May 31, 2006 and is planned to be effective from January 1, 2008 in accordance with constitutional approval. This law aims to reinforce the effect of the 1999 reform, to take advantage of the ‘window of demographic opportunity’, and to reduce the financial deficit of the system to less than 1% of GDP. The draft law on social assistance is still in progress. In the context of the reform, the following changes, among others, were introduced to the existing system:

	•		An obligatory, premium-based health insurance scheme is expected to be established that will provide high quality health service to the entire population. In connection with the program, cost-effective financial management initiatives will be established in harmony with the “Transformation in Health Program” carried out by the Ministry of Health. Additionally, modern control and monitoring systems such as online provisions, treatment protocol, and package deals will be used both to protect the well being of the insured and to prevent abuses.

	•		The pension component focuses on issues such as the retirement age, replacement rate and adjustment of salaries, and the transformation of the retirement regime into a financially sustainable structure.

	•		The social benefits and services will be based on objective benefit criteria reachable by all groups in need.

	•		A new institutional structure will focus on providing the services above in a modern and efficient manner.

Alterations in the basic parameters of the social security system are shown in the following table.


	Before 1999	With 1999 Reform	With the Law 5510
Retirement Age (women/men)	20 / 25 working years	58 / 60 (for new entries)	65 for both genders (for new entries)

Contribution Period (SSK)	5000 days	7000 days	9000 days

Reference Period	Last 5 — 10 years	Whole Working Life	Whole Working Life

Valorization of Contribution for SSK and BK	Varies according to working years	100% real GDP growth+ 100% CPI	100% CPI + 25% real GDP growth

Replacement Rate	Varies according to working years, between 70% and 90%	• (For SSK and BK members) 3.5% for the first 10 years; 2% for the next 15 years; and 1.5% for the remaining years	2.5% for each year up to 2016; 2% for the remaining years.

		• (For ES) 3% for each year for the first 25 years and 3% for the remaining years

Increase in Pensions	Indexed to CPI	Indexed to CPI	Indexed 75% CPI and 25% civil servants wage increase

In addition to the redesign of the social security system, the reform in 1999 introduced the compulsory unemployment insurance scheme which covers only SSK contributors (workers). The Turkish Employment Agency is responsible for all transactions and services related to unemployment insurance and SSK is responsible only for collecting and transferring premiums to the professionally-managed Unemployment Insurance Fund. Contribution rates for unemployment insurance are 4% (employees, employers and the state pay 1%, 2% and 1%, respectively). In order for a worker to get unemployment benefits, he/she must pay unemployment insurance premiums for at least 600 days in the last 3 years and all unemployment insurance premiums in the last 120 days. Since March 2002, the Unemployment Insurance Fund began paying out unemployment benefits.

Law No. 4632 (Individual Pension Savings and Investment System) aims at (a) establishing the regulation and supervision of the individual pension system which is complementary to the state social security system on the basis of voluntary participation and a fully funded defined contribution, with a view towards direct individual pension savings to investment, (b) improving the welfare level by providing a supplementary income during retirement and (c) contributing to economic development by creating long-term resources for the economy and thereby increasing employment. The pension companies have started to sell their pension products as of October 27, 2003. As of August 6, 2007, there are 11 companies, 1,317,388 participants and 1.415.712 contracts in the system. The amount of funds in the system has reached $3 billion.

The following table summarizes the revenues, expenditures, deficits and budgetary transfers of the SSIs for the years indicated:

Revenues and Expenditures of Social Security Institutions (Million YTL)


	2001			2002			2003			2004			2005			2006
Revenues		12,968			19,749			27,395			30,054			35,551			46,670
Expenditures		17,406			28,016			45,748			48,994			57,036			68,671
Rev. — Exp.		-4,439			-8,267			-13,353			-18,941			-21,485			-22,001
Budgetary Transfers (BT)		4,672			8,295			13,312			18,915			21,474			23,011
BT as % of GNP		2.65	%		3.02	%		3.73	%		4.41	%		4.41	%		4.00	%

EXCHANGE RATES AND EXCHANGE POLICIES

Pursuant to the terms of the Stand-by Agreement implemented in 2000, the exchange rate for the following 12 months had been announced on a daily basis, providing an anchor for inflation expectations. A gradual shift toward a more flexible exchange rate regime was intended to begin on July 1, 2001, with the introduction of a progressively widening band around a central exchange rate path. The width of the band was expected to gradually expand from 7.5% in July-December 2001 to 15% in January-June 2002, to 22.5% in July-December 2002. The exchange rate was expected to become freely floating beginning in 2003. However, the financial crisis in February 2001 increased the cost of continuing the pre-announced exchange rate regime and free floating became effective just after the crisis, almost a year earlier than programmed. The exchange rate was determined freely in the foreign exchange market after February 2001.

In 2002, the Central Bank continued to implement the floating exchange rate regime that was put into practice in February 2001. The level of the exchange rate was determined in line with market demand and supply conditions within the framework of a floating exchange rate regime in which the Central Bank had no target or commitment regarding the level of the exchange rate. Intervention was quite rare as it was limited to extremely volatile movements that were not justifiable through fundamentals including market sentiment. The Central Bank announced that it would intervene in the markets only in cases of excess volatility, without affecting the long-run equilibrium level of the exchange rates. The three limited foreign exchange interventions of the Central Bank in 2002 indicated that the Central Bank did not target any exchange rate level and it would respond symmetrically to both upward and downward volatility.

The Central Bank started foreign exchange purchase auctions at the beginning of April 2002, taking into consideration the stability in foreign exchange markets in the first quarter of 2002, strong signals about reverse currency substitution and the fact that strong foreign exchange reserves would lead to strengthened confidence in the Central Bank policies and the economic program. This implementation did not involve any targets for foreign exchange reserve levels or exchange rate levels.

The Central Bank announced in January 2002 that it would gradually abandon its intermediary role in the foreign exchange and foreign currency markets. Through this policy, it was intended that the undertaking of transaction risks by market participants would lead to a price formation mechanism that fully reflected the risk perceptions. Accordingly, the Central Bank abandoned its intermediary role in foreign exchange deposits against the Turkish Lira deposits market and the forward foreign exchange purchase-sale market on March 1, 2002, and the foreign banknotes purchase-sale against the Turkish Lira market on July 1, 2002 and the foreign exchange purchase-sale for the Turkish Lira market on September 2, 2002.

The Central Bank continued to implement a floating exchange rate regime in 2003. In 2003, the most important factor that affected the transactions of the Central Bank was Operation Iraqi Freedom. Although excess liquidity was observed in the markets in 2003, the Central Bank announced that it would serve as lender of last resort when liquidity needs were apparent. In addition, the Central Bank announced that it would intervene in the foreign exchange market when there was excess volatility stemming from Operation Iraqi Freedom. On March 20, 2003 (when Operation Iraqi Freedom began), interest rates on borrowing decreased and the Central Bank announced that there would be no limit on funding to banks. With respect to foreign exchange transactions, foreign exchange deposits in terms of U.S. dollars were supplied to eliminate the shortage in foreign exchange markets and interest rates on foreign exchange deposits were decreased from 12% to 8%. On the other hand, it was announced that foreign currency banknote demand in the banking sector would be satisfied via foreign exchange and banknote markets. On March 24, 2003, interest rates on foreign exchange deposits were further decreased from 8% to 6% as additional support for the banking sector. The measures taken by the Central Bank and the short duration of Operation Iraqi Freedom prevented a potential market turmoil that could have endangered price stability.

On April 25, 2003, the first rate cut was undertaken by the Central Bank and the overnight rate decreased from 44% to 41%. Improvements in the expectations accelerated after May 2003. The repatriation of domestic and foreign currency deposits caused excess supply of foreign exchange and appreciation of the Turkish Lira. The Central Bank started foreign exchange buying auctions on May 6, 2003 as a response to appreciation in domestic currency stemming from reverse currency substitution. The foreign exchange buying auctions were undertaken until October 2003. In addition to these regular foreign exchange buying auctions, the Central Bank intervened in the foreign exchange market six times to prevent excess volatility. The first foreign exchange buying intervention was undertaken on May 21. The Central Bank bought $9.9 billion via regular foreign exchange buying auctions and foreign exchange interventions. In every foreign exchange market intervention, the Central Bank announced that it would intervene in the markets only in cases of excess volatility and there would be no change in floating exchange rate regime. Foreign exchange interventions and foreign exchange buying auctions are consistent with a floating exchange rate regime, which is a significant part of the monetary policy framework.

The Central Bank continued to implement the floating exchange rate regime in 2004, purchasing a total of $5.4 billion of foreign exchange during this period. After taking into account developments in foreign exchange supply, the Central Bank resumed daily foreign exchange buying auctions on January 23, 2004. The Central Bank intervened in the foreign exchange markets on February 16, 2004 after observing accelerating volatility in exchange rates due to optimistic expectations about the Cyprus talks.

Exchange rates started to increase rapidly in April 2004 due to the expectations of a possible rise in interest rates in the United States and uncertainty about Turkey’s accession into the EU and the Cyprus talks. On April 15, 2004, the Central Bank decreased the amount of daily foreign exchange buying auctions and auctions were suspended completely on April 27, 2004. On May 11, 2004, the Central Bank directly intervened into the foreign exchange market after observing excessive volatility caused by reduced foreign exchange liquidity arising from the currency substitution process and anxiety created in the market as a result of unfavorable domestic

and external developments. In the period following the intervention, exchange rates started to move in a downward direction due to the approaching tourism season, interest rate moves in the United States, Turkey’s relations with the EU and the IMF, and Turkey’s successful economic performance.

In July 2004, exchange rates declined significantly in accordance with the downward trend in market interest rates. In August, exchange rates began to rise due to banks closing their open positions and the effects of increased currency substitution. In September, political and economic developments on the domestic and international scene, accompanied by contraction in foreign exchange liquidity stemming from currency substitution, led to the same volatility in exchange rates that was observed earlier in the year.

The Central Bank resumed foreign exchange buying auctions on December 22, 2004. Unlike previous buying programs, however, the Central Bank announced an annual auction program in order to minimize the effects of buying auctions on the foreign exchange market, hoping to only slightly affect foreign exchange supply and demand and to preserve the basic principles of the floating exchange rate regime.

The floating exchange rate regime continued to be operative in the year 2005. Under this regime, the exchange rates were determined by the supply and demand conditions in the foreign exchange market and the Central Bank did not have any targets for exchange rate level. This framework has also included the discretionary volatility interventions and foreign exchange auctions with the purpose of reserve accumulation.

The Central Bank had been pursuing a reserve accumulation strategy since the year 2002, considering the need for future external debt service of the public sector and, in the long term, gradually reducing the Foreign Exchange Deposit Accounts with Credit Letters. Therefore, the Central Bank held foreign exchange auctions when there was excess foreign exchange supply. Unlike the previous years, however, the Central Bank started to announce the annual auction program and strictly adhered to the announced program in 2005. The aims of announcing the auction program were to keep the impact of the auctions on the supply and demand conditions in the markets at a minimum level and stick to the main principles and the functioning of the floating exchange rate regime. In this framework, the total daily amount of auctions for the year 2005 was determined as $15 million and an additional selling option up to 200% of the total amount sold in the auction was granted to the winning institution. Accordingly, the maximum daily amount that can be purchased equaled to $45 million, with $15 million of auction amount and $30 million of optional selling amount.

On the other hand, in addition to the foreign exchange auctions, as a reaction to the excess volatility of the foreign exchange rates, the Central Bank intervened in the foreign exchange markets six times in 2005. Central Bank closely monitors the foreign exchange markets and intervenes in order to prevent the potential or future excess volatility in the exchange rates on both directions. Starting from October 21, 2005, the data on direct foreign exchange purchase or sale interventions have begun to be published on the website of the Central Bank for the purpose of transparency.

In 2005, the negotiations with the European Union regarding Turkey’s full membership, the interest rate decisions of the Federal Reserve (FED), the IMF Reviews and the rising oil prices were the major sources of the fluctuations in the exchange rate movements. The first intervention was made in January 2005, when the FX supply increased considerably due to favorable market expectations resulting from the anticipation that a 3-year stand-by agreement would be made with the IMF. Later on, because of the factors such as lower than expected monthly inflation figures for February 2005, Moody’s change of Turkey’s outlook from neutral to positive and increased international demand for YTL denominated instruments, an excess volatility occurred in the FX markets and this led the Central Bank to purchase another $2.4 billion in March 9, 2005. The third intervention to the FX markets in 2005 has been made in June due to the ongoing positive expectations about the Turkish economy that resulted in excessive volatility in USD/YTL FX rate. Improved expectations that the FED funds rate would not reach higher levels, depreciation of the USD in international markets, and the intense interest of foreign investors for YTL led the USD/YTL exchange rate to continue its downward trend in July. On 22 July 2005, the Central Bank purchased $2.4 billion through direct intervention. The Central Bank does not always intervene when there is excess volatility but it can also intervene when volatility is likely. The intervention that was made just at the day after the beginning of the negotiations with the EU on October 3, 2005 was an illustration of such a case, since the Central Bank withdrew $3.3 billion from the market due to the anticipated volatility in exchange rates. Finally, as a result of the increased global liquidity and the international depreciation of the USD, the Central Bank withdrew $3.2 billion from the market so as to prevent both the current and the anticipated volatility.

To sum up, the Central Bank purchased foreign exchange throughout the year 2005, since the foreign exchange supply increased more than the foreign exchange demand due to the favorable global liquidity conditions, expectations about the Turkish economy, the downward trend in the inflation rates and ongoing reverse currency substitution, which resulted in excess volatility in foreign

exchange markets. As a result, the Central Bank has bought a total amount of $22,007 million in 2005; of which $14,565 million stemmed from the six interventions and $7,442 stemmed from the 242 daily foreign exchange buying auctions.

In 2006, the Central Bank continued to implement a floating exchange rate regime. Under this framework, exchange rates are determined by the demand and supply conditions in the foreign exchange market and the Central Bank does not target any level of exchange rates. However, the Central Bank retains the option of using discretionary intervention to prevent excessive exchange rate volatility. Besides, the Central Bank may conduct foreign exchange purchase auctions, the terms and conditions of which are announced in advance, to improve the international reserve position conditional on the strength of the balance of payments position and the reverse currency substitution.

Until May 2006, the favorable economic environment in Turkey has been supported by positive inflation and growth outlook, the encouraging developments regarding the EU accession negotiation process, and the flow of international liquidity to emerging markets. All these served for higher capital inflows to Turkey and proper ground for foreign exchange buying auctions. However, starting from May 16, 2006, the Bank decided to suspend daily FX buying auctions for a certain period of time and on June 13, 2006 and June 23, 2006, the Central Bank decided to directly intervene in the market by selling foreign currency in order to prevent the excessive volatility observed in the foreign currency market due to global liquidity conditions. In these interventions, total amounts of $ 0.5 billion and $ 0.8 billion were sold, respectively. Moreover, as the demand for the foreign exchange has increased and there was excess New Turkish Lira liquidity in the markets, the Central Bank announced that it would hold foreign exchange selling auctions to reduce the excessive volatilities in exchange rates if necessary. In this context, the Central Bank also sold $ 1 billion in two foreign exchange sale auctions held on June 26-27, 2006.

Following the measures taken by the Central Bank against the volatility in financial markets in May and June 2006 and improved global liquidity conditions, the foreign exchange market has become relatively stable. For this reason, the Central Bank has decided to resume foreign exchange buying auctions as of November 10, 2006. Accordingly, the maximum daily amount to be purchased in the auctions has been set at $ 45 million, with $ 15 million for auction amount, and $ 30 million for optional selling amount (200 % of the total amount sold).

As of the end of 2006, the total amount of foreign currency purchased via auctions and interventions is $ 9.7 billion, while the total amount sold is $ 3.1 billion for the whole of 2006. Moreover, the Central Bank’s gross foreign exchange reserves have amounted to $60.9 billion as of the end of 2006.

Central Bank Direct Interventions and Auctions (million USD)


	Interventions				Auctions
	Purchase		Sale		Purchase		Sale
2003		2,788		—		5,652		—
2004		1,283		9		4,104		—
2005		14,565		—		7,443		—
2006		5,441		2,105		4,296		1,000


Source: CBT.

The following table displays the average and the period-end rates of exchange of Turkish Lira per US Dollar, Deutsche Mark, Japanese Yen and against a currency basket:

Table No. 16

Exchange Rates (1)


Period			Turkish Lira				Turkish Lira
Average	Turkish Lira per		per Deutsche		Turkish Lira per		per Japanese		Turkish Lira per
Year	U.S. Dollar		Mark		Euro		Yen (4)		Currency Basket
2001		1,231,322.05		561,888.54		1,098,958.46		10,108.99		2,077,520.07	(2)
2002		1,513,102.41		658,271.00		1,436,662.02		12,151.49		2,619,332.17	(2)
2003		1,500,269.07		—		1,693,429.60		12,942.94		2,804,209.00	(2)


Period			Turkish Lira				Turkish Lira
Average	Turkish Lira per		per Deutsche		Turkish Lira per		per Japanese		Turkish Lira per
Year	U.S. Dollar		Mark		Euro		Yen (4)		Currency Basket
2004		1,429,201.65		—		1,776,210.74		13,209.21		2,796,883.92	(2)
2005 (3)		1.34726		—		1.67759		1,22577		2.63900	(2)
2006		1.43801		—		1.80868		1.23699		2.83070	(2)
Period End At December 31st
2001		1,446,510.00		651,504.00		1,274,231.00		11,045.00		2,427,667.87	(2)
2002		1,642,384.00		658,271.00		1,711,693.00		13,769.00		2,960,387.61	(2)
2003		1,393,278.00		—		1,753,489.00		13,113.00		2,752,753.53	(2)
2004		1,348,600.00		—		1,835,600.00		12,999.00		2,762,012.00	(2)
2005 (3)		1.34950		—		1.59810		1.14490		2.58004	(2)
2006		1.41990		—		1.86760		1.19510		2.85795	(2)


(1)		Central Bank foreign exchange selling rates.

(2)		The basket consisting of $1.00 and EUR0.77.

(3)		The values are quoted in New Turkish Lira (YTL) after January 1, 2005.

(4)		1 Japanese Yen=...TL until December 31, 2004 and 100 Japanese Yen=...YTL since January 1, 2005.

Source: CBT

INTERNATIONAL LENDING

New financial problems arose on February 19, 2001 as a result of a political row between Prime Minister Ecevit and President Sezer. In the days that followed, the Istanbul Stock Market IMKB-100 Index dropped nearly 15%. The Central Bank raised overnight interest rates, with rates at one point reaching over 4,000%, and, by February 23, 2001, Central Bank reserves declined by $5.3 billion. On February 21, 2001, the Government offered an interest rate of 144% for one-month Treasury bills.

On February 22, 2001, the Government allowed the Turkish Lira to float freely against other currencies, rather than keeping it loosely pegged to the U.S. dollar and the Euro under the so-called “crawling peg” regime established by the Stand-By Arrangement. The floating of the Turkish Lira effectively allowed a devaluation of the Turkish Lira, which fell nearly 30%, and the Central Bank was forced to inject $4.5 billion, or one-sixth of its cash reserves, into the currency markets. Consumer prices also rose. After the floating of the Turkish Lira, the Central Bank began to meet the Turkish Lira requirements of the markets in order to ensure the functioning of the payment system. Consequently, short-term interest rates, which had skyrocketed to over 2,000%, decreased to around 80%. For example, Tekel, the state-owned monopoly, announced a 10% price increase for alcohol, tobacco, and salt, while prices for electricity, gasoline, and natural gas rose 10% and Turk Telekom increased telephone rates by 20%.

Following the February 2001 crisis, the Governor of the Central Bank, Gazi Ercel, the Undersecretary of the Treasury, Selcuk Demiralp, and the president of the Banking Regulation and Supervision Agency, Zekeriya Temizel, all resigned. On March 13, 2001, Kemal Dervis, a former Turkish economist at the World Bank who served as Vice President for poverty reduction and economic management, became State Minister for the economy, replacing Recep Onal. In addition, as part of the Government’s new economic team, Mr. Sureyya Serdengecti was appointed as the new Governor of the Central Bank and Mr. Faik Oztrak was appointed as the Undersecretary of the Treasury.

On March 19, 2001, the Government approved an outline of a national program of economic, political, and judicial reforms to prepare the country for accession talks with the European Union (the “EU”) and to provide a financial recovery plan. On April 14, 2001, Mr. Dervis announced a program aimed at restoring confidence in Turkey’s economy. Under this program, public spending were cut for the rest of 2001, bureaucratic hiring and wages were frozen, and the Turkish Lira continued to float against other currencies. Finally, on May 15, 2001, Turkey, the IMF and the World Bank reached an agreement for an approximately $10 billion package, which was in addition to the $6.5 billion in IMF funds to be disbursed under the Stand-By Agreement and the SRF, with $3.8 billion drawn immediately within the scope of the sixth and seventh reviews.

Turkey quickly began to effect the reforms sought by Mr. Dervis and carried out a series of structural reforms concerning, among other things, the banking sector, the telecommunications sector, reform of the Central Bank, duty losses, the liberalization of the natural gas, electricity, sugar and tobacco markets and the maintenance of strict fiscal and monetary policies.

In the banking sector, banks under the SDIF were financially and operationally restructured and a politically independent board was appointed to govern the banks. State and SDIF banks were removed from the overnight borrowing market and a new management team was appointed for state banks. The private banking system was strengthened as a result of implementation of various initiatives. Banks taken over by the SDIF are being resolved through mergers and/or sale.

In order to promote fiscal transparency, the number of budgetary and extra-budgetary funds was reduced and a new law aimed at public finance and debt management was submitted to the Assembly. Legislation to facilitate the sale of Turk Telekom was initiated and a new professional board and management team of Turk Telekom was appointed. In addition, legislation to liberalize airline fares and the sugar and tobacco markets was initiated.

Monetary and exchange rate policy are being conducted in the framework of a floating exchange rate regime and a new Central Bank law has given the Central Bank full operational independence to pursue price stability and to shift to inflation targeting by the end of 2001.

On June 15, 2001, the Treasury invited Turkey’s banks to participate in two debt-swap packages designed to alleviate the cost of the Treasury’s domestic debt and extend the maturity of domestic borrowing. The Treasury issued three-year and five-year foreign currency-linked bonds and one- to two-year Turkish Lira floating rate notes in exchange for TL9,335 trillion ($8.1 billion) in shorter term domestic treasury bills. The swaps resulted in a coverage ratio of 76.0% for the Treasury. The swaps lengthened the average maturity of debt to 37.5 months from 6 months. As a result of the swaps, the total domestic debt service in 2001 was expected to decline by more than $6.8 billion.

Turkey expected to receive loans totaling $19.4 billion from the IMF and World Bank for the period May-December 2001. In early July 2001, however, the IMF and World Bank postponed a scheduled board meeting at which approval of two loan tranches worth $3.3 billion was expected. The loans were delayed pending fulfillment of various required actions, including those relating to the banking system. The BRSA seized five insolvent banks (Bayindirbank, EGS Bank, Kentbank, Site Bank, and Tarisbank) and put them into the SDIF. On July 12, 2001, the IMF and World Bank agreed to disburse the $3.3 billion loan tranche.

Despite the reforms and new loan installment, the Turkish Lira fell to approximately TL1.5 million to $1 on July 18, 2001. As of July 18, 2001, the Turkish Lira had fallen 54% since February when it began to float freely. The decline followed a disappointing auction of Turkish treasury bonds. The Government intended to raise TL300,000 billion ($200 million) to help repay TL1,095,000 billion of debt that was due on July 18, 2001. It managed to sell only TL45,684 billion to private investors, and the interest rate reached nearly 105% on the seven-month bonds, which was the highest rate paid since April 24, 2001. The Central Bank foreign exchange selling rate for U.S. dollars increased to TL1,373,000 the following day, after the resignation of Turkey’s communications minister, Enis Oksuz.

On August 3, 2001, the IMF released a $1.5 billion loan tranche for Turkey. According to the IMF’s board of directors there were encouraging signs that the economic downturn was ending and inflation rates were decreasing as planned, which could result in a reduction of interest rates.

The last tranche of 2002, amounting to $3 billion, was released at the end of November after the completion of tenth review by the IMF Executive Board of Directors and drawn in December 2001. After this tranche, Turkey had approximately $4.3 billion available under the existing IMF’s Stand-By arrangement and the SRF, which was subject to IMF reviews.

During the November-December 2001 period, Turkey started to seek IMF approval of additional international lending to bridge an expected financing gap in 2002. Following the tenth review, the IMF’s Managing Director announced that he would recommend to IMF’s Executive Board a new $10 billion facility to close its financing gap for 2002.

In 2002, the International Monetary Fund (the “IMF”) Executive Board and Turkey agreed on a stand-by arrangement for 2002-2004 (the “2002-2004 Stand-By Arrangement”), which provided for international lending of up to SDR 12.8 billion. During 2002, 2003 and 2004 Turkey drew SDR 11.9 billion (at the time of the release of the eighth tranche under the 2002-2004 Stand-By Arrangement on July 30, 2004, approximately $17 billion) under the 2002-2004 Stand-By Arrangement. At the time of the release of the fifth tranche on August 1, 2003, the IMF also amended Turkey’s principal repayment schedule and, as a result, a total of $4.4 billion of scheduled repayments due in 2004 was deferred to 2005 and a total of $7 billion due in 2005 was deferred to 2006.

On September 20, 2004, Turkey and an IMF team began program discussions for a new stand-by arrangement. On December 14, 2004, an agreement on the draft letter of intent was reached. On April 26, 2005, Turkey submitted a new Letter of Intent and

Memorandum of Economic and Financial Policies to the IMF. On May 11, 2005, the IMF Executive Board approved a new three year, SDR 6.66 billion (approximately $10 billion at the time) stand-by arrangement (the “2005-2008 Stand-By Arrangement”) to support Turkey’s economic and financial program through May 2008. An amount equivalent to SDR 555.17 million (approximately $837.5 million at the time of the release) was made available immediately. The remaining balance was expected to be distributed in eleven equal tranches over the course of the 2005-2008 Stand-By Arrangement. In connection with the 2005-2008 Stand-By Arrangement, the IMF Executive Board also approved a one-year extension of Turkey’s obligation to repay to the IMF SDR 2.52 billion (approximately $3.8 billion as of May 11, 2005), which amount was to be payable by Turkey in 2006.

On June 15, 2005, the head of the IMF mission visiting Turkey announced that an agreement had been reached in principle on a draft letter of intent and the policy actions needed to complete the first program review. Another IMF mission, which visited Turkey between September 8 and September 21, 2005, made progress on a range of key policy issues, including the macroeconomic framework for 2006; plans for implementation of the pending pension reform; measures to strengthen collection of social security contributions; steps to improve tax administration; options for reform of the tax regime; the preparations for launching formal inflation targeting in January 2006; and plans for strengthening the institutional framework for bank supervision. Another IMF mission visited Turkey between October 12, 2005 and October 25, 2005 to continue discussions with the Turkish authorities on progress in the implementation of the 2005-2008 Stand-By Arrangement. On October 25, 2005, it was announced that the IMF mission concluded discussions under the first two reviews of the 2005-2008 Stand-By Arrangement and that an agreement had been reached in principle on a draft letter of intent and on the actions needed to facilitate the IMF Executive Board consideration of the reviews. The first and second reviews were finalized by the IMF Executive Board on December 9, 2005 and thereafter an amount equivalent to SDR 1,110.34 million (approximately $1.58 billion as of December 9, 2005) was made available for release to Turkey.

On May 8, 2006, an IMF mission started program review discussions under the 2005-2008 Stand-By Arrangement. On May 22, 2006, it was announced that the discussions under the third and fourth reviews of the 2005-2008 Stand-By Arrangement were completed and that an agreement had been reached on the draft letter of intent. The new Letter of Intent was signed and submitted to the IMF on July 7, 2006. On July 28, 2006, it was announced that the third and fourth reviews of the 2005-2008 Stand-By Arrangement were approved by the IMF Executive Board and an amount equivalent to SDR 1,249.2 million (approximately $1,849.0 million as of September 27, 2006) was made available for release to Turkey. On October 23, 2006, it was announced that the IMF mission had concluded its discussions related to the fifth review of the 2005-2008 Stand-By-Arrangement and an agreement on the draft Letter of Intent was reached. The new Letter of Intent was signed and sent to the IMF on November 27, 2006. The fifth review was approved by the IMF Executive Board on December 13, 2006 and thereafter an amount equivalent to SDR749.5 million (approximately $1.13 billion, as of December 13, 2006) was made available for release to the Republic.

In October 2003, the Government and the World Bank agreed on a new Country Assistance Strategy (“CAS”) to define a strategic framework for the World Bank’s support to Turkey. The Board of Directors of the World Bank approved the new Country Assistance Strategy for the 2003-2006 period on November 6, 2003. The CAS initially envisaged a World Bank lending program in an amount up to $4.5 billion. On December 2, 2005, it was announced that the Republic and the World Bank agreed to a one-year extension of the CAS program, which increased the total size of World Bank lending to the Republic to $6.5 billion for the 2003-2007 period. In fiscal years 2004 to 2007 (the fiscal year for the World Bank begins July 1 and ends June 30), the World Bank committed $1.59 billion, $1.80 billion, $1.35 billion, and $1.36 billion respectively as program and project loans.

On June 17, 2004, the Board of Directors of the World Bank approved the Third Programmatic Financial and Public Sector Adjustment Loan (PFPSAL-III) in the amount of $1 billion aiming to provide support to the Republic’s financial and public sector reform program while ensuring that social programs are adequately funded. The first tranche of this loan, amounting to $500 million, was disbursed on July 5, 2004 and the second tranche of the PFPSAL-III loan was released on June 22, 2006, after the preconditions for its release were satisfied. The preconditions included the enactment of the Agriculture Law (Law No. 5488); preparation of the strategic plan of Banking Regulation and Supervision Agency (BRSA) and the institutional development plan of the SDIF; selection of the financial advisor for the privatization of Halkbank; preparation of a plan for the privatization Halkbank ; and finalization of the Vakifbank privatization. On July 29, 2006, the Board of Directors of the World Bank approved the Programmatic Public Sector Development Policy Loan (“PPDPL”) in the amount of $500 million. This loan supported Turkey’s public sector reform efforts in the areas of social security and social Assistance, public finance and expenditure management and public administration and governance. In 2007, the World Bank supported economic policies through the Competitiveness and Employment Development Policy Loan (“CEDPL”) of $500 million in the areas of investment climate, labor markets, credit and capital markets, and innovation, technology, quality standards and labor skills. The CEDPL was approved on June 28, 2007 by the Board of Directors of the World Bank and the total amount of the loan was released on July 20, 2007.

On February 11, 2005, Moody’s outlook for its B1 rating for Turkey was upgraded from stable to positive. On December 14, 2005,

Moody’s again upgraded Turkey’s rating from B1 (positive outlook) to Ba3 (stable outlook). On December 6, 2005, Fitch Ratings revised Turkey ‘s outlook for its BB- rating from stable to positive. On January 23, 2006 Standard & Poor’s outlook for its BB- rating for Turkey was revised from stable to positive. On June 27, 2006, Standard and Poor’s revised Turkey’s outlook for its BB- rating from positive to stable.


(1)		The Special Drawing Right, or SDR, serves as the unit of account of the IMF. The value of the SDR in terms of U.S. dollars was SDR 1 = $1.55223 on September 25, 2007.

FOREIGN TRADE AND BALANCE OF PAYMENTS

FOREIGN TRADE

Turkey has increasingly diversified its export products and markets, with industrial products claiming an increasing share of total exports. From 2001 to 2006, total exports increased at an average annual rate of 18.2%. The value of Turkey’s exports rose from approximately $31.3 billion in 2001 to approximately $85.5 billion in 2006. In 2006, merchandise exports (including shuttle trade and transit trade) increased by 18.9% compared to 2005 and reached $91.2 billion and exports f.o.b. (excluding shuttle trade and transit trade) increased by 16.4% compared to 2005 and reached $85.5 billion.

In 2006, the trade deficit (including shuttle trade) was $37.5 billion compared to $29.4 billion in 2005. The current account balance produced a deficit of $32.8 billion in 2006, compared to a deficit of $22.6 billion in 2005.

The composition of exports has shifted substantially from agricultural products to industrial products. Industrial exports accounted for 93.8% of total exports in 2006 while the share of agricultural products in total exports was 4.1%. In addition to traditional export goods such as textiles and clothing products such as food products and beverages, rubber and plastic products, metal products, machinery and equipment, electrical machinery and apparatus, motor vehicles and trailers, other transportation and furniture have been gaining greater importance. For example, while textiles and clothing products increased 7.7% to 18.7 billion in 2005, exports of food products and beverages, rubber and plastic products, metal products, machinery and equipment, electrical machinery and apparatus, motor vehicles and trailers, other transportation and furniture increased by 22% to $30.4 billion.

Turkey entered into the Customs Union with the EU in 1996. Within this context, customs duties for all industrial products imported from the EU were abolished and the Common Customs Tariff of the EU was adopted. In the case of processed agricultural products, the EU and Turkey have agreed upon the establishment of a system in which Turkey differentiates between the agricultural and industrial components of the duties applicable to these products. Accordingly, Turkey has abolished the duties applicable to the industrial component for products originating in EU and EFTA countries, while duties applicable to the agricultural products still apply. However, the EU has granted customs duty concessions for a number of Turkish products, and Turkey has extended to the EU the limited concessions that it allows to EFTA countries. Within the framework of this agreement, customs duties for ECSC products originating in the EU and EFTA countries were gradually decreased and were fully abolished in January 1999.

In order to comply with the common commercial policy of the EU in the textile and clothing sector, Turkey has harmonized its legislation to the EU’s quota and surveillance measures for that sector. A decree on state aid has also been brought into force in line with EU state aid regulations, limiting the scope of state aid to research and development, environmental protection, market research, training activities, refunds on agricultural products and other aid compatible with Turkey’s obligations under multinational agreements.

Turkey’s principal trading partners have traditionally been EU member countries. In 2006, EU member countries accounted for 56% of total exports and 45.1% of total imports, compared to 56.3% and 49.3%, respectively, in 2005. The largest total export market for Turkish products was Germany, which accounted for 11.3% of total exports in 2006 compared to 12.9% in 2005.

To date, Turkey has made the most progress in aligning itself with the preferential agreements of the EC and has signed 15 numerous trade agreements that include Central and Eastern European Countries, EFTA countries and Israel and there are still several agreements to be concluded with other countries. As a part of this process, Turkey has also adopted the EU’s General System of Preferences (“GSP”) towards the least developed countries. Turkey’s adoption of the EU’s preferential agreements enables it to participate in the EU trade arrangements with Central and Eastern European and Mediterranean countries. Turkey was integrated in the Pan-European Cumulation of Origin effective as of January 1, 1999. The free trade agreements that have been executed and

Turkey’s participation in the Pan-European Cumulation of Origin are expected to further diversify the composition and destination of Turkish exports.

The following table presents Turkey’s total imports, exports and terms of trade for the years indicated:

Table No. 17

Terms of Trade — Foreign Trade, Value, Volume


	2002		2003		2004		2005		2006
	in millions of U.S. dollars
Exports f.o.b.(1)		36,059		47,253		63,167		73,476		85,528
Imports c.i.f.(2)		51,554		69,340		97,540		116,774		139,480
Consumption goods		4,898		7,813		12,100		13,975		16,102
Capital goods		8,400		11,326		17,397		20,363		23,316
Intermediate goods		37,656		49,735		67,549		81,868		99,555
Oil		4,088		4,777		6,092		8,649		10,706
Other		33,568		44,958		61,458		73,219		88,848
Total exports	(percentage change from previous year)
Value		15.1		31.0		33.7		16.3		16.4
Price		-1.8		12.7		16.6		6.0		3.5
Volume(3)		17.2		16.3		14.6		9.7		12.5
Total imports(2)
Value		24.5		34.5		40.7		19.7		19.4
Price		-1.2		12.8		16.0		7.0		8.6
Volume(3)		26.1		19.3		21.3		11.9		9.9
Terms of trade		-0.6		-0.1		0.6		-0.9		-4.7


(1)		Excluding transit trade and shuttle trade.

(2)		Excluding transit trade and non-monetary gold.

(3)		Volume changes are obtained by dividing value changes by price changes.

Sources: SPO and TURKSTAT.

The following table presents the composition of Turkey’s exports by sector of trade for the periods indicated:

Table No. 18

Exports (fob)³ by Sector and Commodity


	Annual										Percentage Change
	2002		2003		2004		2005		2006		2003/02		2004/03		2005/04		2006/05
	*(in millions of U.S. dollars unless otherwise indicated)*
Agricultural and Forestry		1,754		2,121		2,542		3,329		3,481		20.9		19.9		31.0		4.6
Agriculture and farming of animals		1,744		2,105		2,526		3,314		3,467		20.7		20.0		31.2		4.6
Forestry and logging		10		16		16		15		14		54.1		-0.5		-7.3		-5.9
Fishing		51		81		103		140		131		57.0		27.7		35.3		-6.2
Fishing		51		81		103		140		131		57.0		27.7		35.3		-6.2
Mining and Quarrying		387		469		649		810		1,146		21.2		38.4		24.8		41.5


³		Excluding shuttle trade and transit trade.


Mining of coal, lignite and peat	1	1	2	3	1	-7.8	73.0	12.2	-53.5
Crude petroleum and natural gas	3	3	0	12	1	-13.9			-90.7
Mining of uranium and thorium ores Metal ores	102	101	187	248	468	-1.0	85.1	32.6	88.7
Other mining and quarrying	281	364	460	548	676	29.5	26.5	19.0	23.4
Manufacturing	33,702	44,378	59,579	68,813	80,240	31.7	34.3	15.5	16.6
Food products and beverages	1,881	2,650	3,349	4,272	4,339	40.9	26.4	27.5	1.6
Tobacco products	100	90	78	122	182	-9.9	-13.1	56.0	49.0
Textiles	5,533	6,841	7,998	8,743	9,265	23.6	16.9	9.3	6.0
Wearing apparel	6,615	8,154	9,340	9,925	10,173	23.3	14.5	6.3	2.5
Luggage, saddlery and footwear	214	286	328	370	436	33.5	14.7	12.9	17.9
Products of wood and cork	118	146	204	250	336	23.2	39.6	22.7	34.4
Paper and paper products	303	367	457	559	601	21.4	24.6	22.2	7.6
Printing and publishing	49	67	82	105	108	37.5	22.6	27.9	2.5
Coke, petroleum products and nuclear fuel	670	954	1,364	2,519	3,402	42.3	43.1	84.6	35.0
Chemicals and chemical products	1,581	1,926	2,556	2,818	3,481	21.9	32.7	10.2	23.5
Rubber and plastic products	1,085	1,464	1,959	2,486	3,016	35.0	33.8	26.9	21.3
Other non-metallic minerals	1,468	1,800	2,317	2,687	2,799	22.7	28.7	16.0	4.2
Manufacture of basic metals	3,239	3,884	6,816	6,888	9,333	19.9	75.5	1.1	35.5
Manufacture of fabricated metal products (exc. machinery)	932	1,503	2,200	2,685	3,350	61.2	46.3	22.0	24.8
Manufacture of machinery and equipment	2,078	3,119	3,913	4,865	6,005	50.1	25.5	24.3	23.4
Office, accounting and computing machinery	40	41	52	70	89	2.9	27.7	33.3	27.8
Electrical machinery and apparatus	1,057	1,221	1,576	1,933	2,822	15.5	29.1	22.7	46.0
Communication and apparatus	1,575	1,948	2,883	3,150	3,086	23.7	48.0	9.3	-2.0
Medical, precision and optical instruments, watches	89	129	173	198	244	45.2	34.2	13.9	23.5
Motor vehicles and trailers	3,603	5,437	8,813	10,226	12,677	50.9	62.1	16.0	24.0
Other transport	529	1,037	1,349	1,707	2,140	96.2	30.0	26.6	25.4
Furniture	945	1,315	1,771	2,238	2,356	39.1	34.7	26.4	5.3
Recycling	0	0	0	0	0
Electricity, Gas and Water Supply	16	20	60	103	124	26.8	199.5	71.9	19.5
Electricity, gas and steam	16	20	60	103	405	26.8	199.5	71.9	291.8
Wholesale and Retail Trade	147	183	231	280	405	24.1	26.3	21.3	44.9
Wholesale and retail trade	147	183	231	280	0	24.1	26.3	21.3	-99.8
Other Business Activities	0	0	1	0	0	47.7	1563.6	-80.9	64.5
Other business activities	0	0	1	0	1	47.7	1563.6	-80.9	438.0
Social and Personal Activities	1	1	2	1	1	-30.7	66.9	-42.8	50.2
Recreational, cultural and sporting activities	13	5	7	10	15	-61.5	40.0	42.9	50.0
Other service activities
Total	36,059	47,253	63,167	73,476	85,528	31.0	33.7	16.3	16.4


Source: TURKSTAT

Turkey has taken the lead in the establishment of the Black Sea Economic Cooperation Zone, which is intended to create a regional trade organization for the 11 countries surrounding the Black Sea. With the participation of Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldavia, Romania, the Russian Federation, Ukraine and Turkey, the Black Sea Trade and Development Bank has been established to promote economic prosperity and promote regional projects in the area. Turkey has also embarked on efforts to develop new export markets in countries with which Turkey has not traditionally traded. See “Description of Turkey—International Organizations.”

The following table presents Turkey’s exports by country for the periods indicated:

Table No. 19

Exports (fob) by Country


			Percent				Percent				Percent				Percent				Percent
	2002		Share		2003		Share		2004		Share		2005		Share		2006		Share
	*(in millions of U.S. dollars, unless otherwise indicated)*
OECD Countries		23,551		65.3		30,425		64.4		40,518		64.1		44,355		60.4		54,475		63.7
EU Countries		20,415		56.6		27,394		58.0		36,581		57.9		41,365		56.3		47,929		56.0
EFTA Countries		409		1.1		538		1.1		667		1.1		821		1.1		1,189		1.4
Other OECD Countries		4,686		13.0		3,986		8.4		5,875		9.3		6,044		8.2		5,263		6.2
Turkish Free Zones		1,438		4.0		1,928		4.1		2,564		4.1		2,973		4.0		2,967		3.5
Non-OECD Countries		14,206		39.4		17,931		37.9		24,023		38.0		29,138		39.7		34,632		40.5
Europe + CIS Countries		2,607		7.2		3,362		7.1		4,507		7.1		5,855		8.0		7,962		9.3
African Countries		1,697		4.7		2,131		4.5		2,968		4.7		3,631		4.9		4,566		5.3
American Countries		3,914		10.9		4,269		9.0		5,733		9.1		5,960		8.1		6,328		7.4
Middle East Countries		3,440		9.5		5,465		11.6		7,921		12.5		10,184		13.9		11,315		13.2
Other Asian Countries		1,790		5.0		2,348		5.0		2,544		4.0		3,029		4.1		3,942		4.6
Other Countries		758		2.1		355		0.8		349		0.6		478		0.7		519		0.6
Selected Country Groups
- Black Sea Economic Cooperation		3,599		10.0		5,044		10.7		6,779		10.7		8,620		11.7		11,583		13.5
- Economic Cooperation Organization		1,042		2.9		1,569		3.3		2,206		3.5		2,670		3.6		3,341		3.9
- Commonwealth of Independent States		2,279		6.3		2,963		6.3		3,962		6.3		5,057		6.9		6,992		8.2
- Turkish Republics		619		1.7		899		1.9		1,194		1.9		1,409		1.9		1,982		2.3
- Islamic Conference Organization		4,725		13.1		7,205		15.2		10,214		16.2		13,061		17.8		15,007		17.5
Selected Countries(1)
- Germany		5,868		16,3		7,485		15,8		8,725		13,9		9,455		12,9		9,684		11,3
- United Kingdom		3,204		8,4		3,670		7.8		5,544		8.8		5,917		8,1		6,813		8,0


			Percent				Percent				Percent				Percent				Percent
	2002		Share		2003		Share		2004		Share		2005		Share		2006		Share
	*(in millions of U.S. dollars, unless otherwise indicated)*
- Italy		2,376		6.6		3,193		6.8		4,640		7.3		5,617		7.6		6,749		7.9
- USA		3,356		9.3		3,752		7.9		4,849		7.7		4,911		6.7		4,996		5.8
- France		2,135		5.9		2,826		6.0		3,668		5.8		3,806		5.2		4,602		5.4
- Spain		1,125		3.1		1,789		3.8		2,618		4.1		3,011		4.1		3,679		4.3
- Netherlands		1,056		2.9		1,526		3.2		2,138		3.4		2,470		3.4		2,536		3.0
- Iraq		0		0.0		0		0.0		1,821		2.9		2,750		3.7		2,567		3.0
- Russia		1,172		3.3		1,368		2.9		1,859		2.9		2,377		3.2		3,226		3.8
- Israel		861		2.4		1,083		2.3		1,314		2.1		1,467		2.0		1,527		1.8
- Greece		590		1.6		920		1.9		1,171		1.9		1,127		1.5		1,598		1.9
- Belgium — Luxembourg		693		1.9		886		1.9		1,183		1.9		1,292		1.8		1,380		1.6
- Saudi Arabia		555		1.5		741		1.6		769		1.2		962		1.3		983		1.1
- Romania		566		1.6		873		1.8		1,235		2.0		1,785		2.4		2,342		2.7
- U.A.E		457		1.3		703		1.5		1,144		1.8		1,675		2.3		1,959		2.3
- Bulgaria		380		1.1		622		1.3		894		1.4		1,179		1.6		1,566		1.8
Total		36,059		100.0		47,253		100.0		63,167		100.0		73,476		100.0		85,502		100.0


(1)		Countries are selected according to the highest total export values in the last three years.

Sources: TURKSTAT, SPO.

The value of imports increased from approximately $7.9 billion in 1980 to approximately $139.5 billion in 2006. In 2006, the EU accounted for 42.5% of Turkey’s total imports.

In 2006, of the main commodity groups, the share of intermediate goods in total imports was 71.4%, while the shares of capital goods and consumption goods in total imports were 16.7% and 11.5%, respectively. As a result of the Customs Union, all customs duties and charges and the quantitative restrictions on imports from EU and EFTA were abolished. Turkey applies the EU’s common customs tariff on imports of industrial goods from the third countries, except in limited circumstances where the products are automobiles, footwear, certain leather products and furniture. The customs duties applicable to those products were progressively aligned to the EU’s common customs tariffs within the five-year transitional period. To this end, reductions of 10% in 1997, 10% in 1998, 15% in 1999, 15% in 2000 and 50% in 2001 were accomplished through various import regime decrees.

With the establishment of the Customs Union, Turkey’s weighted average rates of protection on industrial imports from the EU and EFTA countries decreased from approximately 10% to 0. As for the products imported from countries that are not part of the Customs Union, average protection rates were reduced from approximately 15%, the pre-Customs Union level, to 5.6% in 1996. As of January 1, 2001, the average of customs duties on industrial products fell further to 4.5%. The average of customs duties in more recent years is not currently available.

The following table presents the composition (by Broad Economic Classification) of Turkey’s imports (other than non-monetary gold) by sector of trade for the periods indicated:

Table No. 20

Imports (cif) by Sector and Commodity


	2002		2003		2004		2005		2006		2003/02		2004/03		2005/04		2006/05
	*(in millions of U.S. dollars, unless otherwise indicated)*										*(% change)*
Capital goods		8,400		11,326		17,397		20,363		23,316		34.8		53.6		17.0		14.5
41 Capital goods(Except transportation vehicles)		7,571		9,823		13,494		17,120		19,634		29.7		37.4		26.9		14.7
521 Transportation vehicles incidental to industry		828		1,503		3,904		3,243		3,682		81.4		159.8		-16.9		13.5
Intermediate goods		37,656		49,735		67,549		81,868		99,555		32.1		35.8		21.2		21.6
21 Unprocessed materials incidental to industry		2,957		4,290		5,776		6,027		7,319		45.1		34.6		4.3		21.4
22 Processed materials incidental to industry		18,032		24,105		33,407		39,549		46,476		33.7		38.6		18.4		17.5
31 Unprocessed fuels and oils		4,957		5,718		7,329		14,699		19,772		15.4		28.2		100.6		34.5
42 Parts of investment goods		4,168		4,840		6,432		6,747		7,622		16.1		32.9		4.9		13.0
53 Parts of transportation vehicles		2,704		3,942		6,544		7,427		8,682		45.8		66.0		13.5		16.9
111 Unprocessed materials of food and beverages		532		957		944		866		779		80.0		-1.4		-8.2		-10.1
121 Processed materials of food and beverages		400		525		624		762		950		31.3		18.9		22.1		24.7
322 Processed fuels and oils		3,906		5,356		6,492		5,791		7,955		37.1		21.2		-10.8		37.4
Consumption goods		4,898		7,813		12,100		13,975		16,102		59.5		54.9		15.5		15.2
51 Automobiles		813		2,220		4,214		4,296		4,269		172.9		89.8		2.0		-0.6
61 Durable consumption goods		687		917		1,440		1,839		2,295		33.5		57.0		27.7		24.8
62 Semi-durable consumption goods		869		1,265		1,911		2,506		3,247		45.6		51.0		31.2		29.6
63 Non-resistant consumption goods		1,739		2,355		3,184		3,415		3,725		35.4		35.2		7.3		9.1
112 Unprocessed of food and beverages		127		119		149		270		316		-5.7		24.9		81.1		16.9
122 Processed of food and beverages		300		404		528		645		755		34.5		30.8		22.1		17.1
321 Gasoline		329		494		556		712		1,084		50.1		12.6		28.0		52.3
522 Transportation vehicles not incidental to industry		34		39		119		292		411		16.5		200.6		146.6		40.6
Others		600		466		493		567		508		-22.4		5.8		15.2		-10.5
7 Other goods not elsewhere specified		600		466		493		567		508		-22.4		5.8		15.2		-10.5
Total		51,554		69,340		97,540		116,774		139,480		34.5		40.7		19.7		19.4


Source: TURKSTAT.

The following table presents imports (other than non-monetary gold) by country or region of origin for the periods indicated:

Table No. 21

Imports (cif) by Country


			Percent				Percent				Percent				Percent				Percent
	2001		Share		2002		Share		2003		Share		2004		Share		2005		Share
	(in millions of U.S. dollars, unless otherwise indicated)
OECD Countries		32,985		64.0		43,899		63.3		59,650		61.2		66,107		56.6		77,738		55.7
EU Countries		25,689		49.8		35,140		50.7		48,103		49.3		52,696		45.1		59,338		42.5
EFTA Countries		2,512		4.9		3,396		4.9		3,911		4.0		4,440		3.8		4,520		3.2
Other OECD Countries		7,151		13.9		7,326		10.6		10,792		11.1		12,935		11.1		14,359		10.3
Turkish Free Zones		575		1.1		589		0.8		811		0.8		760		0.7		944		0.7
Non-OECD Countries		18,569		36.0		25,440		36.7		37,890		38.8		50,667		43.4		61,742		44.3
Europe + CIS Countries		7,487		14.5		10,341		14.9		15,757		16.2		20,386		17.5		25,692		18.4
African Countries		2,696		5.2		3,338		4.8		4,820		4.9		6,047		5.2		7,404		5.3
American Countries		4,065		7.9		4,922		7.1		6,595		6.8		7,857		6.7		9,397		6.7
Middle East Countries		3,186		6.2		4,455		6.4		5,585		5.7		7,967		6.8		10,568		7.6
Other Asian Countries		6,530		12.7		9,644		13.9		15,500		15.9		20,581		17.6		25,634		18.4
Other Countries		1,326		2.6		909		1.3		368		0.4		480		0.4		504		0.4
Selected Country Groups
- Black Sea Economic Cooperation		6,588		12.8		9,298		13.4		15,368		15.8		20,480		17.5		27,017		19.4
- Economic Cooperation Organization		1,548		3.0		2,736		3.9		3,218		3.3		5,108		4.4		8,101		5.8
- Commonwealth of Independent States		5,555		10.8		7,777		11.2		12,927		13.3		17,253		14.8		23,372		16.8
- Turkish Republics		468		0.9		623		0.9		754		0.8		1,267		1.1		1,968		1.4
- Islamic Conference Organization		6,072		11.8		8,195		11.8		10,631		10.9		14,459		12.4		19,108		13.7
Selected Countries (1)
- Russia		3,892		7.5		5,451		7.9		9,033		9.3		12,867		11.0		15,784		11.3
- Germany		7,042		13.7		9,453		13.6		12,516		12.8		13,617		11.7		13,302		9.5
- China		1,368		2.7		2,610		3.8		4,476		4.6		6,866		5.9		8,690		6.2
- Italy		4,097		7.9		5,472		7.9		6,866		7.0		7,558		6.5		7,777		5.6
- France		3,053		5.9		4,164		6.0		6,201		6.4		5,883		5.0		6,111		4.4
- USA		3,099		6.0		3,496		5.0		4,745		4.9		5,371		4.6		5,336		3.8
- Japan		921		1.8		1,861		2.7		1,962		2.0		3,470		3.0		5,285		3.8
- United Kingdom		2,438		4.7		3,500		5.0		4,317		4.4		4,690		4.0		4,660		3.3
- Switzerland		2,143		4.2		2,968		4.3		3,405		3.5		4,054		3.5		3,770		2.7
- Spain		1,419		2.8		2,004		2.9		3,254		3.3		3,549		3.0		3,485		2.5
- South Korea		900		1.7		1,312		1.9		2,573		2.6		3,479		3.0		3,170		2.3
- Iran		1,466		2.8		1,927		2.8		2,684		2.8		3,105		2.7		2,905		2.1
- Ukraine		991		1.9		1,332		1.9		2,509		2.6		2,638		2.3		2,785		2.0
- Belgium — Luxembourg		1,150		2.2		1,524		2.2		1,992		2.0		2,231		1.9		2,231		1.6
- Netherlands		1,311		2.5		1,657		2.4		1,908		2.0		2,142		1.8		1,963		1.4
Total		51,554		100.0		69,340		100.0		97,540		100.0		116,774		100.0		139,480		100.0


(1)		The countries are chosen according to the total import values in the last three years.

Sources: TURKSTAT, SPO.

As of December 31, 2006, Turkey’s gross international reserves were approximately $90.8 billion. As of December 31, 2006, official reserves of the Central Bank were approximately $60.9 billion and commercial banks and special finance house gross foreign exchange reserves (excluding gold and securities portfolio) were approximately $27.5 billion. In 2006, net portfolio inflows to Turkey were $7.4 billion, compared to $13.4 billion in 2005.

OTHER GOODS, SERVICES AND INCOME

In addition to merchandise exports and imports, Turkey’s current account is also composed of earnings from other goods, services and income. This item includes tourism revenues, interest earnings and other invisible revenues such as earnings from shipment and transportation, investment income, contractors’ earnings and other official and private services (a residual category).

In 2006, Turkey’s tourism revenues decreased by 7.2% to $16.9 billion. See “Economy—Services—Tourism.” In addition, earnings from direct, portfolio and other investment were $4.5 billion in 2006, compared to $3.9 billion in 2004.

Turkey’s receipts from all services amounted to approximately $24.5 billion in 2006, which represented an decrease of 8.1% from 2005. Current transfers amounted to $1.7 billion in 2006. On the other hand, the debit for all services and income account amounted to approximately $22.2 billion ($11 billion from income) in 2006, representing an increase of 6.4% (an increase of 16.6% for income) from 2005.

BALANCE OF PAYMENTS

The following table summarizes the balance of payments of Turkey for the periods indicated:

Table No. 22


	2001		2002		2003		2004		2005		2006
	*(in millions of US Dollars)*
Balance of Payments
CURRENT ACCOUNT		3,393		-1,521		-8,036		-15,601		-22,603		-32,774
Trade Balance		-3,730		-7,283		-14,010		-23,878		-33,530		-41,238
Exports		34,373		40,124		51,206		67,047		76,949		91,937
Imports		-38,103		-47,407		-65,216		-90,925		-110,479		-133,175
Services (net)		9,136		7,885		10,511		12,797		15,272		13,361
Services (Credit)		15,203		14,031		17,952		22,941		26,640		24,490
Tourism receipts		8,090		8,479		13,203		15,888		18,152		16,853
Services (Debit)		-6,067		-6,146		-7,441		-10,144		-11,368		-11,129
Income (net)		-5,000		-4,556		-5,557		-5,637		-5,799		-6,584
Income (Credit)		2,753		2,486		2,246		2,651		3,684		4,473
Interest		1,139		784		634		697		1,005		1,453
Income (Debit)		-7,753		-7,042		-7,803		-8,288		-9,483		-11,057
Interest		-5,497		-4,416		-4,579		-4,343		-5,050		-6,353
Current Transfers		2,987		2,433		1,020		1,117		1,454		1,687
Workers Remittances		2,786		1,936		729		804		851		1,111
Official Transfers		201		497		291		313		603		576
CAPITAL ACCOUNT		0		0		0		0		0		0
FINANCIAL ACCOUNT		-1,633		1,406		3,095		13,410		20,487		35,169
Direct Investment (net)		2,855		962		1,253		2,024		8,725		19,136
Portfolio Investment (net)		-4,515		-593		2,465		8,023		13,437		7,373
Assets		-788		-2,096		-1,386		-1,388		-1,233		-4,029
Liabilities		-3,727		1,503		3,851		9,411		14,670		11,402
Debt Securities		-3,648		1,519		2,946		7,984		9,001		9,463
General Government		-3,645		1,958		3,123		7,984		9,351		9,463
Bond issued abroad (net)		99		1,029		1,509		1,959		3,417		3,334
Other Investment		-2,667		7,190		3,424		4,187		16,172		14,774
Assets		-601		-777		-986		-6,955		259		-12,420
Liabilities		-2,066		7,967		4,410		11,142		15,913		27,194
Loans		614		5,039		753		6,136		12,037		19,696
Monetary Authorities		10,229		-6,138		-1,479		-4,414		-2,881		0
General Government		-1,977		11,834		-765		-267		-4,637		-5,223
Banks		-8,076		-1,028		1,975		5,708		9,248		5,813
Other sectors		438		371		1,022		5,109		10,307		19,106
Deposits		-832		348		1,368		647		489		4,622


	2001		2002		2003		2004		2005		2006
	*(in millions of US Dollars)*
Monetary Authority (FX accounts held within CBT)		736		1,336		497		-209		-787		-1,268
Reserve Assets		2,694		-6,153		-4,047		-824		-17,847		-6,114
NET ERRORS AND OMISSIONS		-1,760		115		4,941		2,191		2,116		-2,395


Source: CBT.

CURRENT ACCOUNT

The financial turmoil in November 2000 coupled with the economic crisis in February 2001 resulted in an economic recession, which in turn caused a slowdown in import demand. After the abandonment of the crawling peg system, the Turkish Lira depreciated significantly which resulted in reduced imports. The sharpest decline was observed in imports of consumer goods. Capital and investment goods imports also declined in that period. On the other hand, exports increased as a result of increased exports of transportation vehicles and parts, electrical machinery and mechanical equipments, and iron and steel. Shuttle trade and travel revenues showed slight increases in 2001. Hence, the current account resulted in a surplus of $3.4 billion in 2001. Turkey also experienced negative effects on travel revenues in the last quarter of 2001, as a result of the terrorist attacks in the United States in 2001.

The most important factors that affected foreign trade in 2002 were domestic demand and production increases. Industrial production displayed high growth rates particularly after March, which stimulated imports of intermediate goods for the second quarter of 2002. On the other hand, as the domestic investment and consumption demand remained weak, excess supply was directed towards external markets. This development brought about increased exports despite a sluggish world economy. Imports increased by 24.5% and exports increased by 15.1% in 2002. Shuttle trade and travel revenues continued to increase in 2002. Consequently, the current account yielded a $1.5 billion deficit in 2002.

External accounts continued to deteriorate in 2003, and the current account yielded a deficit of 3.4% of GNP in 2003. The deficit resulted from a widening trade deficit. Imports grew by 34.5% in 2003, mostly led by imports of intermediate goods. The growth in imports was attributed mainly to a rise in industrial production and a growth in exports that necessitate imported inputs, as well as a strengthening currency. Exports increased despite an increasing real exchange rate. Improved export performance was due to lower levels of labor and energy costs and as well as growth in productivity. Services revenues increased by 27.9% as a result of tourism revenues in 2003, and investment expenditures also increased due to portfolio expenditures and interest payments. Workers’ remittances continued to decline in 2003.

Progress towards EU membership and increases in political stability improved expectations for the Turkish economy in 2004. As a result of high growth and capital inflows, the current account balance yielded a deficit of $15.6 billion in 2004. The services surplus reached $12.8 billion (a 21.7% increase over 2003) due largely to an increase of 20.3% in tourism revenues totaling $15.9 billion. However, investment revenues remained unchanged compared to the previous year at a deficit of $5.6 billion. Current transfers reached $1.1 billion in 2004 (a 9.5% increase over 2003) due to increases in workers’ remittances and official transfers. Shuttle trade revenues declined slightly in 2004 by 1.8% to $3.9 billion.

The current account deficit continued to widen and reached $22.6 billion in 2005, mainly due to the widening trade deficit. The expansion of domestic consumption together with the rapid rise in machinery equipment and construction investment contributed to import growth significantly. The increase in crude oil and other energy prices is another important factor behind rapid import growth. In spite of the strong YTL, exports grew by 16.3% owing to strong foreign demand and low unit labor costs in 2005, albeit losing momentum towards the end of the year. Tourism revenues reached $18.2 billion resulting in a services surplus of $15.3 billion in the same year. However, the increasing investment expenditures led to an income deficit of $5.8 billion. Current transfers increased by 30.2% compared to 2004, whereas shuttle trade declined by 10.5%.

The financial turmoil in international markets during May-June 2006 affected the Turkish economy considerably. The domestic demand slowed down significantly, which was reflected in the imports of consumption and investment goods especially by the second half of the year. Exports, on the other hand, regained pace in the second half of 2006 and exports growth rates surpassed those of imports towards the end of 2006. Consequently, current account-GNP ratio stabilized after reaching its record-high level of 8.2% annually in the third quarter of 2006. The tourism sector experienced a weak performance during 2006 due to mainly the world cup held in Germany which is Turkey’s biggest tourist supplier, the avian flu epidemic, hard winter conditions and political tensions in Turkey’s neighboring countries even though it seems there is a slight recovery in the tourism revenues in the first half of 2007.

FOREIGN DIRECT INVESTMENT

Probusiness foreign investment policies have been introduced as part of the liberalization of the Turkish economy. The foreign investment legislation provides a secure environment for foreign investors by providing support from several bilateral and multilateral agreements and organizations; assuring national treatment — granting foreign entrepreneurs the same rights and obligations as local entrepreneurs — and guaranteeing the transfer of profits, fees and royalties and the repatriation of capital.

The foreign direct investment Law No. 4875, which has been in force since June 17, 2003, emphasizes the key elements of the liberal investment environment in Turkey, and represents a “legal guide” to international investors about their rights and obligations. Since all companies established in Turkey within the framework of the Turkish Commercial Code are considered Turkish companies, all duties and responsibilities are the same, regardless of the nature of the capital structure of the company.

Main Principles of Foreign Direct Investment Regime:

	•		No Pre-entry Screening Requirement

	•		No Minimum Capital Requirement

	•		National Treatment

	•		Guarantee to Transfer Proceeds

	•		Key Expatriate Personnel Employment

	•		Protection Against Expropriation

	•		Access to Real Estate

	•		International Dispute Settlement

Turkey has been a party to several international organizations and bilateral and multilateral agreements, which provide a more secure investment environment for foreign investors, such as:

	•		Turkey is a member of OECD, WTO, IMF, World Bank and organizations of the World Bank, including Multinational International Guaranty Agency (“MIGA”).

	•		Agreements to protect and promote investment have been signed with 79 countries, and 64 of these such agreements are currently in force.

	•		Agreements to avoid double taxation are currently in effect with 65 countries.

	•		Turkey has been a party to OECD Codes of Capital Movements and Invisible Transactions and the convention on the International Center for Settlement of Disputes.

	•		Turkey has been a party to investment-related agreements on WTO platforms such as TRIMs (Trade Related Investment Measures) and TRIPs (Trade Related Intellectual Property Rights).

Regulated markets for electricity and natural gas were introduced to address the shortcomings of the current centralized model. The telecommunications sector has also undergone changes, transforming the formerly monopolistic structure to a regulated and competitive sector. The High Council of Telecommunications was established in 2000 as a supervisory body for the telecommunication industry. The last step towards a full liberalization of the sector began on January 1, 2004 following the termination of the monopoly of Turk Telekom on voice telephony services and telecommunication infrastructure. Following full liberalization, the Telecommunication Authority granted the first licenses for territorial data transmission.

Consistent with the recovery of the main economic indicators and efforts to improve the investment environment, FDI inflows continued to rise in 2006. Net FDI inflows into Turkey totaled $20,106 million in 2006, implying a more than twofold increase compared to 2005.

The following table sets forth foreign direct investment inflows for the years indicated:

Table No. 23

Foreign Direct Investment


								Other Capital
								(intra-company			Real
	Equity Capital							loans)			Estate		Total
	Inflow		Outflow			Net		Net			Net		(Net)
	*(in millions of U.S. dollars)*
2001		3,374		(22	)		3,352		—			—		3,352
2002		622		(5	)		617		520			—		1,137
2003		745		(8	)		737		17			998		1,752
2004		1,291		(100	)		1,191		349			1,343		2,883
2005		8,536		(336	)		8,200		(238	)		1,841		9,803
2006		17,755		(657	)		17,098		86			2,922		20,106


Source: CBT

Investments in the services sector accounted for 88% of total foreign direct investment for 2006, while manufacturing accounted for 10.6% of such total.

The following tables set forth foreign direct investment inflows (Equity Capital) by sector and by country:

Table No. 24

Foreign Direct Investment (Equity Capital) by Sector
(in millions of U.S. dollars)


Sector	2002		2003		2004		2005		2006
Agriculture, hunting and forestry		—		1		4		5		5
Fishing		—		—		2		2		1
Mining and quarrying		2		14		75		40		125
Manufacturing		110		448		214		788		1,874
Electricity, gas and water supply		68		86		69		4		112
Construction		3		8		23		80		302
Wholesale and retail trade		89		92		103		68		1,145
Hotels and restaurants		0		4		1		42		28
Transport, storage and communications		1		2		639		3,285		6,699
Financial intermediation		260		51		69		4,016		7,002
Real estate, renting and business activities		0		6		3		29		92
Public administration and defence; compulsory social security		—		—		—		—		—
Education		0		0		0		17		0


Sector	2002		2003		2004		2005		2006
Health and social work		5		23		53		74		264
Other community, social and personal service activities		84		10		36		86		106
Private households with employed persons		—		—		—		—		—
Extra-territorial organizations and bodies		—		—		—		—		—
Total		622		745		1,291		8,536		17,755


Source: CBT

Table No. 25

Foreign Direct Investment (Equity Capital) by Country


Country	2002		2003		2004		2005		2006
European Union (25)		455		555		1,025		4,991		14,561
Germany		86		142		73		391		366
France		22		120		34		2,107		444
Netherlands		72		50		568		383		5,108
United Kingdom		8		141		126		165		635
Italy		241		1		15		692		209
Other EU Countries		26		101		212		1,265		7,810
Other European Countries (Excluding EU)		64		70		109		1,662		95
Africa		0		0		0		3		32
America		9		58		97		122		1,006
North America		9		58		97		114		972
U.S.A.		2		52		36		88		851
Canada		7		6		61		26		121
Central America And Caribbean		0		0		0		8		33
South America		0		0		0		0		1
Asian		70		60		60		1,756		1,946
Gulf Arabian Countries		5		0		1		1,675		1,791
Near and Middle Eastern Countries		0		1		53		1,678		1,915
Other Asian Countries		65		59		6		78		31
Australia		0		0		0		1		108
Unclassified		24		2		0		1		7
Total		622		745		1,291		8,536		17,755


Source: CBT

FUTURE DIRECTIONS

Strengthening private sector’s role in the Turkish economy is an integral part of the Government’s overall macroeconomic program. Within this framework, the Government put efforts for improving the investment climate among the top agenda items and initiated a comprehensive reform program in 2001 in order to streamline all investment-related procedures. The purpose of the Reform Program is to increase domestic and foreign investment by improving the investment environment. Thus, it is intended to prevent administrative obstacles faced during investments, to reduce or eliminate some unnecessary and repetitive bureaucratic transactions and to complete the procedures rapidly. The Reform Program does not have a limited period, instead, it is an on-going improvement initiative.

With a view to provide an efficient structure to coordinate the Reform Programme, the Co-ordination Council for the Improvement of the Investment Environment (YOİKK) has been established. The mandate of the YOİKK is to make specific recommendations to the Council of Ministers to remove the obstacles to the improvement of the investment climate.

The YOİKK assigned 10 specialized technical committees to work on developing concrete proposals and strategies in order to overcome all main obstacles in different fields:

	•		company registration;

	•		employment of foreigners;

	•		sectoral licensing;

	•		land access and site development;

	•		taxation and state aids;

	•		customs and technical standards;

	•		intellectual property rights;

	•		foreign direct investments legislation;

	•		investment promotion and

	•		corporate governance

Productive collaboration between the public and the private sector is the key in this process. To ensure that policy reforms truly reflect and address private sector concerns, direct involvement of companies and investors in this process is critical. Thus, each technical committee consists of the representatives of the private sector and government agencies.

To increase efficiency of the YOİKK, a new Steering Committee was established in May 2005, involving high level executives of six Ministries and governmental agencies and the four leading business associations which have seats on the YOİKK and Investment Advisory Council for Turkey (IAC) platforms. The Undersecretary of the Treasury chairs the Steering Committee. In case of necessity, the Chairman is able to invite representatives from institutions who do not take place among members.

This comprehensive reform program has begun to bore fruitful results in recent years;

On July 4, 2006, the Law on Establishment of Investment Support and Promotion Agency of Turkey (Law No. 5523) was published in the Official Gazette. Under the office of the Prime Minister, the Agency would have administrative and financial autonomy to sustain operational flexibility and provide information and guidance for investors throughout every step of the investment process. The law on establishment of development agencies regulating the formation of the Investment Support Offices which would assist investors in obtaining necessary permissions and provide coordination in legal procedures, entered into force in February 2006.

New FDI law that serves as a declaration to foreign investors of their rights and will enable a shift from an “investment permission system” to an “investment monitoring system” in conformity with international best practices.

Law enabling the establishment of a company in one day, by granting authority to Trade Registries. As a result, company association processes was reduced to 3 transactions from 19 transactions. The efforts are still continuing to eliminate the problems in company liquidation and to allow association of companies in electronic environment.

Certain initiatives in mining, food, pharmaceutics, chemicals and tourism sectors to simplify the legislation and bureaucratic procedures related to the sector licenses. Within this context, the Environmental Impact Assessment (EIA) process was shortened, the preliminary emission authorization was also cancelled for most of the investments upon issue of Regulation on Controlling Industrial Air Pollution.

Regulation on “Opening a Business Place and Work Licence” reducing the required number of documents from 52 to 6 for licensing of sanitary business place and from 43 to 7 for licensing of non-sanitary business places.

The legal arrangement of the General Directorate of Land Registry and Cadastre came into effect on January 7, 2006.⁴ The legislation amends the Article 35 of the Land Registry Law No 2644 and pertains the purchase of real estate by foreigners.

Regarding the sectoral licenses, the legal arrangement of the Undersecretariat of the State Planning Organization pertaining to the establishment of the Development Agencies, including the regulations on the establishment of “One Stop Shops (Investment Support Offices)” System related to sectoral permits at investment and commissioning stages came into force on February 8, 2006.⁵Consequently on July 6, 2006 Development Agencies in Adana (for the provinces of Adana and Mersin) and Izmir were established.

The Investment Portal of Turkey, another significant development in terms of improving the investment climate, has been launched on May 8, 2006 at http://www.investinturkey.gov.tr. The Portal, prepared by the Undersecretariat of Treasury, has a comprehensive and up-to-date content on the subjects that interests both national and international investors.


4		Law No 5444 on the Amendment of the Land Registry Law (Official Gazette January 7, 2006/26046)

5		Law No 5449 Pertaining to the Establishment, Coordination and Duties of Development Agencies (Official Gazette February 8, 2006/26074)

The regulation of the Ministry of Industry and Trade pertaining to the definition of SMEs⁶entered into force on May 18, 2006. This legislation containing a single, EU harmonized definition of SME, ensures the acceptance of a common definition by all establishments and institutions that have the terms SME , Medium Sized Enterprise, Small Sized Enterprise or Micro Enterprise in their charters or programs.

“The Draft for Amendment to Coastal Law” of Ministry of Public Works and Settlement prepared in conjunction with the activities of the Technical Committee on Investment Location has been sent to the Prime Ministry. The views collected by the Prime Ministry are being evaluated by the Ministry. Also, the studies of the said Ministry have been continuing on the “Draft of Land Planning and Development Law”.

The enforcement process concerning the Law amending the Law on Work Permits for Foreigners No: 4817 is ongoing. The Law aims to eliminate the problems faced in the implementation process of the work permits for expatriates.

Furthermore, Turkish Investment Support and Promotion Agency (TISPA)⁷ that aims to fulfill the effective promotion of investment climate of Turkey and the opportunities offered for the investors, was established on July 4, 2006. The Agency charged with the duty of developing and applying the investment support and promotion strategies aimed at encouraging the international investors to invest in Turkey.

On the other hand, another project, EU Twinning Project; “Towards Improving the Investment Climate in Turkey: Comments on the YOIKK Reform Process” has been implemented for the purpose of providing a momentum and new study topics to the YOIKK Reform Program. The Project has been started officially on the 14th of February, 2005 and was completed on September 30, 2006. The project serves the overall objective of increasing the inflow of foreign direct investments into Turkey to a level commensurate with Turkey’s economic potential. To review national legislation and practice related to foreign direct investment and within the Reform Program in Turkey with a view to compare it to EU member states and to assess the impact on the investor community. There are totally 16 components in the project, 10 of them are in conformity with the Technical Committees in the YOIKK Reform process. At the end of the Project, an overall report was prepared and submitted to the YOIKK Technical Committees for the determination of further policy actions.

On February 5, 2007, the YOİKK has announced a new action plan. The plan includes schedule for all representative institutions from the public and private sectors to finalize work of the each Technical Committee. And the plan also allows the public to follow YOİKK’s effectiveness and continuing work. Implementation of the action plan will provide a performance measurement for each Technical Committee’s work to improve the investment environment.

While achieving quite positive results in improving the environment for business by means of national platforms like the YOİKK, another structure with an international perspective, named Investment Advisory Council (IAC) for Turkey was established in 2004 with a view to raise the competitive position of Turkey in the world economy as an investment location. At the end of the inaugural meeting the Council members decided to convene once a year and highlighted a number of priority issues which they believed to be hindering the full blossoming of Turkey’s potential and which they view it would be beneficial to concentrate upon until the next meeting. The high — level IAC meetings in 2004, 2005, 2006 and 2007 brought together the top executives of leading multinational companies, international organizations and heads of Turkish private sector associations in Istanbul and every meeting was entirely chaired by the Prime Minister Recep Tayyip Erdoğan. The IAC structure, and the cooperative dialogue it engenders with the private sector, has proven to be not only fundamental for creating a better investment climate, but also fully supportive of the government’s philosophy that continuous efforts to improve the investment environment will remain at the forefront of the country’s development priorities. The YOIKK technical committees will serve as working groups to which the IAC recommendations shall be remitted for follow up and action.

The last meeting of the Investment Advisory Council was held on July 11, 2007 in Istanbul. The members of the IAC, whose global businesses represents nearly US$ 750 billion of revenues and who employ more than 2 million people around the world, unanimously reaffirm for the fourth consecutive year their commitment to the Turkish economy and reiterate their substantial investment and growth plans for the future. A progress report which was also published on the web page of the Undersecretariat of Treasury was prepared and submitted to the IAC Members before the 2007 meeting and informed them about the improvements made


6		The Regulation Pertaining to the Definition, Characteristics and Classification of Small and Medium Size Enterprises (Official Gazette 18.11. November 18, 2005/ 25997)

7		Law No 5523 on the Establishment of The Investment Support and Promotion Agency of Turkey (Official Gazette July 4, 2006/ 26218)

in Turkey’s investment climate. The members of the Council appreciated the Government’s commitment and effectiveness in successfully carrying out reforms in sustaining macroeconomic stability, pursuing a coherent approach to investment climate with involvement of all stakeholders and a well functioning YOİKK, supporting R&D and innovation, establishment of the Investment Support and Promotion Agency of Turkey, reduction of corporate tax rate from 30 to 20 and successfully implementing the privatization program. Additionally, they advised 13 issues important for the Government to prioritize in order to meet the ongoing challenges in the declaration of outcomes of the fourth meeting.

CAPITAL ACCOUNT

Within the period 2000-2006, financing needs were mainly met by credit drawings from IMF loans, long-term capital inflows, portfolio investments and foreign direct investments. A combination of capital flows totaling $133.2 billion was used to finance the total current account deficits of $87 billion, while net international reserves increased by $48.7 billion during this period (with the remaining $2.5 billion to be net errors and omissions).

In 2000, while the Government’s bond issues, IMF credit uses, short term borrowing by the banking sector and long term borrowing of the private sector played important roles in the financing of the deficit, the financial turmoil in November 2000 resulted in a considerable outflow of portfolio investments.

Foreign direct investments and the Government’s drawings of IMF loans gave rise to capital inflows in 2001, whereas substantial short-term debt repayments of the banking sector and portfolio outflows especially during the crisis were the dominant factors in the financing structure of 2001. As a consequence, Central Bank reserves fell by $2.7 billion in that period.

The Government’s use of $12.5 billion of IMF loans was the most important financing source for the current account deficit in 2002, which led to a $6.2 billion increase in Central Bank reserves.

In 2003, the deficit was financed through portfolio flows, short-term credit drawings by the banking sector, and rising deposits of non-residents in domestic banks. The net errors and omissions that generated $4.9 billion of inflows in 2003 was an important item limiting the financing need. As capital inflows exceeded the current account deficit, Central Bank reserves increased by $4 billion in that period.

In 2004, long-term financing, other than portfolio investments, rose significantly as a percentage of total financing. Long-term capital flows and portfolio investments were mainly composed of long-term credit from the private sector and security purchases by non-residents, respectively. The financial account yielded a surplus of $13.4 billion in 2004 despite significant loan repayments related to IMF credits. Excluding IMF loans and reserve changes, net capital inflow was $23.7 billion during this period. Net errors and omissions continued their increasing pace. As the capital inflows surpassed the external financing requirement, the total reserves (consisting of Central Bank and other banks’ reserves) increased by $6.8 billion.

In 2005, the external financing requirement was met by portfolio investments, long-term credits utilized by private and banking sector and foreign direct investments (“FDI”). Long-term borrowing of private and banking sector amounted to $9.9 billion and $6.5 billion, respectively. Furthermore, the Treasury issued $6.5 billion worth of bonds at low costs, as a result of positive outlook of the Turkish economy in international markets. FDI inflows realized as $8.7 billion, which was the historical highest level at that time. Net errors and omissions resulted in $2.1 billion of inflows. Therefore, excluding IMF loans and reserve changes, net capital inflow reached $44 billion in 2005. Consequently, Central Bank and banking sector reserves have increased by $17.8 billion and $0.3 billion, respectively.

During 2006, the share of portfolio investment and short term loans in capital flows decreased significantly, as the financing structure was dominated by long term loans of private and banking sectors as well as direct investment. Major privatizations together with mergers and acquisitions were the driving factors behind inflow of large amount of long-term loans and direct investments. Hence, despite the high level of current account deficit and ongoing IMF debt repayments, the Central Bank and banking sectors have been able to increase their foreign exchange reserves by $6.1 billion and $10.3 billion, respectively. According to preliminary data, the surge in direct investments and the high share of long term loans continue to meet the financing requirement of the current account deficit.

On December 28, 2006, the Republic announced its 2007 financing program. According to the 2007 financing program, the Republic expects to repay a total of approximately TRY166.5 billion of debt in 2007, of which approximately TRY140.3 billion

constitutes domestic debt and approximately TRY26.2 billion constitutes external debt service. The total borrowing target for the Republic in 2007 is approximately TRY122.0 billion, of which approximately TRY104.2 billion consists of domestic borrowing and approximately TRY17.8 billion consists of external borrowing. Of the TRY17.8 billion of external borrowing expected in 2007, TRY8.2 billion is expected to be raised through bond issuances, TRY6.6 billion from international financial institutions and TRY3.0 billion through project financing. Other sources of funds in 2007 are expected to consist of primary surplus (which is targeted to yield TRY34.3 billion on cash basis), privatization revenues together with transfers from the Savings and Deposit Insurance Fund (“SDIF”) (which is targeted to yield TRY6.8 billion) and collections from guaranteed receivables (which is targeted to yield TRY0.7 billion).

INTERNATIONAL RESERVES

Over the period 2001-2006, Turkey has substantially increased its international reserves, including official reserves of the Central Bank and reserves held by commercial banks and gold. Net international reserves reached $90.8 billion as of December 31, 2006. The following table presents the level of international reserves at the end of the years indicated:

Table No. 26

International Reserves (in millions of U.S. Dollars)


	Gold		Central Bank		Commercial Banks(1)		Gross Reserves		Overdraft		Net Reserves
2001		1,032		18,787		10,392		30,212		20		30,192
2002		1,279		26,807		9,980		38,066		15		38,051
2003		1,558		33,616		9,795		44,968		11		44,957
2004		1,635		36,009		16,143		53,786		1		53,785
2005		1,915		50,515		16,314		68,744		1		68,744
2006		2,373		60,912		27,536		90,822		1		90,821


(1)		Includes all commercial

FINANCIAL SYSTEM

THE CENTRAL BANK

The Law on the Central Bank of Turkey of Turkey (No. 1715) was enacted on June 11, 1930. The Bank was established in October 1931 and opened officially on January 1, 1932. This Law was abolished in 1970 and a new Central Bank Law numbered 1211 was enacted on January 14, 1970. The aim of the new Central Bank Law was to redefine the authorities and responsibilities of the Central Bank and to enrich the monetary policy tools of the Bank so as to enable the Central Bank to play a more active and efficient role in the economy.

The Central Bank has the exclusive right to issue bank notes in Turkey. As the sole regulator of the volume and circulation of the national currency, the Central Bank controls the monetary supply through open market operations and by setting reserve and liquidity requirements. The Central Bank’s open market operations desk maintains a portfolio of Government securities to effect repurchases, reverse repurchases, direct sales and direct purchases. On a day-to-day basis, the Central Bank also regulates liquidity through the interbank market.

The Central Bank manages and controls the official gold and foreign exchange reserves within the framework of overall economic objectives. The Central Bank’s foreign currency reserves consist primarily of U.S. dollar and Euro denominated deposits and marketable securities issued by foreign governments and institutions of high credit quality. The Central Bank is also required to determine and protect the parity of the national currency with gold and foreign currencies within guidelines set by the Government. Besides the foreign exchange market, the Central Bank oversees the domestic markets for Turkish Lira deposits, foreign currency notes and foreign currency deposits. The Central Bank also engages in lending and the granting of credits through its discount window from time to time, though it has not done so to any material extent from January 1996 to date.

The Central Bank performs the traditional functions of a central bank, including the issuance of banknotes, establishing monetary and exchange rate policy in accordance with the needs of the economy so as to maintain price stability by taking into consideration the development plans and annual programs, and advising the Government regarding financial matters.

In the aftermath of the February 2001 crisis, a series of reforms were realized. In May 2001, the Central Bank Law was amended in accordance with international experiences to ensure instrument independence, accountability and transparency. Price stability was declared as the sole and overriding objective of the monetary policy. Short-term interest rates became the main policy instrument of the Bank. The law also established a Monetary Policy Committee with the responsibility of setting the inflation target together with the government. In this context, the Central Bank is expected to inform the Government and the public about the targets and implementations of the monetary policy, safeguard the value of the Turkish Lira against foreign exchange rates and work with the Government to determine the exchange rate regime. The law clearly defines the relationship between the Government and the Central Bank and excludes cash advances to the Treasury and prohibits credit lines to public institutions.

In 2002, with an eye towards modern Central Banking policies and in preparation for an inflation targeting strategy, important changes were made in the operational structure of Turkey’s monetary policy. Within the framework of these changes, on August 1, 2002, the Turkish Banks’ Association, with the assistance of the Central Bank, launched the Turkish Lira Interbank Offer Rate (“TRLIBOR”). The determination of interbank reference rates is expected to play an important role in the pricing of credit and other financial instruments, including forward foreign exchange rates. The Central Bank phased out its intermediation role in both the interbank money market and the foreign exchange and banknotes market by taking into consideration the progress made in strengthening the private banking sector and in selling or closing down the banks under the SDIF. The Central Bank’s gradual withdrawal as a blind broker for banks in the aforementioned markets was concluded as of December 2, 2002. In addition to these developments, beginning on September 2, 2002, a Primary Dealership system was initiated by the Treasury and the Central Bank supported the system by providing the primary dealer banks with Turkish Lira liquidity.

The Central Bank continued efforts to improve the stability of financial markets by implementing policies regarding price stability. Within this framework, the Central Bank introduced the lending operations market for Government Domestic Borrowing Securities (“GDBS”) at the beginning of 2003 as a step to reinforce the Primary Dealer System. Hence, the banks that want to lend GDBS had the opportunity to obtain additional return with low risk, while borrower Primary Dealer banks reduced their quotation liabilities in the secondary market. In addition, markets were immediately stabilized by providing funds on reasonable conditions in the foreign exchange and banknotes markets in order to minimize the adverse market effects of the conflict in Iraq. Similarly, during the terrorist attacks in Istanbul in November 2003, banks were provided with unlimited borrowing facility. Lending interest rates were also temporarily reduced to dissipate the tension in the markets and to diminish possible fluctuations. The payment system functioned normally and closed without problems by the help of these measures.

In 2004, the Central Bank continued to implement implicit inflation targeting under a floating exchange rate regime. In this framework, the Central Bank continued to use short-term interest rates as the primary tool to counteract inflationary pressures whereas some monetary aggregates from the Central Bank’s balance sheet have functioned as nominal anchor in the context of the economic program conducted with the IMF. To this end, the overnight borrowing interest rate was reduced from 26% to 18% throughout the year 2004.

On January 31, 2004, the Law on the Currency Unit of Turkey (Law No. 5083) was published in the Official Gazette (No.25363). In accordance with Law No. 5083 (No. 25363), a new currency, known as New Turkish Lira or TRY, was introduced on January 1, 2005. The conversion rate of the old Turkish Lira to the New Turkish Lira is: TL1,000,000 = TRY1. The subunit of the New Turkish Lira is Yeni Kurus or Ykr; 1 New Turkish Lira is equal to 100 Kurus. Turkish Lira and New Turkish Lira banknotes and coins have been in physical circulation since January 2005. However, on January 1, 2006, the old Turkish Lira banknotes were withdrawn from circulation. The Central Bank will convert old Turkish Lira to New Turkish Lira for a period of ten years.

The implicit inflation targeting regime continued to be implemented with floating exchange rate regime in 2005 as well. There were two important developments in this year, which caused full-fledged inflation targeting to be postponed to 2006 and the announcement of 2005 as a “transition year”: The first one was currency reform of dropping six zeros from the Turkish lira. With this reform, the Central Bank indicated its confidence on the permanency of the achievements made during implicit inflation-targeting period, which in turn, enhanced the credibility of the monetary policies further. Secondly, the Turkish Statistics Institution introduced new price indices, which include changing the base year and calculation methodology of the CPI. The Central Bank continued to use the short term interest rates as the main policy instrument. Due to the favorable inflation outcomes and positive expectations regarding the Turkish economy and the monetary policy, the path of the interest rates was downward throughout the year. In fact, the overnight borrowing interest rates dropped from 18% to 13.5% in 2005.

The year 2006 was a turning point regarding monetary policy implementations in Turkey, since most of the pre-conditions for a successful inflation-targeting regime were met and hence, the Central Bank has adopted a full-fledged inflation-targeting regime after

a prolonged period of “implicit” inflation targeting. With the advent of this new regime, the Monetary Policy Committee (MPC) has evolved into a decision making body from an advisory body. The MPC continued to employ short-term interest rates in the Interbank Money Market as the main monetary policy instrument to achieve the price stability goal. When making decisions on the short term interest rates under the scope of inflation targeting, the MPC mainly focused on medium-term inflation outlook and the policy rates were determined by considering a comprehensive information set which was composed of developments in aggregate supply and demand; inflation expectations and pricing behavior gathered through surveys; developments in fiscal policy, wages, employment and productivity; Central Bank’s inflation forecasts and risk assessments of future external shocks.

Consistent with the medium-term approach, the Central Bank has announced a three-year target. The point target for the first year of the inflation-targeting regime was set as 5 percent with the Government together with a symmetric uncertainty band of 2 percentage points. Also, the year-end targets for the years 2007 and 2008 were announced as 4 percent. Moreover, the Central Bank initially emphasized that in case any developments prevailed that would threaten the possibility of achieving the targets in the medium term, the Central Bank would be required to explain the reasons for the deviation from the target, to take necessary measures to ensure that inflation would revert back to the target, and to inform the public on the expected duration in which inflation would converge to the target.

On December 13, 2006, the Central Bank announced its monetary policy details for the year 2007. It announced that the inflation target rates, which are ‘point targets’ based on CPI with a band of 2% in either direction, are 4% for the years 2007, 2008 and 2009. The Monetary Policy Committee (“MPC”) will meet during the second or third week of each month and the interest rate decision will be made publicly available the same day as the MPC meeting. The Central Bank will also continue publishing a quarterly “Inflation Report”, a semiannual “Financial Stability Report” and a monthly “Price Developments” report in 2007.

MONETARY POLICY AND INFLATION

2001. Following the November 2000 financial crisis, the Government announced a new monetary policy, while the exchange rate policy remained the same. The predetermined daily exchange rate path was announced for the January-June period and the “progressively widening band” around the central exchange rate path was determined. Additionally, new targets for some balance sheet items, such as net domestic assets and net international reserves were announced.

However, the increase in the risk premium pushed the interest rates in primary and secondary markets to pre-crisis levels. Towards the end of February 2001, political uncertainties preceding the Treasury auction caused panic in the markets and the Turkish Lira faced a serious attack. The Central Bank tightened the liquidity, which led to a bottleneck in the payments system. In light of these developments, defending the crawling peg exchange rate regime became impossible. As a result, the currency peg system was abandoned in the wake of the February crisis and the Central Bank announced exchange rates would be determined in the market by supply and demand conditions. Interventions were carried out only to smooth the excessive short-run fluctuations, without interfering with exchange rates reaching their market-determined levels in the long run.

The “Transition Program for Strengthening the Turkish Economy” was initiated in May 2001 to review the 2000 disinflation program and to reinforce structural elements. The goal of this program was to secure economic stability and to put the economy on a sustainable growth path by overcoming the inflation problem. From late February 2001 through the beginning of a new IMF program in mid-May, the Central Bank focused on re-establishing financial market stability by ensuring the re-functioning of the payments system, reducing the open positions of banks to more prudent levels, bringing stability to the exchange rate, and addressing the chronic problems of state-owned banks to enhance the overall stability of the banking system.

A new letter of intent was signed with the IMF in May 2001, which proposed a more active monetary policy. In this framework, a ceiling value for net domestic assets and a floor value for the changes in net international reserves have been set. These values have been taken as performance criteria. Because of the abandonment of the exchange rate anchor, base money has been determined both as an intermediate target and as the new anchor to the economic agents. However, due to the estimation difficulties, periodic ceilings were determined as indicative targets rather than performance criteria. The targeted rates of increase in base money were determined so as to prevent monetization and to restrict the inflationary effects of devaluation. In order to sterilize liquidity injected through the use of IMF credit for domestic financing purposes, programmed foreign exchange auctions were initiated.

The short-term interest rate became the main monetary policy instrument and was used to curb inflationary pressures. The Central Bank actively withdrew the excess liquidity, which was injected into the market by banking operations designed to manage the

November 2000 and February 2001 financial crises through reverse repurchases and foreign exchange sales. As a result, the impact of the excessive increase in net domestic assets to the base money was prevented and monetization was not allowed.

Prior to the September 11, 2001 terrorist attacks in the United States, monetary and foreign exchange markets were relatively stable, compared to the previous months. However, after the terrorist attacks, both the rate of depreciation of the Turkish Lira and interest rates rose. The Central Bank announced that it would meet the liquidity requirements of the markets if necessary and dropped the upper quotation on interest rates. The announcement of new macroeconomic targets and budgetary aggregates, together with international support to Turkey, increased the possibility of additional external financing from the IMF and re-established stability in the markets. The Government agreed to the measures necessary to reach the primary surplus of 6.5% of GNP for 2002. In addition, the IMF announced the approval of $10 billion in financing support for the 2002-2004 period, apart from the $3.2 billion committed in an earlier agreement. These two positive developments resulted in the decrease of interest rates to 70%, in line with pre-September 11, 2001 levels.

The annual inflation rate measured on the basis of CPI dropped to 33.4% in February 2001. Due to the sharp depreciation of the Turkish Lira at the end of February 2001 and the increase in the prices of public goods and services, consumer prices began to rise again. Consequently, the inflation rate was 68.5% in 2001.

The end of year balance sheet targets of the Central Bank were met in 2001. The net domestic assets average for the last five working days of December was TL19,493 trillion, which was below the ceiling of TL22,400 trillion. The decline in net international reserves during November-December 2001 amounted to $1,730 million, which was below the performance criteria set at $3,546 million. The base money average for the last five working days of December was realized as TL7,642 trillion, which was below the performance criteria set as TL7,750 trillion.

The real effective exchange rate calculated on the basis of wholesale prices declined to 87.5% in the first quarter of 2001, and ended the last quarter of 2001 at 98.3%. Annual depreciation of the Turkish Lira was 115.3% against the U.S. dollar and 107.1% against the Euro. During the February 2001 financial crisis, the overnight compound interest rates climbed to unprecedented levels and started to ease in the aftermath of the financial crisis, ending the year at 80.0%.

Annual nominal growth rates for monetary aggregates during 2001 were observed as 51% for M1, 48% for M2 and 88% for M2Y. In real terms, there were contractions of 11% for M1 and 12% for M2, whereas M2Y expanded 11%.

2002. A monetary targeting policy was implemented in 2002 to convince monetary agents that monetary expansion would not reach beyond the levels consistent with macroeconomic targets. The expansion in the monetary base, an item of the Central Bank balance sheet, was set as the target variable and served as the nominal anchor of the program designed to decrease uncertainties in the near future and shape expectations. In addition to the monetary target strategy, the Central Bank stated that it would implement an “implicit inflation targeting” policy consistent with its ultimate aim of price stability and that it also might change short term interest rates in light of the future path of inflation.

Measures were taken to establish exchange rates consistent with domestic economic fundamentals to ensure that the floating exchange rate regime and the exchange rate market would function more effectively in 2002. Within this framework, the Central Bank announced that it would intervene in the foreign exchange rate market only to prevent excessive volatility, without targeting a certain trend level. Moreover, the Central Bank announced that it would hold foreign exchange buying auctions in order to improve the foreign exchange position. Under the floating exchange rate regime, the Central Bank’s control over short-term interest rates was strengthened and short-term interest rates became the main policy instrument of the monetary program.

In the period January-April 2002, the Turkish Lira appreciated by approximately 8%, due to financial support provided by the IMF and strict adherence to the economic program, which increased the confidence in the economic program and cleared the concerns associated with the sustainability of domestic debt. Moreover, Treasury domestic borrowing interest rates decreased by approximately 20 percentage points. The decline in the uncertainty of the global markets improved inflationary expectations, which in turn increased market confidence. In addition to the decline in supply side inflationary pressures, weak domestic demand also contributed to the disinflation trend. Following these economic developments, the Central Bank reduced the short-term interest rates gradually; the overnight borrowing interest rate decreased from 59% to 48% and the overnight lending rate dropped from 65% to 55% in the January-April period.

The favorable economic outlook in early 2002 was disturbed in the May-August period by various undesirable political events, early general election debates and disputes regarding the acceptance of EU harmonization laws. During this period, volatilities in the

Turkish Lira and foreign exchange markets increased and the decline in the inflation rate slowed down. Starting in August, developments such as the determination of the election date, the acceptance of EU harmonization laws and the increasing confidence in the sustainability of the current program after the general elections decreased the perception of political uncertainty. Based on the foresight that these developments would have a positive impact on inflation, the overnight borrowing interest rate decreased from 48% to 46%, whereas the overnight lending rate decreased to 53% from 55% in early August.

During the period August-November 2002, the Central Bank did not make any changes in the levels of short-term interest rates, due to the risk of inflationary pressures in a climate of general elections, the deterioration in fiscal discipline and the delays in some structural reforms. Starting in November, it was foreseen that sustaining fiscal discipline through structural reforms would affect inflationary tendencies in a positive manner. On November 11, 2002, the overnight borrowing rate was lowered to 44% and the overnight lending interest rate was lowered to 51%.

Within the framework of the numerous objectives of the 2002 monetary program, the targets for base money and net international reserve items, specified as performance criteria, and net domestic assets, specified as the indicative target, were attained.

Within the framework of the operation launched following the February 2001 crisis, a substantial amount of liquidity was created in the market as a result of the outright purchase of state borrowing notes by the Central Bank from the public banks and SDIF banks, in order to provide these banks with short-term financing. This structural excess liquidity continued during the year and by the end of 2002, it had reached 9.6 quadrillion TL. Liquidity management of the Central Bank was organized to enhance financial stability without conflicting with the price stability goal. Excess Turkish Lira liquidity in the market was eliminated by Turkish Lira deposit buying auctions in the interbank money market and reverse repo transactions in the Istanbul Stock Exchange repo-reverse repo market via open market operations.

Insufficient demand conditions, together with tight monetary and fiscal policy measures and the remarkable primary surplus targets of the economic program, brought about a strong position in the current account balance. Moreover, external financial support, especially from international institutions, enhanced the strong position in the balance of payments. Under these conditions, demand for Lira-denominated assets increased as the strengthening of the Lira that began on 2001 continued for the first four months of 2002. The volatility of the exchange rate displayed a relative decline during this period. An increase in the level and volatility of the exchange rate that was not compatible with macroeconomic fundamentals was observed at the beginning of May, mainly due to political uncertainties. This trend continued until the end of July and the Central Bank intervened in the markets in a limited way on July 11, 2002 in order to reduce the extreme volatility in the exchange rate. As it was clearly announced to the public, the Central Bank was not targeting a specific exchange rate level and interventions were directed towards reducing volatility in the foreign exchange markets through low transaction volumes. Downward volatility in exchange rates was observed especially before the religious holiday periods in February and December 2003, due to increasing Turkish Lira liquidity needs. As a result, the Central Bank intervened in the markets on the purchase side. Extreme upward volatility in the exchange rates was observed at the end of December due to negative domestic and external developments and the Central Bank’s intervention in the markets on the sale side. In 2002, the US dollar/TL rate increased by 13.8%, while the euro/TL rate increased by 31.8% due to the appreciation of the euro with respect to the US dollar.

In 2002, the year-end CPI inflation remained at 29.7%, below the inflation target of 35%. The CPI inflation for 2002, which was the lowest in 20 years, was also below the CPI inflation expected by the Central Bank Expectations Survey. The ongoing monetary and fiscal discipline and certain structural reforms were the main causes of disinflation. Furthermore, domestic demand developments did not result in an inflationary pressure because of the high rate of increase observed in production in the second quarter of 2002, which stemmed mainly from stock accumulation and expansion in exports. The pace and magnitude of the exchange rate volatility (which affected inflation) were weakened gradually by the adoption of the floating exchange rate regime and by sluggish domestic demand. In addition, the rate of change in food prices, at the lowest level of the last 15 years, caused inflation to remain below the target.

Annual nominal growth rates for monetary aggregates during 2002 were observed as 39% for M1, 31% for M2 and 25% for M2Y. In real terms, there was expansion of 7.3% for M1 and 1.0% for M2, whereas M2Y decreased 3.3%.

2003. The primary goal of the Central Bank is to maintain price stability. In 2003, as in previous years, monetary policy implementation has been determined according to this objective. Likewise, in the framework of the “Transition Program to Strong Economy”, which was introduced in the aftermath of the February 2001 economic crisis and revised at the beginning of 2002 to cover the period 2002-2004, a policy characterized as “implicit inflation targeting” has been implemented that focuses on future inflation. In accordance with this policy, the Central Bank has used short term interest rates as the main policy instrument to fight inflation under

the floating exchange rate regime and monitored the monetary performance criteria and indicative targets introduced in the context of the economic program conducted with the IMF.

In 2003, the Central Bank reduced interest rates six times in April, June, July, August, September and November, in large part, due to the fall in cost-driven inflationary pressures. The reduction in inflationary pressures was caused by a reduction in foreign exchange rates and oil prices in the aftermath of the conflict in Iraq, the government’s commitment to implement the structural reforms envisaged in the economic program and the maintenance of budgetary discipline, and the improvement in inflation expectations in connection with increased market confidence. Eventually, overnight borrowing interest rates were reduced to 26% in October, compared to 44% at the beginning of April.

In compliance with the floating exchange rate regime, the Central Bank let the foreign exchange rate be determined by market conditions to a great extent in 2003. Nevertheless, the Central Bank has announced several times since the beginning of the economic program that it may intervene in the foreign exchange market to prevent excessive volatility and hold foreign exchange purchase auctions to strengthen the foreign exchange position without affecting the long-term tendency and equilibrium value of the exchange rate. In this context, as a result of the increase in the foreign exchange supply, partly owing to the reverse currency substitution, the Central Bank restarted daily purchase auctions on May 6, 2003, with the aim of strengthening the foreign exchange reserve position. The Central Bank stopped holding purchase auctions on October 23, 2003, taking into account the decrease in excess foreign exchange supply beginning from the end of September and the rise in foreign exchange rates due to the demand of some banks to close their open positions by the end of the year. Beginning in May, in order to prevent the excessive volatility in foreign exchange rates, the Central Bank carried out purchase interventions once in May, June and July, and twice in September. The total amount of foreign exchange purchased by the Bank during May-October period was $9.9 billion.

With regard to exchange rates, the US dollar/TL rate was 1:1,647,654 at the end of year 2002 and the Turkish Lira depreciated in the first three months of year 2003 as a result of adverse effects in Iraq, and reached a high of 1:1,754,813 on March, 24, 2003. The rate declined from April through October of 2003 because of declining inflation rates, fiscal discipline, positive developments with the IMF, the US credit aid expectation, and because of higher realizations of export and tourism revenues than expected. The rate reached its lowest figure of 1:1,356,557 on September 23, 2003. The rate fluctuated in October and at the end of year 2003, the rate was 1:1,399,998.

The operational structure of the monetary policy is the same as before; excess Turkish Lira liquidity, which fluctuated between TL5 quadrillion and TL14 quadrillion was withdrawn by Turkish Lira deposit buying auctions in the Interbank Money market and by reverse repo transactions in the İstanbul Stock Exchange (“ISE”) Repo-Reverse Repo Market within the framework of open market operations. In order to extend the maturity of the excess liquidity withdrawn and render the liquidity management more flexible, the Central Bank started two-week deposit buying auctions in November in addition to four-week deposit buying auctions, and abolished the limit on the amount of the auction so as to flexibly determine the amount to be purchased in deposit buying auctions. Moreover, the Central Bank introduced some additional arrangements that would contribute to the deepening and effective functioning of the financial markets by reducing the intermediation costs of the banking system. In this framework, the interest rates on required reserves for the Turkish Lira-denominated deposits were envisaged to be between 75-80% of the weighted average simple interest rates on the banking system deposits.

In this framework of the Stand-by Arrangement, performance criteria for base money and Net International Reserves (“NIR”) and indicative targets for Net Domestic Assets (“NDA”) were reached as of end of December 2003. Among these, base money increased annually by 42.6%. The level of Base Money is mainly determined by the volume of the currency issued. It is known that currency issued generally increases seasonally in the tourism, new-year and salary payment periods. At the end of the aforementioned periods, depending on the currency issued returns, it generally decreases. In addition, transactions held within the framework of daily liquidity management by the Central Bank may affect the volume of the currency issued. However, it is believed that the increase in real money demand played an important role in the rapid increasing trend in currency issued, especially in the last quarter of 2003. In 2003, the main cause of the increase in money demand was improvements in inflationary expectations together with steadily decreasing annual inflation rates since the second quarter of the year. In addition to this, the stabilized value of the Turkish Lira and the decreasing nominal interest rates as a result of a decrease in risk perceptions were the other important reasons for the increase in money demand. Net foreign assets, the second performance criterion, were evaluated with constant program exchange rates and increased annually by 125%. The increase in foreign exchange buying auctions, which were introduced in May, and foreign exchange interventions, played an important role and totaled $9.9 billion in 2003. Finally, net domestic assets, an indicative target, fluctuated sharply during the year depending on the borrowing of the Treasury, seasonal liquidity fluctuations, and in conjunction with this, open market operations conducted by the Central Bank. As of the end of 2003, net domestic assets have demonstrated a limited increase of 4.2% annually.

In 2003, money supplies, defined as narrow and broad (“M1” and “M2”), increased by 51.2% and 32.2%, on a nominal basis, respectively, and by 27.8% and 11.7% on a real basis, compared to the end of 2002. The increase in sight deposits, which is one of the sub-items of the M1 money supply, at a rate of 62.3% on a nominal basis was the main reason for the increase in M1 money supply. Time deposits, which are one of the sub-items of M2 money supply, increased by 26.5% on a nominal basis and by 6.9% on a real basis by the end of 2003. M2Y money supply, which consists of the sum of M2 and foreign exchange deposits increased by 12.3% on a nominal basis, compared to the end of 2002. Taking into account the fact that the CPI inflation was 18.4% by the end of 2003, the M2Y money supply declined by approximately 5% on a real basis.

In 2003, Operation Iraqi Freedom began, which led to a rapid rise in oil prices and exchange rates. Despite the lack of any pressure from the aggregate demand side, the cost-push effects of the conflict slowed the disinflation process temporarily. However, by the end of the conflict in May, the macroeconomic conditions improved quickly and inflation began to decrease. Aside from the conflict, 2003 had all the necessary conditions for achieving disinflation. First of all, monetary and fiscal discipline led to an increase in market confidence, which in turn led to consistent declines in inflation expectations. Secondly, a strong Turkish Lira and low energy prices resulted in lower production costs. Thirdly, food prices also contributed to the disinflation period. Finally, domestic demand put no pressure on prices. As a result, year-end inflation targets were achieved once again as the prices increased by only 18.4% annually as of December 2003. The achieved inflation rate was the lowest since the late 1970s.

2004. The Central Bank continued to implement implicit inflation targeting under a floating exchange rate regime in 2004. The Central Bank used short-term interest rates by taking into account the factors that influence future inflation in line with the goal of price stability. The factors considered in interest rate decision-making are total supply and demand balance, indicators with respect to fiscal policy, developments in wages, employment-unit costs and productivity, pricing behavior in both the public and private sector, inflationary expectations, foreign exchange rates, possible external shocks and inflation forecasts calculated by the Central Bank. The Central Bank was able to reduce interest rates four times during 2004 after recognizing the lack of considerable demand pressure, the fall in inflation expectations, positive developments in the relations with the European Union and IMF and the government’s commitment with respect to fiscal discipline and structural reforms. Eventually, the overnight borrowing interest rate was reduced to 18% on December 20, 2004 (from 26% at the beginning of 2004).

Within the framework of exchange rate policy, the Central Bank declared that exchange rates would be determined by market dynamics and it could intervene in the exchange rate markets in cases where exchange rates display excessive fluctuation in both directions. Moreover, the Central Bank announced that it would hold foreign exchange purchase auctions in order to increase foreign exchange reserves without distorting the long-term tendency and equilibrium value of the exchange rate.

The Turkish Lira appreciated in the first three months of 2004 as a result of the completion of the Seventh Review with the IMF and positive expectations regarding inflation. During this period, parallel to the developments in foreign exchange supply, foreign exchange buying auctions restarted and due to the increased volatility in February, the Central Bank intervened in the markets to buy foreign exchange. However, the expectations about interest rate increases, the referendum in Cyprus and uncertainties about Turkey’s European Union membership caused foreign exchange rates to surge in April 2004. Due to the decline in foreign exchange supply, foreign exchange buying auctions were suspended during this period, and on May 2004, the Central Bank intervened in the markets to sell foreign currency. Positive expectations regarding both foreign exchange entries in summer and economic performance marked the start of an appreciation of Turkish Lira from mid-May 2004. In August and September debates about the financing of the current account deficit and developments in internal politics that may have adversely affected the EU accession process, caused the exchange rate to increase to some extent. However, especially during the last two months of the year, the movements in favor of the Euro in the Euro/US$ parity, strong economic data, a higher investment appetite for emerging markets, expectations regarding the new three-year Stand-By Arrangement with the IMF, and affirmative developments regarding the EU accession process caused the Turkish Lira to appreciate. The US$/TL rate closed 2004 at 1:1,342,700 after opening the year at 1:1,399,998.

The Open Market Operations Implementation Regulation (“OMO”), restructured to take effect as of April 12, 2004, captures both the changes in transaction pricing, and the increase of the amount of government securities delivered as collateral in repo transactions. The latter measure decreased the credit risk of the Central Bank receivables that are vulnerable to market price changes of government securities. In 2004, OMO, one of the basic liquidity management instruments, continued to be actively used. Excess market liquidity continued in 2004 due to the Central Bank’s purchases of government securities issued by the Treasury to strengthen the financial structure of public banks and banks under Savings and Deposit Insurance Fund (“SDIF”) within the scope of the 2001 Banking Operation, liquidity granted to the market due to foreign exchange interventions and auctions to counteract the increased foreign exchange supply stemming especially from reverse currency substitution and foreign exchange and foreign currency entrance from outside the system. The reverse repo transactions in the ISE Repo-Reverse Repo Market and borrowing from Interbank Money Market (“IMM”) transactions were used to withdraw this excess liquidity from the market. Interest payments were another factor increasing

excess liquidity in the market. Furthermore, temporary drops in excess liquidity and its asymmetric distribution among banks led the Central Bank to conduct a small number of repo transactions with some primary dealers. The strategy of liquidity management is conducted in line with the goal of price stability.

The 2004 monetary program, the targets for Base Money, Net International Reserves (“NIR”) and Net Domestic Assets (“NDA”) items (specified as the indicative targets), were set for 2004 by the Letter of Intent dated October 31, 2003 and the corresponding targets were revised in the Letter of Intent dated April 2, 2004. The targets for Base Money and Net Domestic Assets were revised and the targets for Base Money and Net International Reserves were set as performance criteria in the Letter of Intent dated July 15, 2004. The performance criteria, as revised, for Base Money and NIR and the indicative targets for NDA were achieved in 2004.

In 2004, money supplies, defined as narrow and broad (“M1” and “M2”), increased by 36.7% and 35.1%, respectively, on a nominal basis and by 25% and 23.6% on a real basis. The increase in sight deposits at a rate of 49% was the main reason for the observed increase in the M1 money supply. By the end of 2004, time deposits (a sub-item of M2 money supply) increased by 33% on a nominal basis and by 21.6% on a real basis. The M2X money supply, which consists of the sum of M2 and foreign exchange deposits, increased by 23.7% on a nominal basis and 13.2% on a real basis compared to the end of 2003. The M2XR money supply, which is the sum of M2X money supply and the repo transactions that banks carry out with their clients, increased by 22.5% on a nominal basis and by 12.1% on a real basis in 2004.

The downward trend in inflation, which started in 2002, accelerated in 2004. The year-end inflation target has been met for the third straight year. Although there was a rapid rise in the exchange rates in the April-May period due to foreign economic conditions, the effects of this rise, especially on CPI inflation, remained rather limited. The structural change in the relationship between the exchange rate and inflation were effective in this development. The monetary and fiscal discipline that has been maintained for three years, together with falling inflation and increasing competition, contributed to the fall in the exchange rate pass-through by effecting pricing behavior of firms and general expectations.

The Central Bank continued to implement implicit inflation targeting together with a floating exchange rate regime in 2005. As mentioned above, after the collapse of the exchange rate based stabilization program in 2001, it was announced that the final aim of the Central Bank was to switch to the full-fledged inflation targeting regime. However, most of the necessary pre-conditions for the launch of a successful inflation targeting regime had not been met at those times and therefore, a strategy that aimed at preparing the environment for the new regime called as “implicit inflation targeting regime” started to be implemented.

Prior to the year 2005, great achievements were made towards the inflation targeting regime and normalizing the economy. In this period, considerable improvement in achieving price stability has been experienced with the help of the prudent fiscal and monetary policies and also structural reforms, steps towards the central bank independence and the adaptation to the floating exchange rate regime. The fact that the inflation targets were met four consecutive years has helped the increase of the credibility of the monetary policy, hence weakening of the inflation inertia. This, in turn, has contributed to the changing of the pricing behavior of the producers and consumers and, converging the inflation expectations to the targets, which enabled the Central Bank to manage the expectations more efficiently. Furthermore, owing to the favorable expectations about Turkish economy, increased confidence in Turkish lira and increased interest for Turkish assets, a reverse dollarization process has been experienced. Moreover, exchange rate pass through has also weakened and become more lagged compared to the high inflation period. Owing to the prudent fiscal policies, the concerns about the fiscal dominance problem have been eased and the discussions about sustainability of the public debt ceased to be on top of the agenda. Financial sector fragility has been weakened and the depth of the financial and foreign exchange markets have been increased. Finally, the overall confidence in the economy has increased because of the aforementioned achievements together with the other positive developments such as the commence of the negotiations with EU and adherence to the IMF program.

In spite of these favorable achievements, the year 2005 was announced as the “transition year” to the full-fledged inflation targeting regime due to two important developments: Firstly, at the beginning of 2005, six zeros from the Turkish currency was removed. This currency reform was an indication of the confidence in attaining the price stability and this, in turn, enhanced the credibility of the monetary policy further. Secondly, the Turkish Statistics Institution introduced new price indices, which include changing the base year and calculation methodology of the CPI. Many of the new core indices were introduced for the purpose of enhancement of the communication with the public. Furthermore, the Central Bank has completed its preparations regarding the institutional and technical infrastructure in 2005. In this context, the organizational structure of the Bank has been restructured, the duties regarding the implementation of the monetary policies have been redefined and clarified, the information set employed when taking the monetary policy decisions has been broadened, and inflation forecasting methods and models have been improved.

The developments regarding the monetary policies were also directed towards the institutionalization of the monetary policy decision-making process. In order to make the decision making process more transparent and predictable, the decisions on the main policy instruments have started to be made depending on the assessments arising from the pre-set Monetary Policy Committee (“MPC”) meetings. In 2005, the timings of the MPC meetings were set as the 8th of each month. Moreover, the rationale behind the MPC decisions has started to be published within two business days in a press release. In addition to this, CBT were also explaining an assessment of the general economic outlook and inflation developments with a press release entitled “Inflation and Outlook”. These developments contributed to the further convergence of the ongoing regime to a full-fledged inflation targeting.

The short-term interest rates continued to be the main policy instrument directed towards the price stability goal. However, the practice of employing the magnitude of the Base Money and the Net International Reserves (NIR) as performance criteria and the Net Domestic assets (“NDA”) as the indicative target has also continued in compliance with the economic program conducted with the IMF. All the targets, as revised in the Letter of Intent dated November 24, 2005, which describes the policies that Turkey intends to implement in the context of its request for financial support from the IMF, were achieved at the end of the year.

When taking the short term interest rate decisions, the Central Bank took into account the medium term inflation outlook by analyzing the factors that influence the future inflation in line with the price stability goal in 2005 as well. Throughout the year 2005, considering the fall in the inflationary expectations, the lack of considerable demand pressure, the favorable expectations regarding the EU accession of Turkey, the positive developments in Turkey’s relation to the IMF and the belief about the continuation of the fiscal discipline and reforms, the Central Bank reduced the overnight interest rates gradually in a cautious manner. In fact, the overnight borrowing interest rate has fallen by 4.5%, from 18% to 13.5%, along the year 2005. The Central Bank was cautious when reducing the short-term interest rates, because of the inertia in services inflation and risks related to external developments like oil prices and global liquidity conditions.

The floating exchange rate regime continued to be operative in year 2005 as well. The Central Bank did not have any target for the exchange rates and they were determined by the supply and the demand conditions in the foreign exchange market. However, the Central Bank continued to monitor the exchange rate developments carefully. Moreover, the Central Bank held foreign exchange purchase auctions in order to increase its foreign exchange reserves without distorting the long-run tendency and the equilibrium value of the exchange rate. Unlike the previous years, however, the Central Bank started to announce the annual auction program at the end of 2004 and strictly adhered to the announced program in 2005 so as to keep the impact of the auctions on the supply and demand conditions in the markets at a minimum level and stick to the main principles and the functioning of the floating exchange rate regime (the operational framework is explained in detail in the “exchange rates and exchange policies” section). In 2005, the Central Bank withdrew $7.4 billion from the foreign exchange market through 242 foreign exchange purchase auctions. In addition to the auctions, the Central Bank continued to intervene in the exchange rate markets in cases where exchange rates displayed or were expected to display excessive volatility in both directions, as it had already been announced. In this framework, the Central Bank intervened in the foreign exchange markets six times in 2005 and withdrew about $14.5 billion by the interventions. Furthermore, for the purpose of transparency, the data on direct foreign exchange purchase or sale interventions have started to be published on the website of the Central Bank starting from October 21, 2005.

Considering the exchange rate developments in 2005, it can be stated that a more apparent appreciation of the YTL has been experienced. The main reasons lying below this process and the stable position of the YTL were the increased capital inflows and the changes in the domestic portfolio choices of the residents in favor of the domestic currency, which resulted from the decisive implementation of the economic program and the experience of low inflation and strong growth performances. Despite the general tendency of appreciation and the stability of the YTL, due to the debates on Turkey’s EU accession, the interest rate decisions of the FED, the relations with the IMF and the developments in the oil prices, exchange rates exhibited interim fluctuations from time to time. See “Economy-Exchange Rates and Exchange Policies” for year end US$/TL exchange rates.

In 2005, new arrangements were introduced for the required reserve implementation so as to enable the banks to manage their liquidity in a more flexible and efficient manner. In this framework, by the Communiqués on Required Reserves and Liquidity Requirement dated November 16, 2005, the practice of maintaining required reserves was abolished and the total amount of the YTL liabilities started to be maintained on two-weeks average in free deposits accounts.

The excess liquidity conditions in the markets continued in 2005 as well. This excess liquidity in the market was withdrawn by the active use of the OMOs and borrowing from the Interbank Money Market throughout the year 2005.

In 2005, both narrow and broad money supply (“M1” and “M2”), increased by 31.9% and 38.3%, respectively, on a nominal basis and by 22.4% and 28.4% on a real basis. The increase in M1 money supply was mainly caused by the increase in sight deposits at a rate of 48.7%. Time deposits, which is one of the sub-items of M2 money supply, increased by 40.7% on a nominal basis and by 30.6% on a real basis, by the end of 2005. On the other hand, the M2X money supply, which consists of the sum of M2 and FX deposits, increased by 22% on a nominal basis and 13.3% on a real basis compared to the end of 2004.

The declining trend of the inflation rate has continued in 2005. The Central Bank focused on achieving the end-year inflation target for 8% and in fact, the year-end inflation was realized as 7.7%. Moreover, the targets defined for Base Money, NIR and NDA were all met and the exchange rates displayed stability in 2005.

2006. As most of the pre-conditions for a successful inflation-targeting regime were met, the Central Bank has launched a full-fledged inflation-targeting regime at the beginning of 2006. In this framework, year-end targets were announced as 5 percent, for 2006 and 4 percent for 2007 and 2008 at the end of 2005 together with the government. Also, the quarterly path of inflation for 2006, consistent with year-end targets with an uncertainty band of 2 percentage points on both sides was publicized for the purpose of accountability.

In 2006, the declining trend in the annual inflation came to a halt. By the end of the first quarter, annual inflation reached 8.16 percent, in line with expectations and remained within the uncertainty band set around the target path. The increase in the first quarter could mainly be attributed to the simultaneous emergence of different supply-side shocks such as increasing crude oil prices, surges in gold prices and increases in unprocessed food prices. Especially, unprocessed food prices starting from the last quarter of 2005 reached very high levels, which restrained the decline in consumer inflation considerably. It is important to note that, despite these adverse supply factors, inflation expectations were well managed in the first four months of 2006. The strong course of domestic demand in the first half of 2006 also had an effect on the increase in inflation during pre-May period. However, when price data is analyzed in sub-item detail and capacity indicators are taken into account, it is observed that supply-side factors were more effective. On the other hand, in the post-May period, the change in global risk perception and exchange rate developments resulting from international liquidity shock were influential on inflation dynamics. In May, global liquidity conditions changing in favor of developed countries and higher global risk aversion triggered capital outflows in many emerging markets including Turkey. Consequently, the risk premium increased rapidly and the New Turkish lira (YTL) depreciated vis-à-vis the US dollar by more than 20 percent in a short span of time. Until that time the strong domestic currency had been a factor that limited the adverse effect of the increase in commodity prices on domestic prices. It also helped domestic production to shift to a more capital-intensive form, and thus, further contributed to the rise in productivity. The depreciation of the YTL contributed to the increase in inflation, through the pass-through channel, in the remainder of the year along with the ongoing supply shocks. Meanwhile, inflation expectations also deteriorated notably. While the stickiness in service prices continued, goods prices were the main driver of the increase in annual inflation.

As a reaction to the volatility in financial markets in the May-June 2006 period and the consequent rise in inflation expectations, the Central Bank implemented a two-pillar strategy. The first pillar of the policy reaction was the 400 basis points interest rate hike in the two extraordinary MPC meetings held in June 2006. Together with the further 25 basis points increase in July 2006, raising the overnight borrowing rates to 17.50 percent, the Central Bank aimed at containing the second round effects of the exchange rate pass-through and eliminating the gap between inflation expectations and the medium-term targets. This gave the markets a clear signal that the Central Bank was determined in its commitment to the medium term inflation targets. The second pillar, on the other hand, was a set of measurements taken to manage the YTL and foreign exchange liquidity in the market. To reduce excess YTL liquidity in the market and to contain excessive volatility driven by liquidity constraint in the foreign exchange market, the Central Bank introduced YTL Deposit Buying Auctions and Foreign Exchange Sale Auctions to be held on dates and in amounts to be announced in advance. Furthermore, the lending rate was increased by another 200 basis points (a total of 600 basis points) to reduce the potential volatility in the markets by designing a flexible mechanism to deal with sudden shifts in market sentiment.

These policy measures confirmed the adherence of the Central Bank to its medium-term commitments, and hence they were well received by the markets. As a consequence, financial markets stabilized and the YTL rebounded. Meanwhile, the deterioration in inflation expectations stopped in July, although they remained well above the medium term target of four percent. On the other hand, the risk premium, supported also by favorable global conditions, declined by almost 100 basis points between the end of June and August. In this period, market interest rates also displayed a declining trend.

In the second half of the year 2006, the contribution of domestic demand conditions to the disinflation process increased while international liquidity conditions improved. However, the Central Bank maintained a tight stance on monetary policy through the rest of the year, keeping the overnight borrowing rate at 17.50 percent, due to factors such as uncertainties in the transmission mechanism

of the monetary policy, the risks relating to oil and other commodity prices, the rigidity of services inflation, inflation expectations being well above medium-term targets, and the uncertainties pertaining to the global economy.

As a result of the developments explained in detail above, the annual CPI realization at the end of the year 2006 was 9.65 percent, breaching the upper limit of the uncertainty band announced as 7 percent for the end of 2006. Consequently, the accountability principle was put into practice pursuant to Central Bank Law. In this framework, the Central Bank wrote open letters to the Government in July and October 2006 and January 2007, explaining the reasons why inflation exceeded the target, evaluating measures taken by the Central Bank to bring inflation back to the target, and finally presenting the medium term outlook and the horizon in which inflation converges to the target. These letters were shared with the public and sent to the IMF in the scope of the IMF program conditionality as well.

The Central Bank has changed its balance sheet structure in accordance with IMF agreements. The restructured balance sheets have been derived from the Central Bank Analytical Balance Sheet, as shown below:

Table No. 27

Selected Central Bank Balance Sheet Data

As of December 31


	2001			2002			2003			2004		2005		2006
				*(in millions of New Turkish Liras)*
ASSET		60,089.5			74,070.5			76,497.1			74,672.7		90,070.1		104,352.4
Foreign Assets		34,409.6			50,995.3			52,891.9			53,592.1		72,337.7		91,464.6
Domestic Assets		25,680.0			23,075.2			23,605.3			23,605.2		17,732.4		12,887.8
Cash Operations		25,664.1			24,221.8			22,881.8			19,048.1		15,722.7		12,242.2
FX Revaluation Account		(174.8	)		(1,146.6	)		(723.5	)		2,032.5		2,009.7		645.6
IMF Emergency Assistance		190.6			0.0			0.0			0.0		0.0		0.0
LIABILITY		60,089.5			74,070.5			76,497.1			74,672.7		90,070.1		104,352.4
Total Foreign Liabilities		50,220.7			53,551.1			52,362.6			49,929.4		51,522.4		62,436.8
Liabilities to Non-Residents		36,733.2			37,368.8			35,647.9			30,554.0		22,857.8		24,328.3
Liabilities to Residents		13,487.5			16,182.3			16,714.7			19,375.4		28,664.6		38,108.5
Central Bank Money		9,868.8			20,519.5			24,134.5			24,743.3		38,547.7		41,915.6
Reserve Money		7,975.9			10,668.3			15,010.4			20,327.8		32,696.4		41,398.5
Currency Issued		5,282.7			7,635.6			10,675.5			13,465.2		19,612.0		26,815.2
Deposits of Banking Sector		2,520.2			2,791.8			4,191.3			6,723.2		12,898.9		14,419.9
Extra Budgetary Funds		104.2			178.1			48.3			39,196.0		90.6		55.4
Deposits of Non Banking Sector		68.9			62.8			95.3			115.0		94.9		108.0
Other Central Bank Money		1,892.9			9,851.1			9,124.1			4,415.4		5,851.3		517.1
Open Market Operations		1,244.0			9,578.7			8,260.1			3,622.1		4,983.0		-1,098.4
Deposits of Public Sector		649.0			272.4			864.1			793.4		868.3		1,615.5

Source: CBT.

The Central Bank’s Program Balance Sheet was revised four times between the end of 1999 and 2003. As of the end of 2006, the Program Balance Sheet, in accordance with the Letter of Intent presented on April 26, 2005, is as follows:

Table No. 28

Central Bank Program Balance Sheet Data


	DECEMBER 29,
	2006
	*(Thousands of YTL)*
	*(constant)*
I-BASE MONEY		41,235,021
a-Currency issued		26,815,151
b-Bank deposits		14,419,870
-Required reserves		0
-Free Reserves		14,419,870
II-NET FOREIGN ASSETS (A+B+C)		48,562,687
A-Net International Reserves (1-2+3)		64,707,076
1-Gross foreign reserves		89,771,027
a-Gold		2,378,139
b-Foreign banknotes		378,924
c-Correspondent accounts		86,764,652
-Current accounts		5,316,477
-Portfolio accounts (Excl.TDF)		81,447,621
-Other accounts		554
d-Reserve tranche position		249,313
2-Gross International Reserve Liabilities		-25,063,952
a-Overdrafts		-1,082
b-Letters of credits		-1,658,038
c-Short term credits		0
d-Dresdner account ( 1 year)		-3,655,375
e-FX deposits of Banking sector (*)		-19,501,178
f-IMF		-248,278
-Use of credit		0
-SDR allocation		-248,278
3-Net Forward position		0
a-Swap		0
b Forward options		0
B-Medium term FX credits (net)		2,123,790
C-Other		-18,268,179
Workers Account		-18,656,202
1-Dresdner account		-18,656,202
a-2 year		-8,591,650
b-3 year		-10,064,552
2- Other( FX Lending Excl.)		-80,610
3- Portfolio (TDF)		468,633
III-NET DOMESTIC ASSETS		-7,327,666
A-Treasury Debt		18,777,939
a. CBRT’s Portfolio		18,811,873
aa. DİBS prior to Nov.5, 2001		18,811,873
ab. DİBS purchased from secondary market		0
b. Other		-33,933
B-Public sector deposits(YTL)		-1,615,515
C-Public sector deposits(FX)		-19,044,177
D-Funds		-55,398
E-Other public sector deposits		-108,041
F-Credits to banking sector		777
G-Open market operations (net)		1,098,382
H-Other		-6,533,394


	DECEMBER 29,
	2006
	*(Thousands of YTL)*
	*(constant)*
I-Revaluation accounts		151,761
J-IMF Emergency assistance (Treasury)		0
K-FX Lending		0

NIR (1)
NDA (2)		-7,327,666
Treasury Liabilities to the IMF (3)		15,814,764
Treasury FX denominated borrowing with an original maturity of less than 1 year (4)		0
NIR (Program definition) (1-3-4)
NDA (program Definition) (2+3+4)		8,487,098

Source: CBT

The following table presents key monetary aggregates for the dates indicated:

Table No. 29

Key Monetary Aggregates


	2001		2002		2003		2004		2005		2006
	(in millions of New Turkish Lira)
M1		11,073		14,259		21,564		29,469		38,868		47,491
M2		46,986		61,195		80,923		109,344		151,238		185,145
M2X (M2 + foreign exchange deposits at commercial banks)		104,133		133,45		149,855		185,419		226,216		286,544

Source: CBT

The following table presents the discount rates of the Central Bank for the dates indicated:

Table No. 30

Discount Rates


	Discount
Year	Rates
2001		60	%
2002		55	%
2003		43	%
2004		38	%
2005		23	%
2006		27	%

Source: CBT

BANKING SYSTEM

The Banks Act (Law No. 4389) changed nine times in last five years, with the aim of harmonization to the developments in the country and abroad (Law No. 4389 as amended eight times thereafter, with law No. 4491 in December 1999, with Law No. 4672 in May 2001,with Law No. 4684 in June 2001, with Law No. 4743 in January 2002, with Law No. 4842 in April 2003, with Law No. 5020 in December 2003, with Law No. 5189 in June 2004 and with Law No. 5228 in July 2004). The new Banking Act (Law No. 5411) which was prepared in accordance with EU directives and international principles and standards and published in the Official Gazette dated November 1, 2005 (No. 25983re.), with the aim of:

• Settling markets to an active, regular and transparent structure,

• Protecting the rights of the individual customers who use the financial services,

• Settling the Banking Regulation and Supervision Agency’s (BRSA) structure, duties and responsibilities to be more sensitive to the market’s needs and more elastic,

• Performing the functions of regulation and supervision of the activities of banks, financial holding companies, financial leasing companies, factoring companies, financing companies and support services institutions,

• Making the management and organization structures of the institutions covered by this Law more sensitive, elastic, and open to dialogue,

• Making good governance dominant by implementing corporate governance principles,

• Integrating the Turkish banking system to the international markets,

• Granting the permissions for the establishment and operations of banks, financial holding companies, financial leasing companies, factoring companies, consumer financing companies and outsourcing institutions as a part of prudential supervision,

• Establishing a sufficiently flexible regulation and supervision system and regulation structure to answer the changing conditions of the financial markets,

• Protecting the fundamental principles such as transparency and equality between the parts of the financial system,

• Establishing and generalizing the confidence and stability in the financial markets,

• Predicting the risky developments in the financial markets,

• Decreasing the transactions and intermediation costs in the banking sector,

• Making the strategies and policies of the BRSA compatible to the road maps of the financial markets,

• Establishing the procedures for the exchange of information between the BRSA and related authorities.

The Turkish banking system is currently regulated and supervised by the BRSA which is an independent and autonomous public entity with administrative and financial autonomy that supervises banks and other financial institutions. BRSA, whose administrative body is the Banking Regulation and Supervision Board (“BRSB”) was established based on the repealed act No. 4389. Following the appointment of the members of the BRSB, the BRSA commenced its operations on August 31, 2000.

The Savings Deposit Insurance Fund (“SDIF”) is a public legal entity that was administered and represented by the BRSA through December 2003. Through an amendment to the repealed Banks Act No. 4389 in December 2003, the SDIF was given the independent authority and duty to insure savings deposits and resolve instances where the BRSA intervenes in banks through transfer or merger of these banks with another bank, transfer of its shares to third parties, or liquidation.

In addition to the Central Bank (“CBT”), 50 banks are operating in Turkey as of the end of 2006, including 13 investment and development banks, 4 participation banks and 33 commercial banks. By year end 2006, of the commercial banks in the sector, 3 are state banks, 14 are private banks, 15 are foreign commercial banks 1 is SDIF bank.

When analyzed by banking groups, it is observed that the share of state banks and private banks decreased in favor of foreign banks from 2005 to 2006. While the share of the state banks in the sector by asset size decreased from 30.6% to 28.9%, the share of foreign banks increased from 5.1% to 11.9%. During that period, the share of private banks decreased from %58.3 to %53.2.

Since 2002 total assets of Turkish banking system is growing steadily. Total assets of sector which was around $133 billion in 2002 has increased 166.7% and reached $354 billion as of end of 2006. The increase in loans is more sharp. The total loan portfolio has increased five times during 2002-2006 period. The non-performing loans which amounted $9.6 billion in end-2001, decreased to $6.1 billion as of December 2006. The amount of provisions set aside for these loans was USD 5.4 billion. Securities portfolio has also significant part in the balance sheets of banks. The total amount of the securities portfolio is $112.5 billion as of December 2006.

Table: Main Figures Of Banking Sector⁸


Billion USD	2002		2003		2004		2005		2006

Total Assets		132.6		182.7		233.8		303.0		353.6
Loans		31.3		49.7		77.7		116.5		155.0
Securities Portfolio		52.7		76.6		92.2		106.5		112.5
Deposits		86.4		114.2		146.8		187.3		218.2
Own Funds		16.0		25.9		35.0		40.7		42.1

Capital structures of the banks in the system were the core of the restructuring program. A three-phase audit was implemented to reveal the capital structures of the private banks. As of December 2006, the average capital adequacy ratio of the whole sector is 22.3%.

The universal banking system in Turkey allows commercial banks to engage in banking and other financial services. Three of the commercial banks in Turkey are state-owned banks. The major commercial banks are internationally recognized institutions with nationwide branch networks and deposit bases. Banks are permitted to deal in foreign exchange and to borrow and lend in foreign currency.

State Banks

Priority was given to the financial restructuring of state banks. Simultaneously with the strengthening of their financial structure, operational restructuring studies were initialized. The main objective of the latter is to re-build organizational structure in compliance with the requirements of contemporary banking and international competition.

As a first step, management of the two state banks was transferred to a newly created Joint Board of Directors. The Board was granted the authority to restructure and prepare the state banks for privatization. In order to reduce their short-term liabilities, state banks obtained liquidity through repo or the outright sale of government securities to the Central Bank and fully eliminated their short-term liabilities (amounting to TL8.5 quadrillion as of March 16, 2001) to private banks and non-bank entities (excluding those to the Central Bank). Fully released from short term and costly funding needs upon the financial support provided within the program, the state banks started to conduct their operations and transactions in light of competition and profit-maximization. State banks’ deposit interest rates began to be determined uniformly and below the interest rates of the government securities. Thereafter, deposit interest rates of the state banks showed a development parallel to the decrease in interest rates generally. The Treasury supplied special issue government bonds of TL23 quadrillion in 2001 and all claims of the state banks on Treasury arising from subsidized lending (duty losses), including the interest accrued to these loans, were securitized. Legislation was enacted on July 3, 2001 to prevent generation of new duty losses and to annul the Acts and the Council of Ministers’ Decrees that allowed subsidized lending through state banks (creating these losses).

State banks have become better at identifying problem loans and setting aside appropriate provisions for such loans, increasing transparency. As a result, non-performing loans of state banks rose to TL3,613 trillion and provisions set aside for such loans rose to TL2,904 trillion in December 2002, compared to TL1,017 trillion and TL296 trillion, respectively, at the end of 2000. The loss was due to the merger with Emlak Bankasi, and the provision set aside for the loss, amounted to TL1.9 quadrillion and TL1.4 quadrillion, respectively. The performing loans portfolio of the state banks was YTL5.3 billion as of December 2002, YTL7.9 billion as of December 2003 and YTL12,9 billion as of December 2004. As of December 2005, the non- performing loans portfolio of the state banks decreased to YTL1,516 million and provisions made for these non-performing loans decreased to YTL1,442 million.

In order to strengthen the capital structure of state banks, funds in the form of both securities and cash were injected into these banks. As a result, total paid-up capital of the state banks rose to TL3.4 quadrillion from TL476 trillion in December 2000 and own funds thereof rose to TL6.0 quadrillion from TL713 trillion as of December 2002. Total paid-up capital and own funds increased to TL3.6 quadrillion and TL8.4 quadrillion, respectively, as of December 2003. In December 2004, total paid-up capital and own funds totaled YTL3.3 billion and YTL8.0 billion, respectively. Also, own funds increased to YTL8.7 billion as of December 2005. Capital injections as well as the increased share of Treasury papers carrying zero risk-weight contributed to the increase in capital adequacy. The state banks determine lending rates while taking into account funding costs in order to achieve efficiency and profitability.


^{⁸ Includes the data of participation banks.}

Table No. 31

Consolidated Balance Sheet of State Banks


	Million YTL						% Share
	Dec. 2004		Dec. 2005		Dec. 2006		Dec. 2004		Dec. 2005		Dec. 2006
Assets
Cash & Claims on Banks		4,595		4,280		6,641		5.6		4.6		6.2
Securities Portfolio		53,225		54,164		58,839		64.4		58.8		54.9
Loans		12,864		19,523		28,289		15.6		21.2		26.4
Loans under Follow-Up (Net)		104		74		76		0.1		0.1		0.1
-Loans under Follow-Up		1,601		1,516		1,405		1.9		1.6		1.3
-Provisions for Loans under Follow-Up (-)		1,496		1,442		1,328		1.8		1.6		1.2
Duty Losses		—		—		—				—		—
Other Assets		11,916		14,062		13,396		14.4		15,3		12.5
Liabilities
Deposit(1)		64,397		72,094		84,961		77.9		78.3		79.2
Borrowings from Banks(2)		1,848		1,221		2,420		2.2		1.3		2.3
Other Liabilities		8,403		9,796		9,501		10.2		10.6		8.9
Shareholders’ Equity		8,056		8,993		10,359		9.7		9.8		9.7
Balance Sheet Total		82,704		92,103		107,241		100.0		100.0		100.0


(1)		Interbank-Deposits are excluded.

(2)		This item includes Interbank Deposits and Interbank Money Market transactions.

		Source: BRSA

During the operational restructuring of state banks, Emlak Bank’s license was revoked and its assets were transferred to Ziraat Bankasi as of July 9, 2001. Emlak Bank’s non-banking related properties, participation shares, commercial real estate and assets that were subject to legal follow-up and related provisions were excluded from the transfer.

Important steps were also taken to reduce the number of personnel and branches of the state banks to a reasonable level. Accordingly, the number of branches was reduced by 27.5% to 1,809 as of December 2006 from 2,494 as of December 2000 (including Emlak Bankasi), while the number of personnel was cut nearly in half (to 31,544 from 61,601) during the same period. In the aftermath of this restructuring, a positive impact in financial and operational restructuring began to show in the profitability performance of the state banks. Along these lines, the state banks declared a total of TL750 trillion in profit (Ziraat Bankasi TL156 trillion and Halk Bankasi TL594 trillion) as of the end of 2002. They have declared a total of YTL1,558 million in profit (Ziraat Bankasi YTL1,072 million and Halk Bankasi YTL486 million) as of the end of 2003 and YTL2,058 billion in profit (Ziraat Bankasi YTL1,530 million and Halk Bankasi YTL528 million) as of December 2004. The total profit of state banks was YTL 2,334 million (Ziraat Bankasi YTL1,802 million and Halk Bankasi YTL532 million) as of December 2005. As of December 2006, total profit of state banks is 2,964 million YTL (Ziraat Bankasi YTL2,100 million and Halk Bankasi YTL863 million)

The SDIF banks

After the BRSA began operating on August 31, 2000, the administration of 13 banks was assumed by the SDIF, in addition to the 8 banks already existing under its administration. Of these 21 banks whose administration was taken over during the period 1997-2002, 13 banks were merged, 5 banks were sold to domestic and foreign investors and the license of 1 bank was revoked. After the merger of Pamukbank with Halkbank, by the end of December 2004 there was only 1 bank (Bayindirbank) left under the administration of the SDIF, which served as the bridge bank for the resolution of the SDIF banks. With the implementation of Decision No. 1085, dated July 3, 2003, of the Banking Regulation and Supervision Board, the license of Turkiye Imar Bankasi T.A.S. to perform banking activities and accept deposits was revoked and the management and control of this bank was transferred to the SDIF. The SDIF banks were subjected to an intensive financial and operational restructuring process following their takeover, including the following:

	•		short-term liabilities were liquidated;

	•		FX open positions were considerably reduced;

	•		deposit rates were decreased and brought in line with market rates;

	•		deposit and FX liabilities were transferred to other banks; and

	•		branch and personnel numbers were cut down to reasonable levels.

A sum of $21.7 billion was required for the financial restructuring of banks that were taken over by the SDIF. Of this amount, $17 billion has been obtained from public sector resources and the remaining $4.7 billion from private sector resources (i.e., from the SDIF’s own resources). A considerable portion of the SDIF’s income comes from insurance premiums collected from banks. Cash penalties, collections, income generated from bank sales and deposits which have been subject to prescription constitute other sources of income for the SDIF. A portion of the funds stated above have been used for repayment or transfer of the SDIF banks’ deposit liabilities amounting to $26 billion.

With a view towards accelerating the resolution of the SDIF banks, their deposits and foreign exchange liabilities were transferred to other banks. An important portion of the SDIF banks’ deposits were sold to other banks through a series of auctions, backed by matching government securities portfolios. Auctions were realized within a separate bidding process for pools of TL and foreign exchange deposits in 5 stages. As a result of these auctions, TL479 trillion in Turkish Lira and $2,587 million in foreign exchange denominated deposits were transferred to 8 private banks. The SDIF banks used a portion of special issue bonds granted by the Treasury to eliminate their short-term liabilities. These liabilities, amounting to TL5.2 quadrillion as of March 16, 2001 (excluding those liabilities to the Central Bank), were fully eliminated by using the funds provided through outright sales to the Central Bank. Short-term liabilities to the Central Bank, amounting to TL2.6 quadrillion as of the same date, were fully repaid in 2002.

In this regard, in order to settle and reschedule the debts of Cukurova Group and to accelerate the sales process for Yapi Kredi Bank, three separate supplementary agreements were executed: one between Yapi Kredi Bank and the Cukurova Group dated July 20, 2004; one between SDIF and the Cukurova Group dated August 4, 2004; and one between BRSA and the Cukurova Group dated August 5, 2004. While the agreements signed by each of the SDIF and Yapi Kredi Bank with Cukurova Group consist of a repayment protocol concerning the restructuring of the debt, the agreement between BRSA and Cukurova Group aims to solve the ownership problem of the Yapi Kredi Bank and accelerate the sale process. Cukurova Group failed to pay the first required installment to Yapi Kredi under the supplementary agreement dated July 20, 2004. As a result, the supplementary agreement was annulled and the former agreement between the parties, dated December 31, 2002, was reinstituted. The agreements between Cukurova Group and each of the BRSA and SDIF, which were signed in August 2004, remain in effect. In January 2005, it was announced that Cukurova Group and Koç Finansal Hizmetleri A.S. (“KFH”) signed a protocol to begin talks regarding a potential sale of the shares of Yapi Kredi Bank. UniCredito Italiano S.p.A. acquired a 50% stake in KFH in 2002. On May 8, 2005, Cukurova Group and KFH entered into a definitive share purchase agreement for the purchase of 57.42% of the shares of Yapi Kredi Bank held by Cukurova Group and the SDIF. On August 11, 2005, it was announced that BRSA approved the transfer of Yapi Kredi Bank shares to KocBank and, on September 28, 2005, it was announced that KocBank completed the acquisition of 57.4% of shares of Yapi Kredi Bank. The remaining debt of the Cukurova Group to Yapi Kredi Bank is expected to be repaid over the next 10 years. On November 25, 2005, it was announced that Cukurova Group made an early repayment of approximately $947.2 million of its outstanding debt to SDIF.

The SDIF has begun selling non-related party loans of failed banks through loan auctions and is also taking steps to dispose of its holdings of shares in companies and other assets taken over by the SDIF, including the media assets, the cement factories and a mobile-phone operator, Telsim, previously owned by the Uzan Group, the former owner of Imar Bank. The tender for Star TV was held on September 26, 2005 and the tender was won by Isil Televizyon Yayinciligi (owned by Dogan Yayin Holding) which submitted the highest bid of $306.5 million. The tenders for nine cement factories were held in October 2005 and the highest bids totaled $1.07 billion. On December 21, 2005, the Competition Board approved the sale of eight of the nine cement factories for approximately $945 million. The tender for the ninth plant (Gaziantep cement plant) was rejected due to competition concerns, though it was later announced that a new tender is planned for the Gaziantep cement plant. The tender for Gaziantep cement plant was held on April 11, 2006 and Limak Kurtalan Cimento San. won the tender with the highest bid in the amount of $93.25 million. On May 4, 2006, the Competition Board approved the sale of Gaziantep cement plant. The tender for Telsim held on December 13, 2005 was won by Vodafone, which submitted the highest bid of $4.55 billion. On September 28, 2006, it was announced that SDIF had agreed with Yasar Group (former owner of the Yasarbank) on early repayment of its outstanding debt to SDIF. According to the agreement, Yasar Group paid approximately $48.4 million and €71.9 million in cash to SDIF on September 28, 2006.

Open foreign exchange positions of the SDIF banks, which were approximately $4.5 billion before May 2001, decreased substantially as a result of the injection of foreign exchange-indexed Treasury papers during the second half of May 2001 and became $561 million as of end of June 2001. Although their foreign exchange net open position had increased with the SDIF’s takeover of Pamukbank, it decreased to $367 million as of December 2002 and to $30.6 million as of December 2003. The long position of the sole SDIF bank, Bayindirbank, was $11 million as of the end of 2004 and $33 million as of end of 2005. Foreign exchange net open

position of SDIF bank was $20 million as of end of 2006. The SDIF banks’ deposit interest rates have been kept in line with the market rates since March 2001.

Private Banks

With the “Banking Sector Restructuring Program” implemented in May 2001, private banks (excluding development and investment banks, and foreign banks’ branches) strived to have a healthier structure and to reach internationally accepted minimum capital levels. Due to adverse economic and financial developments, the program was further strengthened by the introduction of a set of new instruments which strengthen the capital of private banks through public support if necessary, establish a legal framework for the restructuring of debts to the financial sector (known as the Istanbul Approach), and establish asset management companies. The legal framework for these instruments (Act No. 4743 on Restructuring of Debts to the Financial Sector and amendments made to some laws) were put into force on January 31, 2002. 25 privately owned deposit banks went through a three-stage audit and standard reports displaying the financial status of these banks as of December 31, 2001 were prepared. Provisional Article 4, added to the Banks Act, made it possible for those satisfying certain conditions to receive one time support in the form of the SDIF’s participation in Tier 1 capital or a subordinated loan (Tier 2 capital).

Detailed explanations of the Bank Capital Strengthening Program and the audit and assessment results of the program were announced to the public through the “Introductory Guide” and the “Progress Report,” both of which aim to increase the transparency in the banking sector.

Table No. 32

Balance Sheet of Banks Covered by the Program(1)


	TL Trillion				$ Million
	December		December		December		December
	2003		2004		2003		2004
Liquid Assets		1,481		1,833		1,063		1,372
Banks		8,381		12,208		6,015		9,138
Interbank Money Market		3,666		2,083		2,631		1,559
Securities Portfolio		45,840		55,521		32,901		41,558
Fixed Securities		13,695		10,539		9,830		7,888
Loans		52,380		80,166		37,595		60,005
Receivables under Follow-Up (Gross)		641		4,375		460		3,274
Receivables under Follow-Up (Net)		4,023				2,887

Total Assets		163,779		206,370		117,549		154,469

Deposits		102,858		125,235		73,824		93,739
Own Funds		23,243		30,722		16,682		22,996


(1)		This table is consolidated to include domestic and foreign branches and provides inflation-adjusted balance sheet data for the 25 banks covered by the Bank Capital Strengthening Program. The Bank Capital Strengthening Program was finalized at the end of year 2004.

Source: BRSA

Cash capital increases, correction of provisions set aside for non-performing loans, positive changes engendered in the market risk and valuation of securities were considered during the evaluations and accordingly, Vakiflar Bankasi, Pamukbank and Sekerbank were determined to have capital needs. Pamukbank was transferred to the SDIF, Sekerbank’s capital needs were covered in cash by its shareholders, and a subordinated loan providing funds to reach the 9% capital adequacy ratio was extended to Vakiflar Bankasi.

In order to help private sector companies continue to operate and regain solvency after the financial crises, a legal framework for the restructuring of debts to the financial sector, know as the Istanbul Approach, was introduced by Act No. 4743, and related regulation was issued by the BRSA. In accordance with the “Financial Restructuring Framework Agreements” (“FRFA”) and by tying these agreements to “Financial Restructuring Contracts” within three years from the date of their approval by the BRSA, restructuring or rescheduling of bank receivables has become possible. Additional financing to debtors, if necessary, may also be provided under the approach.

Companies are separated into two “scales” according to the FRFA. The criteria for the “large-scale” companies are determined as follows: the number of registered employees of the company must be above 100, the annual export volume must be above $15 million, the annual turnover must be above TL25 trillion and the audited balance sheet size must be above TL15 trillion. Companies not meeting the above criteria are categorized as medium or small-scale companies. As of December 2003, there were 72 small-scale and 184 large-scale companies under the Istanbul Approach, with a total of $5.5 billion in contracted loans. As of December 2004, the number of small-scale and large-scale companies increased to 101 and 205, respectively, while total contracts rose to $5.7 billion. FRFA has been completed on April, 2005. As of this date, total 318 companies (of 217 are large scale companies) were under the Istanbul Approach with a total of $6.0 billion in contracted loans.

Regulatory and Supervisory Framework

Parallel to the financial and operational restructuring of the banking sector, necessary laws and institutional arrangements have been realized. These efforts aimed to strengthen the regulatory and supervisory framework to ensure efficiency and competitiveness in the banking sector and facilitate sound banking practices, thus establishing confidence in the sector. The legal framework in place has become almost fully harmonized with the international standards.

In the process of preparing the Banking Act No. 5411, international standards were considered. The main highlights of the Banking Act Nr. 5411 include:

	•		Financial holding, leasing, factoring and consumer finance companies have been under the supervision of BRSA.

	•		The field of activities that banks have been allowed to perform is in conformity with EU Directives.

	•		BRSA has become more transparent.

	•		An open partnership structure and a new organizational chart have been allowed for efficient supervision by BRSA.

	•		Principles of corporate governance have been established for Turkish banks and financial holding companies.

	•		The paid-up capital for establishment of banks can not be less than YTL30 million and it is made compulsory that the capital increased shall be paid in cash as free from any collusion and without using internal resources, excluding resources permitted to be added to capital by the related legislation.

	•		Banks shall disclose their up-to-date articles of association on their web sites to increase transparency.

	•		Financial institutions shall establish audit committees to conduct the audit and supervisory functions of their executive boards.

	•		A prohibition against the transfer of resources to finance deficits of funds established by the institutions exclusively for their employees that provide health, social aid and retirement benefits.

	•		Grants extended by banks and institutions subject to consolidation in a fiscal year shall not exceed 4% of the bank’s shareholders’ equity. However, half of these grants shall be extended to areas that are exempted from taxes by laws.

The regulations set forth in Banking Act No. 5411 have been put in force since the end of October 2006. The regulations are prepared by revising the related previous regulations and by making necessary adjustments to get in line with the international codes and standards using European Union Directives, BIS Principles, Corporate Management Principles of OECD, the Acts of European Union Member and candidate Countries.

The regulations concentrate on capital adequacy, risk management, lending and subsidiary limits, loan loss provisioning, compliance with International Accounting Standards, independent auditing and cooperation with foreign supervisory authorities. The regulations especially regarding financial leasing, factoring and financing companies, independent audit firms, valuation and rating institutions, outsourcing institutions, principles of corporate governance for banks, audit committee and internal systems within the banks, accounting and information systems, capital adequacy and own funds, liquidity are also important for the Turkish banking system.

With the Regulation on Measurement and Assessment of Capital Adequacy of Banks, published in the Official Gazette No. 26333 on November 1, 2006, in addition to credit risk and market risk, principles regarding operational risk are set forth. Moreover, with this regulation, principles as regards the settlement and commodity risks are added in the regulatory framework. And with Regulation on Banks’ Own Funds, innovative capital instruments are recognized and characteristics of these instruments are set.

Regulation on Banks’ Corporate Governance Principles is a regulation which came into force as of November 1, 2006. With this regulation, the corporate governance principles of banks, which are in line with recommended principles stipulated by the Basel Committee, are set forth.

Regulation on Banks Internal Systems was published in the Official Gazette No. 26333 on November 1, 2006. The characteristics of the members of the audit committee and standards in order to ensure their independence are set forth by this regulation. Internal audit functions are depended on risk-based approach. With this regulation the following are set by the Board: the principles and procedures applicable to the establishment, functioning and adequacy of internal control, risk management and internal audit systems; the units to be established; the activities to be performed; the duties and obligations of senior management; and the reporting to be made to the Agency.

Regulation on Measurement and Evaluation of Liquidity Adequacy of Banks, prepared by the BRSA Board upon the approval of the Central Bank, was published in the Official Gazette No. 26333 on November 1, 2006. The objective of this Regulation is to regulate the procedures and principles for achievement and maintenance by banks of adequate levels of liquidity in order to satisfy the liabilities attached to their assets.

Regulation on the Principles and Procedures Related to the Determination by Banks of Qualifications of the Loans and Other Receivables and to the Provisions to be Set Aside was published in the Official Gazette No. 26333 on November 1, 2006. The Regulation determines the principles and procedures for the classification of loans and other receivables of banks according to their characteristics and for the provisions to be set aside for them.

Regulation on the Procedures and Principles for Accounting Practices and Retention of Documents by Banks published in the Official Gazette No. 26333 on November 01, 2006, requires banks to recognize their operations in line with Turkish Accounting Standards which are in compliance with IAS’s and IFRS’s. Upon consulting the associations of institutions and the Turkish Accounting Standards Board, the principles and procedures are established by the Board, (i) to ensure uniformity in banks’ accounting systems; (ii) correctly record all their transactions; and (iii) timely and correctly prepare their financial reports in a style and format that will meet the requirements for proper reporting, that is clear reliable and comparable and that is suitable for auditing, analysis and interpretation.

Regulation on Authorization and Activities of the Organizations that Will Conduct Independent Audit at Banks was published in the Official Gazette No. 26333 of November 1, 2006. The purpose of this Regulation is to lay down the principles and procedures related to the authorization, operations and revoking powers of the independent audit firms that conduct the audit at the banks. By this Regulation, the rights and interests of depositors are to be protected by reviewing whether the banks’ transactions are recorded in a correct manner and whether financial statements are prepared in compliance with the provisions of National Accounting Standards.

Regulation on Authorization and Operations of Valuation Agencies was published in the Official Gazette No. 26333 of November 1, 2006. This Regulation establishes principles and procedures for the establishment, recognition and operations of independent and impartial valuation agencies which will be authorized to value banks’ assets and liabilities recorded on their balance sheets, banks’ guarantees received in connection with their credits and other receivables, banks’ rights and liabilities arising from their contracts, and banks’ revenues or expenses arising from transactions.

Regulation on Authorization and Operations of Rating Agencies was published in the Official Gazette No. 26333 of November 1, 2006. With this Regulation, principles and procedures for the establishment, recognition and operations of independent and impartial external credit rating agencies which will be authorized to evaluate credit risks of the banks in terms of the standardized approach in the scope of Basel II was determined.

Regulation on the Establishment and Operations of Financial Leasing, Factoring and Financing Companies, was published in the Official Gazette No. 26315 on October 10, 2006. With this Regulation, the rules and procedures relating to the establishment, activities, amendments in articles of association, management, merger, dissolution, exchange of shares, limits of operations, accounting, reporting and supervision of these companies were determined.

Regulation on Outsourcing Activities Banks Receive and Authorization of Institutions That Will Perform the Outsourcing Activities was published in the Official Gazette No. 26333 on November 1, 2006. With this Regulation, rules and procedures of authorization of the institutions which provide services as an extension and complement to main services to the banks and the principles relating to the types of outsourcing services that can be procured were regulated.

Regulation on the Merger, Division and Exchange of Shares of Banks published in the Official Gazette No. 26333 dated November 1, 2006, set out the principles and procedures applicable to mergers, divisions and exchanges of shares of Banks operating in Turkey. With this Regulation, divisions and exchanges of shares were introduced.

On the other hand, Act on Bank Cards and Credit Cards Nr. 5464 was put into force by being published in the Official Gazette No. 26095 dated March 1, 2006. In the process of preparing the Act, European Union Directives, “Core Principles of Payment Systems” and “Know Your Customer” reports published by Basel Committee on Banking Supervision, “40 Recommendations on Money Laundering” principles published by the Financial Action Task Force on Money Laundering (FATF) and opinions of related parties are used. The main highlights of the draft include:

	•		Cardholders and institutions establishing card systems, issuing cards and/or making contracts with merchants are subject to the Act.

	•		Institutions intending to establish card systems, issue cards or make contracts with merchants must meet certain conditions and receive permission from BRSA. The reasoned decisions for issuance and revocation of operating permissions shall be published in the Official Gazette.

	•		Card issuers shall not issue credit cards without a claim or written contract.

	•		Places where credit card claims can be collected shall be determined by the Banks Association of Turkey and The Association of Special Finance Institutions upon the approval of the Agency.

	•		If a minimum periodic payment is not paid within the period established by the Act or a judicial fine is levied because of improper card use, all credit cards of the cardholder shall be revoked.

	•		Limits on the liability of a cardholder for unauthorized use have been established and a cardholder shall not be liable for more than YTL150 24 hours before the notification to the issuer.

	•		Credit card limits for one individual holder for the first year shall not exceed twice the individual’s monthly average income, up to YTL1,000.

	•		The institutions subject to this Act shall make their records regarding internal controls, risk management, internal audit systems, and accounting and financial reporting units available for supervision by the Agency. The Agency may revoke the operating permission of any institution not complying with these measures.

	•		Only the institutions granted permission to establish card systems, issue cards and make contracts with merchants, shall be allowed to perform these activities.

According to Act on Bank Cards and Credit Cards No. 5464, Regulation on Bank Cards and Credit Cards was published in the Official Gazette Nr. 26458 on March 10, 2007. With this regulation, the procedures and principles about the issuance, use, clearing and settlement of bank cards and credit cards and licensing and operation of card system organizations and card issuing organizations are determined. In addition, the rules concerning the legal form and general transaction terms of Bank Card and Credit Card contracts, operating principles of the institutions in card payments systems, obligations of issuers, card holders and member companies, are set forth.

Turkey has also undertaken efforts to improve Savings Deposit Insurance Fund (“SDIF”) practices. Board Resolution No. 1043, dated May 14, 2003 reduces the burden on the banks created by the enforcement of Resolution No. 2000/682 in order to ensure the transition to risk-based premium system. Board Resolution No. 1083 dated July 3, 2003 provides that the sums of principal and interest amounts of the accounts defined in Resolution No. 2000/682, dated May 31, 2000, regarding “Savings deposit under insurance

and premiums to be collected by the Savings Deposit Insurance Fund” are fully guaranteed by insurance as of July 3, 2003. Beginning on July 5, 2004, a ceiling was introduced to parallel EU regulations whereby up to YTL50,000 of these amounts will be under the insurance guarantee. On November 25, 2004, Board Resolution No. 1419 was introduced which raised the upper limit of the extra premium ratio from 11 to 13 per 10,000.

Also an IT audit team has been formed by BRSA and this team has started their training on information systems audit. An IT Audit with limited scope has been accomplished at deposit money banks in 2005 by independent auditing institutions. A regulation regarding “Auditing Bank’s Information Systems by Independent Auditing Institutions” has gone into effect. According to this regulation, beginning with 2006 each bank has to be audited once a year in terms of application controls and once in a two year period in terms of general controls. “Communiqué on the Report Format Pertaining to the Audit of the Information Systems to be Installed in the Banks by the Independent Auditing Firms” has been published and for the first year (2006) all banks’ information systems have been audited and reported to the BRSA according to these regulations.

CAPITAL MARKETS

Capital markets deregulation was undertaken in line with overall financial sector reform. The objectives of these reforms were several: to secure transparency, confidence and stability in the capital markets; to contribute to the private sector’s more effective utilization of capital markets; to bring market discipline to State Owned Enterprises (“SOEs”) and strengthen the process of their restructuring; to facilitate local government financing in capital markets; to develop new instruments, institutions and markets to reduce the costs of credit and funds allocation; to deepen the financial markets; to contribute to the participation of the public at large in investment activity; and to reach the standards of developed nations in financial structure and practice.

The Capital Market Law was enacted in 1981 to adapt the legal framework to world markets, and one year later, the regulatory body responsible for the supervision and regulation of the Turkish securities market, the Capital Markets Board (the “CMB”), was established. In 1983, a decree law came into effect to restructure the stock exchanges and secondary securities markets. The İstanbul Stock Exchange (the “ISE”) was established in 1986. In 1989, the foreign exchange regime was amended to allow non-residents to invest in Turkish securities and allow residents of Turkey to invest in foreign securities.

The Capital Market Law was amended in 1992 and new instruments were introduced such as repurchase agreements, futures and options contracts, convertible bonds, asset-backed securities and non-voting shares. The law also prohibits insider trading activities and manipulation, and provides for penalties ranging between TL10 billion and TL25 billion in fines and two to five years’ imprisonment.

Prospective securities issuers, including SOEs and municipalities, now fall within the scope of the CMB’s “Registration System” and all are subject to common disclosure requirements. Prospectuses for the issuance of securities are now more detailed, in accordance with EU directives. External auditing has been extended in the market.

Mutual funds, including those established by non-bank financial institutions, have been differentiated based on portfolio structure. “Type A” funds are mutual funds required to invest at least 25% of their portfolios in the shares of companies traded on the ISE and permanently established in Turkey. To encourage individuals to invest in the capital markets, the Government has exempted Type A funds from income taxes.

Rules regarding margin trading, borrowing and lending securities and short-selling were promulgated in December 1994. In March 1996, principles for the issuance of capital markets instruments by non-residents were introduced. Such principles are regulated by the CMB. The Capital Markets Law also authorizes the CMB to regulate the establishment and operations of institutions that operate in the futures markets. In March 1997, a communiqué concerning the establishment and operations of rating institutions was published by the CMB. In June 1998, a communiqué establishing certain principles regarding capital and capital adequacy requirements of intermediary institutions was published by the CMB.

The 1999 amendments to the Capital Market Law introduced new provisions to the markets, including minority rights, interim dividends and dematerialization of capital market instruments. In addition, the amendments to the Capital Market Law call for the establishment of a central registry, an investor protection fund, a capital market training, research and licensing institute, the Turkish Association of Capital Market Intermediary Institutions and the formation of a Turkish Accounting Standards Board.

“Regulation Regarding the Establishment and Operating Principles of the Central Registry for Dematerialized Securities” became effective in June 2001 and the Central Registry was established as a private entity in 2001. The principles regarding dematerialized securities were finalized in 2002. The dematerialized system became operational for equities in 2005, and for mutual fund certificates in 2006.

The regulation concerning the principles for licensing of the staff of financial intermediaries who engage in capital markets activities became effective in August 2001 and licensing exams began in September 2002.

With the objective of providing domestic and foreign investors with more accurate information about the financial situation of publicly held companies, consolidated financial statements for holding companies were regulated in November 2001.

The Law on Individual Pension Savings and Investment System was enacted in 2001 and the related regulation was published in February 2002. Pension funds began to operate in October 2003.

The Accounting Standards Board of Turkey was established in March 2002 and existing regulations on independent auditing standards were improved in November 2002 in light of the Sarbanes-Oxley Act passed in the United States.

Adopting international standards in the Turkish capital markets is seen as a crucial issue for enhancing integrity in the market and to attract both domestic and foreign investors. In line with this objective, important steps have been taken in the areas of accounting, independent auditing and valuation standards. As a result of the efforts for harmonization with International Financial Reporting Standards, 33 principles fully in line with the international standards were published. Complementing these efforts for enhancing investor confidence, also a 7 year rotation requirement was introduced for auditing firms, and in 2006, standards for independent auditing firms were revised to align the rules with international auditing standards.

With the progress in the introduction of a mortgage market, a particularly important area has been valuation. Adoption of International Valuation Standards aims at harmonization with EU and international implementations and the acceptability of Turkish valuation reports in the international markets.

The regulation regarding the establishment of operational principles for an organized market for SMEs became effective on March 18, 2003. In July 2003, the Capital Markets Board issued Corporate Governance Principles, which used the OECD principles as a benchmark and were updated in 2005 in accordance with the OECD revisions. Implementation of these principles is based on the generally accepted “comply or explain” approach.

In April 2004, regulations related to Exchange Traded Funds became effective. In 2006, hedge funds were regulated, whereby a definition of qualified investors was introduced to the system. Moreover, in 2006, a regulation enabling the functioning of “funds of funds” was issued.

In 2005, the Futures and Options Exchange began its operations in Izmir as the first derivatives exchange in Turkey. Contracts traded on this exchange consist of commodity futures (cotton, wheat), interest rate futures, gold futures, foreign exchange futures and index futures.

The amount of private sector securities issued increased from TL5,793 trillion in 2000 to YTL 7,066 million in 2005. In 2000, the total traded value of securities on the secondary market was TL111 quadrillion. By year-end 2006, the total traded value of securities reached YTL325.1 billion. As of December 31, 2006, total market capitalization was YTL 230.0 million.

In a general pattern of cyclical fluctuations, Istanbul Stock Exchange (“ISE”) market indices both in terms of New Turkish Lira and US dollar followed a downward trend from April 2000 to the end of 2002 and then increased from the beginning of 2003. This upwards movement continued generally in 2004 and 2005. In 2006 ISE 100-Index, being 44,590 in January 2006, declined to 35,453 in late June 2006 and closed at 39,117 in December 2006. Consequently, ISE Share Price Index-100 decreased by 1.7% in YTL terms and 6% in US dollar terms. In 2006 the Industrials Index decreased by 0.8% (5% in US dollar terms), the Financials Index by 4% (in US dollar terms 8%) and the Services Index increased by 23% (in US dollar terms 17%) in comparison to 2005. November 2000 and February 2001 crises led to a decrease in the trading volume, but then with considerable increases, the trading volume reached 146.6 billion YTL ($100.2 billion) in 2003, and 208.4 billion YTL ($147.8 billion) in 2004. After reaching 269.9 billion YTL ($201.8 billion) in 2005, the total trading volume in the ISE equities market in 2006 climbed to 325.1 billion YTL ($229.6 billion). For 2006, average daily trading volume in the ISE equities market was 1,301 million YTL ($919 million) This figure indicates an increase by 20.4% over the previous year in YTL terms, while in US dollar terms it amounts to an increase by 13.8%. In 2006, a total

nominal value of 91.6 billion YTL equities were traded, which amounts to nominal 367 million YTL on daily average basis, with a total number of 45.5 million contracts. By the end of 2006, total market capitalization was YTL230 billion ($162.8 billion) in the Turkish stock market.

In addition, the average daily traded value registered on the bonds and bills market at the end of 2006 was YTL 11.6 billion ($8.1 billion). The total traded value in the bonds and bills market was YTL 2,921 billion ($2,040 billion). In 2006, trading volume of transactions executed off the exchange and registered to the exchange was 201.1 billion YTL ($ 140.4 billion) for outright transactions and 504.7 billion YTL (351.4 billion US Dollar) for repo transactions.

As of December 31, 2006, there were 40 banks and 105 brokerage houses licensed as members trading at the ISE.

The ISE was recognized as a “Designated Offshore Securities Market” by the U.S. Securities and Exchange Commission in 1993 and was designated as an “appropriate foreign investment market for private and institutional Japanese investors” by the Japan Securities Dealers Association in 1995. Likewise, the ISE has been approved by the Austrian Ministry of Finance as a regulated market in accordance with the regulations of the Austrian Investment Fund Act in 2000.

ISE Settlement and Custody Bank Inc., namely Takasbank, is one of the most crucial institutions for the Turkish financial markets. It is an investment bank providing clearing, settlement and/or custody services for the ISE markets (Stock Market, Bond and Bills Market), Futures and Options Exchange and for the portfolio assets of mutual funds and investment trusts. In addition to these services, Takasbank provides the ISE members with a range of banking services such as credit services for cash within Takasbank Money Market (“TMM”) and credit services for securities, including Securities Purchasing Loans (“SPL”) and Securities Lending/Borrowing Facility (“SLBO”). In 1995, Takasbank was granted the title of “Eligible Foreign Custodian” by the SEC and designated as an “Approved Depository” by the Securities and Futures Authority of the United Kingdom. Also in 1995, the Japan Securities Clearing Corporations and Japan Securities Depository Center recognized Takasbank as an eligible depository conforming to the standards predetermined by these institutions.

The following table shows market activity in the Turkish capital markets for the periods indicated:

Table No. 33

Securities Markets Activities


	2002		2003		2004		2005*		2006*
Securities Issued (in trillions of TL)		4,193		7,882		10,696		7,066		17,058
Outstanding Securities (in trillions of TL)		164,115		214,012		252,601		280,017		296,299
Private		13,177		18,008		25,186		31,916		41,058
Public		150,939		196,004		227,415		248,773		255,240
Traded value on the ISE Markets (in trillions of TL)
Stock Market		106,302		146,645		208,423		269,931		325,131
Bonds and Bills Market		838,520		1,253,631		1,924,080		2,340,000		2,921,000
Off-exchange bonds & bills transactions		547,175		527,761		622,332		568,782		705,774
Stock Market Capitalization (in trillions of TL)		56,370		96,073		132,556		218,308		230,038
ISE National 100 Index(1) (on TL basis)		10,370		18,625		24,972		39,778		39,117
Number of Companies Traded		288		285		297		303		316


(2)		For the stocks traded in ISE, dematerialized system became operational within CRI as of November 28, 2005 and the records of stocks held in fungible custody at Takasbank before are now held in dematerialized form at CRI.

(1)		Year-end figures

*		in YTL (million)

Sources: Capital Markets Board, ISE, Undersecretariat of Treasury, Privatization Administration.

PUBLIC FINANCE

GENERAL

The public sector in Turkey includes the central government (the “Government”), social security institutions (“SSIs”), local governments (provincial governments, municipalities and villages), financial and non-financial state owned enterprises (“SOEs”) and extra-budgetary funds (EBFs). Social security institutions and local governments both prepare their own budgets. The central government budget consists of three parts: (1) the general budget agencies: ministries and agencies equivalent to ministries against to Constitutional Law, (2) special budget agencies: agencies directly affiliated to the central government but with some degree of autonomy, (3) regulatory and supervisory agencies: agencies belonging to the central government but with a larger degree of autonomy.

In the course of accession negotiations, Turkey reformed its public financial management in accordance with EU practices and improved budget coverage, formulation, execution, accounting, audit and procurement. The main change is the introduction of the Public Financial Management and Control Law (PFMC Law), adopted by the Turkish Parliament in December 2003 (Law No. 5018, as amended in 2005, Law No. 5436). Enactment of the PFMC Law marked a defining moment, providing a new legal framework for modern public expenditure management and accountability. Throughout the Law, key concepts of the modern public financial system such as managerial responsibility models, effective and efficient use of resources, strategic planning, performance based budgeting, multi-year budgeting, accountability, fiscal transparency, modern internal audit/control and external audit practices which are the core elements of the new public sector framework have been put into practice or are to be put into practice in the medium term. Several other reform laws have been enacted, including the Special Provincial Administration Law, Metropolitan Municipalities Law, The Municipalities Law, and etc.

The PFMC Law is being implemented step by step and covers public financial management and control at all levels of government. Although not an organic law in the sense of legal prevalence, being a frame law it requires in many instances secondary legislation for its implementation.

On July 3, 2005, a new Municipalities Law (Law No. 5393) was approved by the Assembly, and the law was published in the Official Gazette on July 13, 2005 (No. 25874). The Municipalities Law is intended to reorganize the structure, duties and responsibilities of municipalities.

Below, some brief information is given about the budgeting process, accounting system, internal and external audit in line with the new reforms.

Budgeting

The new system modernizes the budgeting process according to international standards. The central budget remains the pivotal point of the public finances and is prepared according to a schedule common to OECD countries. A medium-term economic programme is prepared by the State Planning Organization covering macro policies, targets and main economic indicators in the context of development and strategic plans and general economic condition and is adopted by the Council of Ministers. A medium term fiscal plan, consistent with the medium term economic programmes is prepared by the Ministry of Finance and it includes total revenue and total expenditure projections, budgetary targets and proposed budget appropriation ceilings for public administrations and is endorsed by the High Planning Council. These documents set the framework for the discussions and negotiations with relevant ministries and spending agencies, before political reconciliation in the Cabinet and the Parliament.

A rolling multi-year budget framework for the two following years after the budget year accompanies the budget law. The approved budget is implemented through a unified treasury system and the closing accounts are presented shortly after the end of the budget exercise. A detailed audit report is submitted to the Parliament before closing the accounts.

The accounts of the SSIs, EBFs and local governments are prepared, implemented and closed according to their respective laws, but are coordinated with the central budget. Their provisional budgets are communicated to the Parliament before the approval of the central budget. Integrated general government accounts are published in quarterly periods, together with a yearly report shortly after the end of the budget exercise.

To align the accounts with the Government Financial Statistics (GFS) standards, the budget codification system is being overhauled. Each spending item is identified in institutional, administrative, economic and functional terms and budgets and budget

reports are compiled according to these different classifications. The new codification system has been gradually applied to all general government entities beginning from 2006.

The fiscal year is the calendar year and the annual budget process commences in June with the budget call of the Prime Minister prepared by the Ministry of Finance. Individual ministry budgets are prepared and reviewed by the High Planning Council. A budget bill together with supporting information is submitted to the Turkish Grand National Assembly (“TGNA”) in early October. Following debate, the annual budget law is approved by the TGNA and promulgated by the President in early December.

Each of the SOEs adopts an annual financial program, which is approved by the Council of Ministers. The TGNA annually appropriates a single amount to the Treasury for allocation among the SOEs. Revenues and expenditures of the SOEs are excluded from the consolidated budget. Since 1993, revenues and expenditures of most EBFs have been consolidated with the national budget. In 2000 and 2001 most of the EBFs were abolished by two new laws (Law Nos. 4629 and 4684). There are only 5 EBFs remaining. This consolidation is intended to impose discipline on EBF spending and decrease the EBFs’ contribution to the annual public deficit.

Accounting

Establishing a uniform accounting system for general government and supervision of the system are the responsibilities of the Ministry of Finance’s General Directorate of Public Accounts. The Ministry of Finance has accounting offices in ministries and agencies. The offices are responsible for collecting revenue, ordering payments and recording the financial transactions of the line ministries and agencies (Article 61 of the PFMC Law). The Ministry of Finance is responsible for compiling, consolidating and disseminating accounting data and financial statements for the central government on a monthly basis as defined in the PFMC Law.

The accounting and reporting standards for general government are set by the State Accounting Standards Board, which is established within the Ministry of Finance. The Ministry of Finance sets rules for the preparation of the final accounts and supervises the compilation. After completion the Final Accounts Law is submitted to the Turkish Court of Accounts (TCA) and the National Assembly. The Turkish Constitution mandates that the Final Accounts Law should be submitted to parliament within seven months of the end of the fiscal year and that the TCA shall submit its certification no later than 75 days thereafter.

Currently the main fiscal policy indicators are the overall balance and primary balance of the central government budget, and the total and primary balance of the “Consolidated Government Sector”. In order to submit fiscal notifications to the European Commission, huge efforts have been made to prepare accounts in accordance with ESA 95 standards. The ambition is to produce accounts in accordance with ESA 95 for the year 2009.

Internal audit

The PFMC Law requires each public administration to establish an internal audit unit. Internal auditors within the line ministries and agencies will be made responsible for system, performance, financial, compliance and IT audits. The internal auditors are required to report to the head of the agency. The target is to hire 1200 new internal auditors for the public administrations covered by the PFMC Law with appropriate qualifications by the end of 2007.

External audit

External audit is regulated by the law on the Turkish Court of Accounts (TCA). Article 68 of the PFMC law specifies that the TCA may audit all general government organisations (central government agencies, local governments and SSIs). TCA’s independence is secured. TCA prepares its own budget and presents it to parliament directly. It decides on its own audit programme. The president and the members of the court are elected by the parliament. The tenure of members and auditors continues until the age of 65. The president, members and auditors cannot be appointed to another position without their consent. Removal can only happen due to criminal conviction or for medical reasons. At present, the TCA predominantly carries out compliance audits, the results of which are held through a judicial procedure. The TCA also submits a report to the parliament on the general conformity on the fiscal transactions of the central government. Both types of reports are published and publicly available. In order to enhance the capacity for the new external audit areas, the TCA has established a twinning project with the British National Audit Office and conducted a number of training exercises for staff.

CONSOLIDATED CENTRAL GOVERNMENT BUDGET

The Government implemented a three-year IMF-monitored program in 1998 in order to tackle increasing inflation and the fiscal deficit. The aim of this program, which ultimately took only eighteen months, was to reduce inflation to a single-digit level by 2000

while ensuring sustainable growth. In this context, Government income policy was set in line with the inflation targets. As part of its efforts to reduce inflation, the Government announced that the Treasury, the Central Bank and the Ministry of Finance would each produce quarterly policies to provide a clearer picture of the Government’s short-term action.

In October 1998, a comprehensive draft budget was proposed for 1999, but it was held back after the fall of the coalition government. Instead, a transitional budget was approved by the TGNA. The transitional budget was in force for the first half of 1999. The 1999 budget was approved by the TGNA on June 18, 1999. In 1999, total consolidated budget revenues were estimated to be TL18,030 trillion (23.0% of GNP) while total expenditures were estimated to be TL27,144 trillion (34.7% of GNP). Consequently, the budget deficit was estimated to be TL9,114 trillion (11.6% of GNP) and the primary surplus was estimated to be TL1,187 trillion (1.5% of GNP).

However, the severe slowdown in the growth rate (GDP fell by 7.9% in Q1 and 3.7% in Q2) in the first half of 1999 forced the government to revive economic activity, and a tax bill (Bill No. 4444) was submitted to the TGNA aimed at easing the negative effects of the decrease in the growth rate. Unfortunately, this adversely affected the progressive steps taken with the reform.

Bill No. 4444 included some major changes:

	•		The definition of income was changed back to its previous form;

	•		The declaration method was abolished and the withholding method was adopted for bank deposits and repo transactions;

	•		Filing obligations for mutual funds were abolished;

	•		Excluding wage and salary income, tax rates on personal income were increased by 5%; and

	•		The advance tax period was extended from three months to six months effective from January 1, 2000 and the rate has been lowered to 20% from 25%.

Shortly after the bill was announced, a devastating earthquake hit the Marmara region — the industrial heartland of Turkey — resulting in extensive damage to both daily life and infrastructure. This brought an immediate need for extra revenue and gave rise to some one-off taxes along with large scale allocations to compensate for the short term effects of the disaster.

Therefore, an additional tax bill (No. 4481) was submitted to the TGNA and approved on November 26, 1999. In this bill:

	•		Income and corporation taxpayers pay an additional 5% of their 1998 income;

	•		Motor vehicle and real estate taxpayers pay an additional amount equal to their tax liability in 1999;

	•		Until December 31, 2000, a surcharge on 25% of the service provided by Global System for Mobile Communications (“GSM”) operators to their subscribers was paid as a special communication tax;

	•		Until December 31, 2000, a special transaction tax equal to the amount of education levies was paid; and

	•		The legal ceiling of Petroleum Consumption Tax was increased from 300% to 500%.

As part of tax bill No. 4481, a one-off “interest tax” aiming to tax “windfall gains” on government paper issued before December 1, 1999 was also introduced and became effective January 1, 2000. The rates applied to the interest gains depend on the time to maturity and the type of security. For discounted government papers, the rate is 4% for securities with a time period to maturity between 1 and 91 days, 9% for securities with a time period to maturity between 92 and 183 days and 14% for securities with a time period to maturity greater than 183 days. As for government bonds with floating rate coupon payments, the rate is 4%. The tax rate on windfall gains for government bonds with fixed coupon payments is 19%.

Shortly after the introduction of these new revenue measures the Government decided to replace the ongoing 18-month stabilization program already monitored by the IMF staff with a stronger one (the “Disinflation Program”). This new program was designed to free the country from the high inflation that had plagued the economy for two decades, to restore macroeconomic

fundamentals, and to address the long-standing structural weaknesses in the economy. Within this context, a three-year Stand By Arrangement (“SBA”) for Turkey was approved by IMF authorities on December 22, 1999.

The goals of the first year of the Disinflation Program backed by the SBA in 2000, were to bring about a sharp decline in inflation and to curb the pace of the increase in domestic debt stock by decreasing the public sector borrowing requirement.

The delay in the privatization of Turk Telekom (a SOE engaged in the telecommunication business) along with other structural reforms triggered a debate. This jeopardized business confidence and resulted in turmoil in the financial markets in late November 2000, one month after the 2001 budget bill was submitted to the TGNA.

While the negotiations were taking place at the Plan and Budget Commission, the overnight rates in money markets rose to levels as high as several thousand percent. In December 2001, the Treasury did not open tenders in order to end the year without any auctions.

In order to keep the program on track and to compensate for the impact of the lag in structural reforms, the government took further fiscal measures in November. These included increasing rates and fees and extending the implementation period for some taxes. Some of the measures introduced in late 2000 to safeguard the program targets for the fiscal year 2001 were:

	•		Minimum taxation was reintroduced, requiring taxpayers to file minimum earnings no less than the limits specified in the legislation;

	•		The implementation period for special education levies, special transaction taxes and special communication taxes were extended until the end of 2002;

	•		Special transaction taxes increased by 100%, doubling the rate of taxation;

	•		Motor vehicle taxes and motor vehicle purchase taxes increased by 75% and 60%, respectively;

	•		Advance tax payment periods for personal income and corporate income tax were re-extended by 3 months. The advanced corporate income tax rate was raised from 20% to 25%;

	•		Ad valorem fees were increased by 50% and specific fees were increased by 100%; and

	•		Value added tax on telecommunication services (other than GSM networks) increased to 25% from 17%. However, the Supreme Court subsequently suspended implementation of this measure.

On December 20, 2000, the Assembly passed the 2001 budget. The 2001 budget was based on real growth of 4.5% and a deflator of 18%. The budget bill estimated revenues totaling TL43,127 trillion (28.1% of GNP) and expenditures of TL48,360 trillion (31.5% of GNP). Consequently, the budget deficit was estimated to be TL5,233 trillion (3.4% of GNP). The primary balance was estimated as TL11,447 trillion (7% of GNP). The 2001 budget projected a 9% decrease of primary expenditures in real terms.

The February 2001 financial crisis forced the Government to float the Turkish Lira on February 22, 2001, which was earlier than anticipated. The subsequent devaluation of the Turkish Lira following the float led to a new macroeconomic framework. A supplementary budget bill was approved when the new macroeconomic framework pressured public spending. The supplementary budget added TL30.6 quadrillion (16.8% of GNP) on top of the original expenditure estimate, of which TL24.1 quadrillion was allocated to interest expenditures. It also projected TL5.9 quadrillion of additional revenues (3.3% of GNP).

In order to bring stability to the economy following the February 2001 financial crisis, the first major step taken by the Government was to recognize the unpaid duty losses of the public banks and to recapitalize the intervened banks in the Savings Deposit Insurance Fund portfolio by securitizing all of them. This led to a sizeable increase in the domestic debt stock in May 2001.

By the end of 2001, total budget revenues were TL51,543 trillion (29.2% of GNP, a 2.6% increase compared to the previous year). Total expenditures were TL80,579 trillion (45.7% of GNP), reflecting the sharp increase in interest expenditures as a result of the aforementioned banking reforms. Non-interest expenditures were TL39,517 trillion (22.4% of GNP). The consolidated budget deficit, as a result, was TL29,036 trillion (16.5% of GNP) in the fiscal year 2001.

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Even after the unstable global economic outlook caused by the terrorist attacks against the United States on September 11, 2001, Turkey managed to reach the year-end performance criteria set by the Stand-By Arrangement.

On February 4, 2002, the IMF board approved a new Stand-By Arrangement for 2002 — 2004. The primary goals of the new program were sustainable growth and disinflation.

The consolidated budget for 2002 estimated 4.0% real growth with a 46.0% deflator. Total revenues were estimated as TL71,218 trillion (26.0% of GNP) and expenditures as TL98,131 trillion (35.9% of GNP), of which TL55,336 trillion are primary expenditures (20.2% of GNP). The primary surplus was targeted as TL15,882 trillion (5.8% of GNP) while the budget deficit was estimated as TL26,913 trillion (9.8% of GNP).

In the first half of the year the criteria set for the consolidated government sector, including the consolidated budget, were met. However, these promising developments were overshadowed by expectations of an early election. These expectations led to a slowdown in accomplishing structural reforms. In the end, Parliament decided to hold early elections at the beginning of November.

In this environment, the 2002 fiscal year consolidated budget revenues were realized at TL75,592 trillion, representing 27.5% of GNP, and expenditures amounted to TL115,682 trillion, representing 42.1% of GNP. The budget deficit reached TL40,090 trillion (14.6% of GNP) while primary surplus was TL11,781 trillion (4.3% of GNP).

After the 2002 elections, the new government came into power and put into effect the provisional budget for the three month period of January — March of 2003. At the end of those three months, the 2003 budget was submitted to Parliament.

The consolidated budget for 2003 was prepared with the assumptions of 5.0% real growth and of a 24.4% deflator. Total revenues were estimated as TL100,782 trillion (28.2% of GNP) and expenditures as TL145,949 trillion (40.9% of GNP), of which TL80,499 trillion were primary expenditures (22.5% of GNP). The primary surplus was targeted as TL20,282 trillion (5.6% of GNP) while the budget deficit was estimated as TL45,167 trillion (12.6% of GNP).

The 2003 fiscal year consolidated budget revenues totaled TL100,250 trillion, representing 28.1% of GNP, and expenditures amounted to TL140,455 trillion, representing 39.4% of GNP. The budget deficit reached TL40,204 trillion (11.3% of GNP), while primary surplus amounted to TL18,405 trillion (5.2% of GNP).

At the beginning of 2004, the Turkish budget classification system was changed. The new system is called the Analytical Classification-Code System. The major changes in the new system include a scheme in which tax rebates are subtracted from revenues and therefore budget revenues appear as net figures (after deduction of rebates). In the previous system, expenditures included tax rebates. Since 2004, the budget data have been disseminated according to the new Analytical Classification-Code System. Therefore, 2004 and 2005 data are shown in Table 35 according to the new classification. The old budget data series have not been converted to the new system, yet. Therefore, the data of 2004 and 2005 are shown in a separate table.

In 2004, estimated consolidated budget revenues were TL104,109 trillion (24.3% of GNP) and estimated expenditures were TL149,945 trillion (35.0% of GNP). Consequently, the budget deficit was projected as TL45,836 trillion (10.8% of GNP) and the primary surplus was targeted at TL20,214 trillion (4.8% of GNP).

Actual consolidated budget revenues reached TL110,721 trillion (25.8% of GNP) in 2004 and exceeded the original target by 1.5% of GNP. Total expenditures were TL141,021 trillion (32.9% of GNP) and the budget deficit was TL30,300 trillion (7.1% of GNP). The primary balance realization was TL26,188 trillion, representing 6.1% of GNP and 1.3% above the target.

Due to strong growth and buoyant revenues, fiscal performance in 2004 exceeded the program targets. Expenditures were kept in line with budget and, tax collections were robust, particularly from corporate tax and VAT.

On December 29, 2004, a Government decree regarding the reduction of VAT was published in the Official Gazette (No. 25685). In accordance with the decree, the VAT collected from food, education and health products was reduced to 8% from 18% beginning on January 1, 2005. Furthermore, on March 8, 2006, another Government decree regarding the reduction of the VAT collected from textile products to 8% from 18% was published in the Official Gazette (No. 26102), which became effective on March 9, 2006.

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The economic program within the framework of Stand by Arrangement has been focusing on debt reduction through the high primary surpluses, retained by 6.5% of GNP primary surplus target for public sector during the program period.

Fiscal Policy remained prudent in 2005. In 2005, estimated consolidated budget revenues were YTL126,409 million (26.0% of GNP) and estimated expenditures were YTL155,628 million (31.2% of GNP). The budget deficit was projected as YTL29,137 million and primary surplus was targeted at YTL27,302 million (5.8% of GNP).

At the end of the year consolidated budget revenues and expenditures reached YTL137,981 million (28.4% of GNP) and YTL146,098 million (30.0% of GNP), respectively. The budget deficit was YTL8,117 million (1.7% of GNP) and primary surplus was YTL37,563 million (7.7% of GNP).

As the Law No. 5018, Public Fiscal Management and Control Law (PFMCL) came into effect in Jan 1, 2006; the institutional scope of the budget was broadened due to the Law. Other than the institutional changes; another change made in the system was that, shares of local governments and funds started to be disseminated on a gross basis within both revenues and expenditures. Accordingly, the data for 2006 are also shown in a separate table below (Table No.36).

In 2006, estimated central government budget revenues were YTL160,326 million and estimated expenditures were YTL174,322 million which generated a budget deficit of YTL13,996 million. The provisional results show that at the end of 2006, budget revenues and expenditures were realized at YTL171,309 million (29.8% of GNP) and YTL175,304 (30.4% of GNP) million, respectively. The budget deficit was YTL3,995 million, representing 0.7% of GNP and primary surplus was YTL41,951 million, representing 7.3% of GNP.

On October 17, 2006, the Council of Ministers submitted the draft budget law for 2007-2009 period to the Assembly. The draft law includes TRY204.9 billion target for central government budget expenditures, TRY188.2 billion target for central government budget revenues and TRY36.2 billion target for central government budget primary surplus in 2007. The Budget Law (Law No. 5565) was approved by the Assembly on December 26, 2006. On October 17, 2005, the Council of Ministers submitted the draft of the first multi-annual budget for the 2006-2008 period to the Assembly. The draft budget includes 5% targets for the CPI and PPI rates and a 6.5% target for the primary surplus/GNP ratio for the public sector at the end of 2006. The Assembly passed the 2006 budget on December 27, 2005, and the Budget Law (Law No. 5437) was published in the Official Gazette on December 31, 2005.

The following table sets forth the consolidated central Government budget (adjusted).

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Table No. 34

Consolidated Central Government Budget


	2001		2002		2003
	*(in trillions of Turkish Lira)*
REVENUES		51,543		75,592		100,250
Tax Revenues		39,736		59,631		84,316
Direct Taxes		16,081		20,077		27,808
Indirect Taxes		23,655		39,554		56,508
Non-tax Revenues (1)		11,155		14,566		14,112
Grants		0		405		131
Annex Budget		652		989		1,692
TOTAL EXPENDITURES		80,579		115,682		140,455
NON-INTEREST EXPENDITURES		39,517		63,812		81,846
Personal		15,212		23,089		30,209
Other Current		5,236		8,019		8,304
Investment		4,150		6,892		7,180
Interest Payments of Which		41,062		51,871		58,609
Foreign Borrowing		3,568		5,064		5,890
Domestic Borrowing (2)		37,494		46,807		52,719
Transfers to SOE’s		1,107		2,170		1,881
Other Transfers (3)		13,812		23,642		34,271
PRIMARY BALANCE		12,026		11,781		18,405
OVERALL BALANCE		-29,036		-40,090		-40,204
DEFERRED PAYMENTS		1,499		1,765		-247
OTHER DEFERRED PAYMENTS		1,339		555		-786
ADVANCES		-4,732		2,944		-1,839
CASH BALANCE		-30,930		-35,102		-43,076
FINANCING		30,930		35,102		43,076
BORROWING (NET)		18,194		31,960		44,679
Foreign Borrowing (net)		-5,349		14,485		1,796
Receipts from Loans		4,364		23,494		12,476
Payments on Loans		-9,713		-9,009		-10,680
Domestic Borrowing (Net)		23,542		17,474		42,884
G-Bonds (net)		8,534		-896		54,856
Receipts		35,091		29,517		93,064
Payments		-26,557		-30,413		-38,208
Treasury Bills (net)		15,008		18,371		-11,973
Receipts		42,463		66,157		55,697
Payments		-27,455		-47,786		-67,670
RECEIPTS FROM ON LENDING		898		2,085		1,264
CURRENCY, DEPOSITS AND OTHER TRANSACTIONS		11,838		1,057		-2,868


(1)		Includes privatization proceeds.

(2)		Includes non-cash interest payments.

(3)		Includes transfers to EBFs.

Source: UT.

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Table No. 35

Consolidated Central Government Budget


	2004		2005
	(in millions of NewTurkish Lira)
REVENUES		110,721		137,981
Tax Revenues		90,077		106,929
Direct Taxes		27,997		32,673
Indirect Taxes		62,080		74,256
Other		20,644		31,052
Non-Tax Revenues		17,500		25,468
Capital Revenues		161		2,025
Grants and Aids		1,202		1,333
Receivables		0		0
Annexed Budget Revenues		1,781		2,225
EXPENDITURE		141,021		146,098
PRIMARY EXPENDITURE		84,532		100,418
Personnel Expenditure		28,948		31,856
Social Security Contributions		4,024		4,533
Purchase of Goods and Services		12,684		14,446
Interest Payments		56,488		45,680
Domestic Interest Payments		50,053		39,270
Foreign Interest Payments		6,057		6,223
Discount and Short Term Transactions		379		186
Current Transfers		27,683		35,223
SOE Duty Losses		381		522
Transfer to Emekli Sandigi		7,800		8,889
Transfer to Bag-Kur		5,336		6,863
Transfer to SSK		5,757		7,507
Transfer to Unemployment Insurance Fund		440		503
Social Aid and Solidarity Incentive Fund		332		0
Transfer to the Autonomous Agencies		1,308		1,576
Credit and Dormitories		834		1,114
Agricultural Subsidies		3,084		3,707
DIS		2,480		2,393
Deficiency Payment		334		0
Livestock		209		345
ARIP		31		29
Other Agricultural Subsidies		30		940
Tax Rebates to Pensioners		710		1,293
Aids to Other Countries and Contributions to Int. Ins.		363		391
Other Current Transfers		1,338		2,857
Capital Expenditure		8,050		9,805
Capital Transfers		437		1,546
Lending		2,669		3,009
Contingencies		37		0
PRIMARY BALANCE		26,188		37,563
BUDGET BALANCE		-30,300		-8,117
DEFERRED PAYMENTS		-81		513
OTHER DEFERRED PAYMENTS		1,795		2,263
ADVANCES		-3,038		-3,970
CASH BALANCE		-31,624		-9,310
FINANCING		31,624		9,310
BORROWING (NET)		34,217		19,309
FOREIGN BORROWING (NET)		3,505		-2,009
Receipts		13,309		13,760
Payments		-9,804		-15,769
DOMESTIC BORROWING (NET)		30,712		21,318
G-Bonds (Net)		25,853		33,773
Receipts		96,490		111,413
Payments		-70,636		-77,640
Treasury Bills (Net)		4,859		-12,455
Receipts		61,578		40,116
Payments		-56,719		-52,571

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	2004		2005
	(in millions of NewTurkish Lira)
RECEIPTS FROM ON-LENDING		943		669
PRIVATIZATION REVENUE		0		1,773
PAYMENTS FROM SDIF		0		1,215
ON LENDING (1)		0		931
CURRENCY/DEPOSIT AND OTHER TRANSACTIONS		-3,536		-12,726


(1)		On lending credit used by the Agricultural Products Office (TMO)

Source: UT.

Table No. 36


	2006
	(in millions of New Turkish Liras)
*CENTRAL GOVERNMENT BUDGET REVENUES ()**		171.309
I. GENERAL BUDGET REVENUES		166.620
Tax Revenues		137.474
Direct Taxes		43.258
Indirect Taxes		94.216
Other		29.146
Non-Tax Revenues		26.435
Capital Revenues		1.841
Grants and Aids		870
II. REVENUES OF SPECIAL BUDGET AGENCIES		3.292
III-REVENUES OF REG. & SUPERVISORY INSTITUTIONS		1.398
CENTRAL GOVERNMENT BUDGET EXPENDITURES		175.304
PRIMARY EXPENDITURES		129.359
Personnel Expenditure		37.733
Social Security Contributions		5.067
Purchase of Goods and Services		18.646
Interest Payments		45.945
Domestic Interest Payments		38.641
Foreign Interest Payments		6.662
Discount and Short Term Transactions		642
Current Transfers		49.603
Duty Losses		7.242
Treasury Aids		21.739
Transfers to Non Profitable Institutions		185
Transfers to Households		1.154
Agricultural Subsidies		4.747
Transfers to Abroad		592
Shares from Revenues		13.944
Capital Expenditure		11.934
Capital Transfers		2.637
Lending		3.738
Contingencies		0
CENTRAL GOVERNMENT BUDGET PRIMARY BALANCE		41.951
CENTRAL GOVERNMENT BUDGET BALANCE		-3.995
DEFERRED PAYMENTS		-1.355
OTHER DEFERRED PAYMENTS		1.538
ADVANCES		-1.730

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	2006
	(in millions of New Turkish Liras)
CENTRAL GOVERNMENT BUDGET CASH BALANCE		-5.541
CENTRAL GOVERNMENT BUDGET FINANCING		5.541
BORROWING (NET)		2.740
FOREIGN BORROWING (NET)		-1.722
Receipts		16.755
Payments		-18.476
DOMESTIC BORROWING (NET)		4.461
-YTL Denominated T-Bills		-8.224
Receipts		18.530
Payments		-26.754
-YTL Denominated G-Bonds		18.171
Receipts		95.404
Payments		-77.232
-FX Denominated G-Bonds		-5.486
Receipts		2.297
Payments		-7.784
RECEIPTS FROM ON-LENDING		518
PRIVATIZATION REVENUE		7.159
PAYMENTS FROM SDIF		84
LENDING (-)		0
CURRENCY/DEPOSIT AND OTHER TRANSACTIONS		-4.961


()*		Provisional / The central government budget comprises the general budget (list I), the special budget agencies (list II) and the budget of regulatory and supervisory institutions (list III)

TAXATION

The Government collects taxes⁹ on personal and corporate income, real estate, goods and services (including the value added tax), and foreign trade. Except where indicated, all tax rates cited in this section exclude the 10% Fund levy, chargeable until the end of 2003.

The personal income tax is levied on a scheduler basis and includes the following features:

• Earned income received from a single employer is subject to a progressive withholding tax at marginal rates rising from 15% to 40%. In 2005, the 40% ceiling was lowered to 35%. In 2004, the personal deduction was eliminated and replaced by a tax credit for the same expenditures, at a maximum of 8%, which declines to 4% as certain expenditure thresholds are exceeded. The withholding tax is final;

• Earned income from more than one employer is subject to declaration if the second income is higher than the TL14 billion threshold for the year 2004 and if it is higher than the YTL 15,000 threshold for the year 2005 and if it is higher than the YTL 18,000 threshold for the year 2006.

• Capital income is taxed at marginal rates rising from 15% to 35% as of 2006. There is a requirement to file an annual tax return for unearned income not subject to a final withholding tax.

On the other hand, the taxation of the gains derived from the sale and the retention of marketable securities and other capital market instruments, and the taxation of deposit interests, repo gains and the income that is derived from private finance institutions is regulated by Temporary Article 67, which was added to the Income Tax Law through Article 30 of the law No.5281 (Law regarding the amendments to some laws and adaptation of tax laws to New Turkish Lira). These regulations will be applied during the period between January 1, 2006 and December 31, 2015. In particular:


⁹	Except where indicated, all tax rates cited in this section exclude the 10% fund levy that was chargeable until the end of 2003.

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Interest income derived from the government bonds issued prior to January 1, 2006 is not subject to the withholding tax, instead the tax rate is “0.” There is a personal exemption of YTL 390,820.9 for the year 2006, and a tax is levied on any amount above this;

According to the Temporary Article 67, a withholding tax at a rate of 15% (for residents 10% from July 23, 2006) is applied on the gains from the retention and sale of all kinds of bonds (Goverment, private sector etc.) and Treasury bills issued after January 1, 2006. This tax rate is 0% for non-residents from the date of july 7, 2006.

Also, the income from the sale of shares is subject to withholding tax at a rate of 15% (for residents 10% from July 23, 2006, for non-residents 0% from July 7, 2006) provided that the stocks are held for less than one year and belonged to full corporations and listed on the Istanbul Stock Exchange.

Income from dividends is not aggregated with income from government securities and other taxable income, and there is a threshold of YTL 18,000 for 2006. Dividends are currently subject to withholding tax at 15% from July 23, 2006, 50% of dividends will be exempted from income tax, and if the remaining 50% is above the threshold of YTL18,000 for 2006 it will be included in taxable income, and the participation in the withholding tax can be credited. There are special provisions for dividends derived from investment funds and investment trusts;

Income from bank deposits acquired from January 1, 2006 is subject to final withholding tax at fixed rate of 15% according to the new provisions of Temporary Article 67.

The corporate income tax is payable by legal persons at 30% (plus the 10% surcharge until January 2004). In 2004, the applied corporate income tax rate was 33%. For the year 2005, the corporate income tax rate was reduced to 30%. As of the year 2006, Corporation Tax Law No. 5422 was abolished and Corporation Tax Law No. 5520 was enacted. Also, the corporate income tax rate was reduced to 20%. Other key features include:

• Depreciation of assets at a rate of 20%, or use of declining balances, with full indexation against movements in the wholesale price index. Depreciation of assets are based on the economic life of each asset after January 1, 2004;

• Losses can be carried forward for 5 years;

• Investment tax allowance application was eliminated at the beginning of the 2006.

• Starting on January 1, 2004 the corporate tax base is now fully indexed to inflation.

Social security contributions are payable by employees at a rate of 14%, and by employers at a rate of 19.5%. For employees whose gross earnings are below the base or above ceiling earnings, which are determined at least twice a year, these contribution rates are applied to base or ceiling amounts respectively. The ceiling amount up YTL38,119 and the base amount up to YTL5,864 for the year 2005. According to Social Security Law amended with the Law No. 5198, the base wage for Social Security contributions was equalized to the minimum wage since July 1, 2004. Social security contributions are paid into funds that are not consolidated under the central government accounts. There are four such funds, one for each civil servants (“ES”), employees (“SSK”), self employed and farmers (“Bag-Kur”), and the unemployed. The employer’s contribution varies with the riskiness of the job, rising to 24%. Within the same income range, there is an additional contribution to the unemployment fund of 1% by the employee and 2% by the employer.

VAT is a broad based tax on consumer spending and normally has a neutral effect on businesses because the input VAT is deductible from the output VAT. The following transactions performed in Turkey, among others, are subject to VAT:

• the supply of goods and services in the course of commercial, industrial, agricultural, and professional activities; and

• the importation of all goods and services.

The following transactions are exempt with the right to deduct input VAT:

• the exportation of goods;

• the supply of services abroad;

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• the processing of goods for exports;

• the supply of ships, aircraft, and rail transportation vehicles, and the supply of services related to the manufacture of such vehicles;

• the supply of services to ships and aircraft at harbors or airports;

• the supply of international transport services;

• the supply of goods and services to persons engaged in the exploration for hydrocarbon sources;

• the supply of machinery and equipment to persons who are normally subject to tax but who have provided an investment document that the machinery and equipment are part of the investment;

• international roaming contracts according to the reciprocity principle;

• the supply of goods and services related to the exploration, management and refining of gold, silver and platinum;

• goods and services related to national security; and

• goods and construction works related to the construction, restoration and enlargement of seaports and airports.

• Diplomatic exemptions,

• The supply of gas oil for trucks and tractor trailers which transport export goods.

The rates are currently as follows:

• the standard rate is 18%;

	•		the reduced rate is 8% for food products (except alcoholic beverages) (starting from January 1, 2008 chocolates and carbonated drinks will be included), cashier machines, cinema, theatre, opera and ballet tickets, private educational services, books and similar publications, and effective from January 1, 2005, medical equipment and medical products imported or certified by the Ministry of Health, medicines, textile and confection products and custom manufacturing of them, stationary materials for students, tourism services (starting from January 1, 2008), services given by restaurants, bakeries and etc. (except alcoholic beverage services) (starting from January 1, 2008), services given to senior citizens, the handicapped and orphans; and

	•		the reduced rate is 1% for particular agricultural products, newspapers and magazines, leasing, special vehicles for disables (excluding cars), blood and blood components used to treat humans and animals.

RECENT DEVELOPMENTS IN TAX POLICY

Based on a review carried out jointly with the World Bank (“WB”) in 2002, a long-term strategy for improving the tax system was put in place. The overarching objective of the strategy was to improve the stability, transparency, and equity of the tax system through measures to minimize tax distortions broadening the tax base, and improving the efficiency of tax administration. Earlier studies of the tax system by the IMF, the WB and the FIAS (Foreign Investment Advisory Service) signaled concerns about the complexity of Turkey’s tax system. These concerns were exacerbated by the instability of the tax policy and high, unstable inflation rates. The proliferation of additional special taxes and surcharges, which were the result of pressure to reduce the fiscal deficit, contributed to this complexity and instability. Partial inflation indexation in combination with differential nominal tax rates and investment incentives across financial instruments distorted the real effective tax rates across financial instruments and real business investments.

On the tax policy side, with a view toward simplifying and harmonizing the indirect tax system with the EU, a unified Special Consumption Tax (“SCT”) was enacted in June 2002 to consolidate a range of excise and specific taxes into a single tax charged on a limited range of luxury goods. Implementing circulars for the SCT law were published in July, and the tax went into effect in August 2002. A government decree issued in January 2003 eliminated earmarking of SCT revenues. This tax consolidated a range of selective taxes on oil products, vehicles, alcohol and tobacco products, and a range of luxury consumer goods into a single tax charged on

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importation and domestic production of selected goods. In most cases, the charge on domestic production by the SCT is at the factory gate. In some cases, such as motor vehicles, it is at the level of the dealer, and in others, such as tobacco, it collected from the manufacturer and added to the consumer retail price. The VAT is charged on top of the SCT.

The SCT tariff is composed of four lists: List I includes petroleum products; List II is motor and other registered vehicles; List III covers alcohol and tobacco products; and List IV has a range of consumer durables and luxury goods.

The SCT comprised 26% of total tax revenues (excluding social security contributions) in 2004.

When the new Special Consumption Tax was introduced, the following major taxes and charges were abolished effective August 1, 2002:

	•		Petroleum Consumption Tax;

	•		Liquid Fuel Price Stabilization Fund;

	•		Motor Vehicle Purchasing Tax (“MVPT”);

	•		Environment Fund;

	•		Supplementary Motor Vehicle Purchasing Tax;

	•		Supplementary VAT;

	•		Defense Industry Support Fund (Partially); and

	•		Tax for Education and Health Care Services.

The higher VAT rates of 26% and 40% were also eliminated on August 1, 2002 and replaced by the SCT.

In line with this tax strategy, a legislative package of direct tax reform was submitted to Parliament and enacted in April 2003. The objectives of this legislation were to harmonize the system of investment incentives and tax rates on income from financial investments, to reform the system of income tax credits, and to simplify taxation of corporate earnings and dividends. This legislation was intended to bring Turkey’s personal and corporate income tax regimes closer to OECD standards and in line with international best practices.

The investment tax allowance system was simplified with an automatic uniform rate of 40%, down from rates of 200% and 100%. The new system provides a uniform 40% investment tax allowance automatically without an investment certificate, abolishes the allowance for predicted investment, and eliminates the 19.8% withholding tax on the investment tax allowance. For the recourses before the introduction of the law, previous provisions apply.

The special deduction and expenditure deduction (VAT-linked rebates) for wage earners are replaced with an integrated income tax credit system. The tax reduction value of the deductions increases in a regressive fashion with the increasing income level and tax rate. In the case of the tax credit, the tax value decreases in a progressive fashion with the declining credit rate. As qualifying basic needs expenditures increase, the credit rate declines from 8% to 4% as follows:

	•		For qualifying expenditures up to TL3 billion: 8%;

	•		For qualifying expenditures up to TL6 billion: 8% for the first TL3 billion, and 6% for the remainder;

	•		For qualifying expenditures above TL6 billion: 7% for the first TL6 billion, and 4% for the remainder; and

	•		Qualifying expenditures are limited to the total annual taxable income of the employee.

For the year 2006 these rates are arranged as follows:

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	•		For qualifying expenditures up to YTL 3,600: 8%;

	•		For qualifying expenditures up to YTL 7,200: 8% for the first YTL 3,600, and 6% for the remainder;

	•		For qualifying expenditures above YTL 7,200: 7% for the first YTL 7,200, and 4% for the remainder;

In addition, the integrated income tax credit system was eliminated at the beginning of the year 2007.

On December 30, 2004, the Assembly passed a new law (Law No. 5281) regarding the reduction of income taxes and the simplification of taxation practices on financial instruments. In accordance with Law No. 5281, the upper limit of income taxes was reduced by 5% to 40% beginning in 2005, the tax exemption on financial instruments was eliminated and a new tax on financial market instruments was introduced. On December 31, 2004, Law No. 5281 was published in the official Gazette. However, on June 22, 2006, the Government announced its intention to introduce a new tax exemption on financial instruments for non-resident investors. The new law (Law No. 5527) was approved by the Assembly on June 27, 2006 and published in the Official Gazette on July 7, 2006 (No. 26221). With the Law No. 5527, the withholding tax on earnings derived from financial instruments by non-residents was reduced to zero and non-residents are not be responsible for any declaration. The withholding tax for domestic investors was reduced to 10% from 15% for earnings derived from domestic government debt securities, and private sector debt securities and for capital gains derived from the purchase and sale of equities. There was no change on the 15% withholding tax implementation on deposits and repurchase transactions. However, on August 2, 2006, it was announced that CHP applied to the Constitutional Court for the cancellation of Law No. 5527. On March 30, 2006, the Assembly passed another law (Law No. 5479) regarding the reduction of income taxes and the simplification of income taxation practices. With Law No. 5479, the upper limit of income taxes was reduced by 5% to 35%, the number of income tax brackets was reduced to 4 from 5 and the tax exemptions of various investments were eliminated. Law No. 5479 was published in the Official Gazette on April 8, 2006 (No. 26133), and the income tax reductions and the elimination of the tax exemptions were effective as of January 1, 2006. On June 13, 2006, the Assembly approved the new Corporate Tax Law (Law No. 5520). In accordance with the Law No. 5520, the corporate income tax rate was reduced to 20% from 30% effective from January 1, 2006. Law No. 5520 was published in the Official Gazette on June 21, 2006 (No. 26205).

The fund levy (which was 10% of the corporate tax) was abolished, and, as a result, the tax burden on corporate profit was reduced by 3%. The withholding tax system was simplified so withholding is deferred until the profit is distributed. The imputation tax credit system for dividend income was abolished as of January 1, 2004, and the real amount of withheld tax can now be credited. A 50% dividend deduction to offset taxes paid at the corporate level was introduced. The final tax burden on corporate profit was reduced to 45% from a high of over 60%.

An inflation adjustment was introduced for the financial income statements of corporate taxpayers who keep their books on a balance sheet method. An inflation adjustment can be applied if the increase in the price index is higher than 10% in the relevant accounting year and higher than 100% in the past three years. As a result of the inflation adjustment, a series of amendments were made to the same provisions in the tax system relating to revaluation, depreciation, investment allowance, etc.

Tax incentives for activities in the free trade zones (“FTZ”) were rationalized. The corporate income tax and the personal income tax exemptions were abolished for new companies, but the tax holidays of existing FTZ companies were grandfathered for the length of their licenses or until 2008.

Tax holidays in selected regions were removed and replaced with job creation incentives in low-income regions. These incentives, which were in place in 36 provinces with a per capita GDP below $1,500 (mainly in eastern Turkey) for a five year period which started in September 2003, include:

•

An exemption on personal income tax for any non-public sector or public sector employee whose employment represents an incremental increase over employment levels in September 2003. This is limited to taxes payable on the minimum wage and amounts to a 15% subsidy. The limit converts this into a unit subsidy equal to 15% of minimum wage;

110

The following table sets forth tax revenues for the years indicated:

Tax Revenues

Table No. 36

(in thousands of New Turkish Lira)


	2001		2002		2003		2004		2005		2006
Total Tax Revenues		39,735,928		59,631,868		84,316,169		100,373,325		119,627,201		137,474,325
Taxes on Income		15,647,635		19,343,160		25,716,037		31,764,736		36,537,204		40,140,754
Personal Income Tax		11,579,424		13,717,660		17,063,760		21,244,067		24,489,502		28,983,049
Corporate Income Tax		3,675,665		5,575,495		8,645,345		10,520,669		12,047,702		11,157,705
Additional Personal Income Tax		6,429		6,188		4,445		—		—		—
Additional Corporate Income Tax		3,908		2,445		2,088		—		—		—
Interest Tax		382,209		41,372		399		—		—		—
Taxes on Wealth		433,284		734,338		2,092,062		1,597,486		2,626,642		3,117,184
Motor Vehicle Tax		398,868		695,937		1,206,187		1,535,992		2,538,335		2,998,105
Inheritance and Gift Tax		21,882		30,061		56,406		61,494		88,307		119,079
Additional Motor Vehicle Tax (Law No.4481)		5,801		3,263		16,143		—		—		—
Additional Motor Vehicle Tax (Laws No.4837 and 4962)		—		—		808,438		—		—		—
Additional Real Estate Tax		6,733		5,077		4,888		—		—		—
Taxes on Goods and Services		18,103,195		30,063,990		43,926,990		43,551,189		52,772,347		59,419,991
Domestic Value Added Tax (VAT)		7,289,543		11,542,749		15,389,547		13,148,051		14,103,912		15,923,069
Additional Tax		820,346		1,144,333		2,538		—		—		—
Motor Vehicle Purchase Tax		302,900		142,273		225		—		—
Special Consumption Tax		—		6,008,635		22,299,243		26,648,100		33,344,806		36,926,175
Petroleum Consumption Tax /		5,658,541		6,353,549		6,484		—		—		—
Banking and Insurance Transaction Tax		1,511,207		984,568		1,159,763		1,593,549		1,988,092		2,624,254
Stamp Duty		833,885		1,313,556		1,707,181		2,197,619		2,552,161		3,148,720
Fees		750,670		1,142,279		1,591,034		2,529,911		3,279,569		3,952,188
Special Communication Tax		592,072		852,250		1,048,050		1,881,575		3,023,212		3,577,724
Special Transaction Tax		320,280		512,674		663,562		—		—		—
Gambling Tax		23,751		67,124		59,363		279,914		312,325		368,769
Taxes on Foreign Trade		5,551,053		9,487,175		12,578,666		18,868,483		21,825,868		27,551,053
Customs Duties		382,240		594,697		889,356		1,351,100		1,538,383		2,080,931
VAT on Imports		5,149,317		8,857,452		11,641,552		17,442,941		20,222,158		25,425,510
Other Revenues from Foreign Trade		19,496		35,026		47,758		74,442		65,327		44,612
Abolished Taxes		761		3,205		2,414		-136,099		33,410		144,435


*		Since the budget system is converted from Consolidated Budget System to Control Budget System, the tax revenues of 2004-2005 are revised.

Sources: Ministry of Finance, UT.

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The following table sets forth the components of tax revenues as a percentage of GNP for the years indicated:

Table No. 37

Components of Tax Revenues as a Percentage of GNP

2001

2002

2003

2004

2005

2006

Total Tax Revenues

22.52

21.68

23.64

23.40

24.59

23.88

Taxes on Income

8.87

7.03

7.21

7.41

7.51

6.97

Personal Income Tax

6.56

4.99

4.78

4.95

5.03

Corporate Income Tax

2.08

2.03

2.42

2.45

2.48

1.94

Additional Personal Income Tax

0.00

—

Additional Corporate Income Tax

0.00

—

Interest Tax

0.22

0.02

0.00

—

Taxes on Wealth

0.25

0.27

0.59

0.37

0.54

Motor Vehicle Tax

0.23

0.25

0.34

0.36

0.52

Inheritance and Gift Tax

0.01

0.02

0.01

0.02

Additional Motor Vehicle Tax (Law No.4481)

0.00

—

Additional Motor Vehicle Tax (Laws No.4837 and 4962)

—

0.23

—

Additional Real Estate Tax

0.00

—

Taxes on Goods and Services

10.26

10.93

12.32

10.15

10.85

10.32

Domestic Value Added Tax (VAT)

4.13

4.20

4.31

3.07

2.90

2.77

Additional Tax

0.46

0.42

0.00

—

Motor Vehicle Purchase Tax

0.17

0.05

0.00

—

0.00

Special Consumption Tax

—

2.18

6.25

6.21

6.86

6.41

Petroleum Consumption Tax /

3.21

2.31

0.00

—

Banking and Insurance Transaction Tax

0.86

0.36

0.33

0.37

0.41

0.46

Stamp Duty

0.47

0.48

0.51

0.52

0.55

Fees

0.43

0.42

0.45

0.59

0.67

0.69

Special Communication Tax

0.34

0.31

0.29

0.44

0.62

Special Transaction Tax

0.18

0.19

—

Gambling Tax

0.01

0.02

0.07

0.06

Taxes on Foreign Trade

3.15

3.45

3.53

4.40

4.49

4.78

Customs Duties

0.22

0.25

0.31

0.32

0.36

VAT on Imports

2.92

3.22

3.26

4.07

4.16

4.42

Other Revenues from Foreign Trade

0.01

0.02

0.01

Abolished Taxes

0.00

-0.03

0.01

0.03

Sources: Ministry of Finance, UT.

On May 5, 2005 the Assembly adopted Law No. 5345 establishing the Revenue Administration under the Ministry of Finance as a semi-autonomous entity, structured along functional lines and with the local tax offices directly under its control. Responsibility for tax policy is retained by the Ministry of Finance, allowing the Revenue Administration to focus on tax administration. On May 16, 2005, Law No. 5345 was published in the Official Gazette (No. 25817).

STATE OWNED ENTERPRISES

SOEs continue to play an important role in the Turkish economy. As of July 2007, there are 27 SOEs: 21 SOEs in the Treasury’s portfolio and 6 SOEs in the Privatization Administration portfolio. (Companies whose shares are majority owned by the state.) There are also four state banks, Ziraat Bank, Halk Bank, Kalkınma and Exim and a publicly owned satellite company, TÜRKSAT A.Ş., which all have their own special laws.

Major SOEs established in the non-financial sector include: MKEK (industrial chemicals, munitions, special steels and castings); PETKİM (petrochemicals); PTT (postal and telegraph services); TMO (Turkish Grain Board); EUAS (Turkish Electricity Generation Corporation); TEDAŞ (Turkish Electricity Distribution Corporation); TETAŞ (Turkish Electricity Trading and Contracting Company); TEİAŞ (Turkish Electricity Transmission Company); BOTAŞ (oil pipeline); TCDD (railways); TKİ (lignite company); TTK (Turkish Hard Coal Extraction Company); TEKEL (tobacco); and TSFAS (sugar company).

Supervision and regulation of SOEs is carried out by several government agencies.

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Since November 25, 2000, the state-owned banks, Ziraat Bank and Halk Bank, have not been subject to Decree No. 233. These banks are now considered public joint stock companies, subject to banking and commercial laws only. Ziraat Bank and Halk Bank are among the largest and most important commercial banks of all the publicly held banks, holding 27.8% of total customer deposits (excluding deposits of Vakifbank) as of December 31, 2006.

In accordance with the provisions of Law No. 5572, which modified Banking Law No. 4603, the privatization deadline of November 2003 has been prolonged to November 2010. Treasury shares at Halk Bank were taken into the privatization portfolio and program in accordance with High Privatization Council Decree No.2007/8. An initial public offering was held for 24.98% of the Bank’s shares and the shares started trading on the Istanbul Stock Exchange on May 10, 2007.

In addition to receiving funding directly from the Government budget, SOEs are also allowed to borrow from domestic commercial banks and in foreign markets. The net external financing requirements of non-financial SOEs increased from approximately YTL 1,098 million in 2005 to YTL 1,838 million in 2006.

The following table summarizes information related to the financing requirements of the non-financial SOEs in the Treasury’s portfolio and the SOEs in the Privatization Administration’s portfolio for the years indicated:

Table No. 38

Financing Requirements of Non-Financial SOEs


	2001			2002			2003			2004			2005			2006*
	(in billions of TL — thousands of YTL)
Total financing requirement:		(3,595,786	)		(4,704,665	)		(3,203,999	)		(3,468,377	)		(4.028.935	)		(5,149,080	)
Increase (reduction) from internally generated funds		2,315,158			5,924,776			4,896,750			5,999,293			2.931.160			3,310,899
Net financing requirement from outside sources		(1,280,628	)		1,220,111			1,692,751			2,530,916			(1.097.775	)		(1,838,181	)
Transfers from consolidated budget		1,591,814			2,621,827			2,408,344			1,810,913			1.969.843			5,260,986
Borrowing requirement		311,185			3,841,938			4,101,095			4,341,828			872.068			3,422,806
Deferred payments(1)		4,370,999			1,579,548			384,402			26,231,490			4.219.345			16,985,492
Advance payments(1)		(3,654,726	)		(4,522,711	)		(4,460,669	)		(30,265,090	)		(7.389.159	)		(20,773,417	)
Cash financing requirement		1,027,459			868,775			24,828			308,228			(2.297.746	)		(365,119	)
Change in cash		(1,778,865	)		(1,083,379	)		(146,752	)		408,116			(971.917	)		(271,398	)
Securities and deposits		(162,416	)		(1,048,648	)		(46,167	)		(1,313,594	)		337.890			(199,546	)
Domestic bank borrowing, net		(266,674	)		(92,660	)		(41,291	)		167,844			1.064.480			844,038
Foreign borrowing, net		1,180,496			1,355,912			209,382			429,407			1.867.293			(7,975	)
Government bonds		0			0			0			0			0			0


(1)		Dramatic changes in deferred and advanced payments are due to inflation accounting introduced in 2004 and balance sheet restructuring of the electricity distribution company in 2006

*		Preliminary data

Source: UT.

In 2006, non-financial SOEs reported an operating surplus of YTL 561 million. (Excluding TUPRAŞ which was privatized in January 2006.)

The non-financial SOEs’ investments accounted for 20.3% of total public sector fixed investments in 2001, 20.1% in 2002, and 15.4% in 2003 and 17.2% in 2004, 14.6% in 2005 and %16.6 in 2006. Budgetary transfers to SOEs accounted for approximately

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2.0%, 2.3%, 1.7%, 1.3% and 1.4% and 3.0% of consolidated budget expenditures in 2001, 2002, 2003, 2004, 2005 and 2006 respectively.

The following table summarizes the profits and losses of non-financial SOEs both in the Treasury’s portfolio and the Privatization Administration’s portfolio for the years indicated:

Table No. 39

Profits and Losses of Non-Financial SOEs


	2001			2002			2003			2004			2005			2006
	(in billions of TL - thousands of YTL)
Total Revenues		47,316,129			67,208,638			79,051,538			84,311,124			58,260,323			73.515.936
Total Expenditures		(47,552,477	)		(64,045,590	)		(74,498,684	)		(79,596,580	)		(57,718,210	)		(72,954,668	)
Operating surplus (loss)		(236,348	)		3,163,048			4,552,854			4,714,544			542,113			561,268


*		Excluding accrued duty loss receivables from Treasury.

Source: UT.

ENERGY SECTOR

Electricity Sector

TEIAS, EUAS and TETAS: Significant steps have been made recently towards a fundamental restructuring of SOEs in the electricity sector pursuant to the Electricity Markets Law (Law No. 4628), which came into effect in March 2001. The ultimate goal is to develop a transparent, competitive and liberalized electricity market, achieve stability of supply, and ensure environmentally friendly electricity at a low cost and of good quality. The most important factor under the proposed arrangement is the central role of competition in ordering the market. In order to accomplish such goals, the Government intends to withdraw to a purely regulatory role that is managed by the Energy Market Regulatory Authority (“EMRA”), while retaining ownership of electricity transmission (a natural monopoly). EMRA takes over the regulatory functions of MENR. Standard regulatory functions include licensing, tariff setting, market monitoring, and dispute settlement. With the enactment of the Electricity Market Law, the Turkish Electricity Generation and Transmission Corporation (“TEAŞ”), which was one of the dominating SOEs in the electricity sector, was divided into three separate companies covering generation, trading, and transmission activities. This was one of the early steps in the current liberalization plan. The new companies, Turkish Electricity Transmission Company (“TETAŞ”) for the transmission of electricity, Electricity Generation Company (“EÜAŞ”) for generation of electricity, and Turkish Electricity Trading Company (“TEİAŞ”) for trading electricity, became operational in October 2001. On the other hand, Turkish Electricity Distribution Company has been operating since 1994.

EÜAŞ operates most of the electricity generation power plants. Among them, there are mainly lignite based, hydro based and natural gas based power plants. The installed capacity of EÜAŞ, along with its affiliates is around 24.000 MW which comprises about 59% of the total installed capacity in Turkey. EÜAŞ carried out 48% of the energy generation in Turkey in the year 2006.

TEİAŞ operates high voltage transmission systems in Turkey and has monopoly in the sector.

TETAŞ is responsible for purchasing energy generated by EÜAŞ hydro power plants and most of the private sector plants (“BO, BOT and TOORs”) and selling the purchased energy to electricity distribution companies and for exporting and importing.

After the enactment of the Electricity Market Law, supplementary legislation has been enacted by EMRA.- some of which is listed below:

	•		Electricity Market Licensing Regulation, August 2002;

	•		Electricity Market Tariffs Regulation, August 2002;

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	•		Eligible Consumer Regulation, September 2002;

	•		Import and Export Regulation, September 2002;

	•		Customer Service Regulation, September 2002;

	•		Electricity Market Grid Regulation, January 2003;

	•		Electricity Market Distribution Regulation, February 2003;

	•		Electricity Transmission System Supply Reliability and Quality Regulation, November 2004;

	•		Electricity Market Balancing and Settlement Regulation, November 2004;

	•		Regulation Concerning Electricity Demand Forecast;

	•		Communique Regarding Wind and Solar Measurements; and

	•		Regulation Regarding Price Equalization Mechanism, December 2006.

In order to announce the government’s intent to privatize the state-owned electricity utilities and liberalize the electricity market, the “Electricity Sector Reform and Privatization Strategy Paper” was issued on March 17, 2004. This Strategy Paper defines the implementation procedures and principles for the electricity sector liberalization and privatization program.

Gas Sector

The new Gas Market Law (No. 4646), which is in effect since May 2, 2001, is an important step in the present reform plan, and envisages restructuring state enterprises into separate functional companies (transmission, distribution, trading and storage).

BOTAŞ: The sector has been dominated by the government-owned Turkish Pipeline Corporation (“BOTAŞ”), which was one of the most prominent SOEs in the energy sector and owned pipeline infrastructure for oil and gas transmission, LNG terminals, and gas distribution facilities. BOTAŞ will be divided into separate functional companies for energy transmission, distribution, trading and storage. Law No. 4646 will liberalize and partially privatize the gas sector.

Agriculture Sector

TMO: The Turkish Grain Board (“TMO”), which is associated with the Ministry of Agriculture and Rural Affairs, is an SOE that was previously responsible for support purchases of cereals. However, since June 2002, TMO has acted only as an intervention agency to regulate the market. TMO has 4.5 million tons of storage capacity and has purchase offices throughout Turkey. TMO purchased 2.19 million tons of cereal and 162,000 tons of hazelnut in 2006.

TEKEL: The General Directorate of Tobacco, Tobacco Products, Salt and Alcohol Enterprises (“TEKEL”) is under the privatization program associated with the Ministry of Finance. TEKEL has been assigned to carry out operations mainly in the areas of tobacco, tobacco products,, and salt. Until 2001, it was responsible for support purchases of tobacco. Since 2002, TEKEL has purchased the required amount of tobacco by entering into production contracts with farmers. The duties assigned to TEKEL are carried out by 4 Establishments: the Leaf Tobacco Processing and Trading Establishment, the Cigarette Industry Establishment,, Salt Industry Establishment, and the Marketing and Distributions Establishment. In the fourth quarter of 2003, the Alcohol Drinks Industries Establishment was privatized.

Railways

TCDD: TCDD provides passenger and freight transport services as the only railway transportation company in Turkey. As of the end of 2006, TCDD owned over 10,984 miles of track, and approximately 732 locomotives, 993 passenger vehicles and 16,320 wagons. It employs approximately 33,000 people (including its subsidiaries).

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PRIVATIZATION IMPLEMENTATIONS

Turkey aims at further enhancing her functioning market economy through ensuring openness and competitiveness; upgrading productivity; strengthening the investment climate-attracting much more Foreign Direct Investment-encouraging private initiative/entrepreneurial skills and as a result promoting employment.

Therefore, major legislative changes took place in Turkey in recent years such as

	•		Electricity Market Law,

	•		Natural Gas Market Law,

	•		Telecommunications Law,

	•		Sugar Law,

	•		Tobacco Law,

	•		Banking Law,

	•		Petroleum Market Law,

	•		Foreign Direct Investment Law,

	•		Company Law,

	•		Law concerning the elimination of FDI restrictions in some sectors,

	•		Law regarding several amendments which is aimed at accelerating privatization,

	•		Provisions authorizing real estate purchases to foreigners.

As a result, unprecedented privatization proceeds and a noticeable increase in foreign investor interest have been witnessed. While overall proceeds from privatization in 2005 (on a commitment basis) reached around $12.5 billion, the amount of proceeds (on a commitment basis) in 2006 were around $8.1 billion.

Cash transfers to the Treasury from the Privatization Administration (including transfers from privatized companies) were approximately TRY3,551 billion in 2005 (as compared to TRY1.5 billion envisaged in the financing program for 2005) and approximately TRY10,551 billion in 2006 (as compared to TRY7.0 billion envisaged in the financing program for 2006).

Substantial portion of the total privatization flows, on a commitment basis, both in 2005 and 2006 arise from big-ticket items such as Turk Telekom (Telecommunications, 55% — $ 6.55 Billion), Tüpraş (Petroleum Refining, 51% — $ 4.14 Billion), Erdemir (Iron and Steel, 49.29 % — $ 2.96 Billion) Atatürk Airport (Airport operations, Operating rights of 15.5 years — $ 3 Billion), Vakiflar Bankasi (Banking, Initial Public Offering / 25.18% — $ 1.28 Billion), Tüpraş (Sale channeled through ISE to an Institutional Investor Fund, 14.76% — $ 454 Million), Eti Alüminyum (Bauxite/Aluminium production, 99.99% — $ 305 Million), Petkim (Petrochemicals, Secondary Public Offering / 34.5% — $ 273.7 Million), Başak Companies (Insurance & Retirement Fund, Various Stakes - $ 268 Million), Istanbul Hilton Hotel (Real Estate, $ 255.5), Thy (Turkish Airlines, Public Offering / 28.75% — $ 207.8 Million) and Ataköy Group of Companies (tourism including marina operations, all of the State-owned shares — $ 189 Million), Tekel’s Buildings (twin towers — $ 100 million).

From the period 2004 through 2006, the privatization implementations of Turkey have resulted in net inflows of approximately $ 21.8 billion, of which US $ 8.1 billion was realized in 2006 alone.

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Privatization Implementations


*		The 15.5 years Transfer of Operating Rights (TOR) of Ataturk Airport ($3 billion) and Initial Public Offering (IPO) of Vakıflar Bank’s 25.18% share ($ 1.3 billion) are included.

The preparations as to the block sale of Tekel’s cigarette facilities, the IPO of Turk Telekom, IPO of THY and Salıpazarı Port / Galataport are ongoing. Studies as regards the privatisation of Toll Motorways and Bridges and Sugar Factories are underway. On the other hand, the PA continues to divest its smaller holdings such as Çelik Palace Hotel, Mazıdağı Phosphate Facilities, and plans to sell some of its land/real estate holdings including the recent sale transaction of a land which is situated in the northwestern part of Turkey resulted in revenues of US $ 58 million. Necessary legal amendments for the licensing of National Lottery Games are about to be completed within 2007. The tender process for the privatisation of Electricity Distribution companies was halted but is expected to resume after some internal reorganizations. Furthermore, the privatisation of power generation companies will be pursued during the period of 2007-2009.

On September 23, 2004, the Privatization Administration announced a tender for the privatization of motor vehicles inspection stations. The highest bid in the amount of $613.5 million was submitted by AKFEN-Dogus-Tuvsud OGG. The bid was approved by the Privatization High Council, but the Council of State halted implementation of the Competition Board’s verdict on November 9, 2005.

On December 13, 2004, the Privatization Administration announced the tender for the privatization of the tobacco unit of Tekel. The original bidding deadline for the tender was postponed from February 18, 2005 to March 4, 2005 and, subsequently, to April 8, 2005. On April 8, 2005, the privatization of the tobacco unit of Tekel was cancelled because no offer was received.

EXTRA-BUDGETARY FUNDS

In 1984, due to increasing budgetary restrictions, the Government established a number of Extra Budgetary Funds (“EBFs”) with the objective of financing the implementation and administration of specific Government programs, such as incentive programs for exports and investment, social and housing programs, and public investment projects. Until 1993, the EBFs were not included in Turkey’s consolidated public budget and had been independently financed and administered. In 1992, the Assembly enacted legislation to include 63 EBFs in the 1993 consolidated budget. In 1998, 62% of the revenues of consolidated EBFs and 9% of revenues of non-consolidated EBFs were appropriated directly to the consolidated budget.

In 2000 and 2001, a fundamental shift in the structure of EBFs was mandated in order to increase budget coverage and promote fiscal transparency. As a result, sixty-one budgetary funds and eight EBFs were abolished. Currently, there are only three EBFs remaining. Non-consolidated EBFs of continued importance to the Turkish economy are the Privatization Fund, which oversees the privatization of SOEs, the Social Aid and Solidarity Fund, which assists the disabled and poor, and the Defense Industries Support Fund, which develops military manufacturing capabilities.

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The following table presents, for the years indicated, the operating balance and financing of eleven of the largest EBFs, including the Privatization Fund, the Public Participation Fund, the Mass Housing Fund, the Defense Industries Support Fund and the Support Price Stabilization Fund, and two special accounts, the Petroleum Consumption Tax and the Budget Education Health Tax, each of which has been in continuous existence since 1988 (with the exception of the Privatization Fund, which was established in 1995). Since 2002, the consolidated EBF’s balance included only Privatization, Defense, Solidarity and the Support Price Stabilization funds.

Table No. 40

Extra-Budgetary Funds


													2005
	2001			2002			2003			2004			(Program)
	*(in billions of Turkish Lira)*
Revenues		4,593,213			2,733,643			3,280,727			4,265,110			4,162,292
Expenditures		4,065,514			3,661,812			3,311,582			3,919,193			3,550,442
Surplus (Deficit)		527,699			(928,170	)		(30,856	)		345,918			611,850
Financing
Foreign borrowing, net		(41,839	)		205,282			(68,848	)		(25,687	)		(83,914	)
Domestic borrowing, net		(485,860	)		722,888			99,703			(320,230	)		(527,936	)
Total		(527,699	)		928,170			30,856			(345,918	)		(611,850	)

Source: SPO.

In 2004, revenues from the EBFs were YTL4,265 million, while expenditures of such EBFs were YTL3,919 million. This resulted in a surplus of YTL346 million in 2004, compared with a deficit of YTL31 million in 2003. In 2005, revenues from the EBFs were YTL4,162 million, while expenditures of such EBFs were YTL3,550 million, resulting in a surplus of TL612 million. In 2006, a surplus of YTL1,016 million is programmed for the EBFs. Privatization revenues are not included in revenues.

LOCAL GOVERNMENT

The operations of local authorities expanded rapidly following the Government’s 1984 decision to decentralize responsibility and to transfer substantial amounts of tax revenues to local authorities. Total expenditures by local authorities were realized as TL5,946.7 trillion in 2000, TL9,221.4 trillion in 2001, TL10,370.9 trillion in 2002, TL14,235.8 trillion in 2003 and TL15,709 trillion in 2004.

In 2005, total expenditures by local authorities were estimated to increase to TL20,052 trillion and the surplus was estimated to be TL398 trillion. In 2006, total expenditures by local authorities were estimated to increase by 18% to TL23,621 trillion and the surplus was estimated to be TL445 billion.

The following table presents the operating balance of the local authorities for the years indicated:

Table No. 41

Local Authorities


	2002			2003			2004		2005(1)		2006(2)
	*(in billions of Turkish Lira)*
Revenues		10,137,301			12,879,060			16,004,200		20,450,000		24,066,132
Expenditures		10,370,927			14,235,760			15,709,028		20,052,000		23,621,000
Surplus (Deficit)		(233,626	)		(1,356,700	)		295,172		398,000		445,132


(1)		Provisional.

(2)		Estimate.

Source: SPO.

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SOCIAL SECURITY INSTITUTIONS

Turkey’s three Social Security Institutions (“SSIs”) have recorded a decreasing deficit (before budgetary transfers) of approximately TL2,600.3 in 2000, representing 1.9% of GNP as a result of structural reforms put into practice in 1999. In 2001, the SSIs experienced a deficit of approximately TL4,439 trillion or 2.5% of GNP.

The 2001 budget provided for direct transfers to the social security institutions of TL4,672 trillion. In 2002, SSIs realized a deficit of TL8,267 trillion, representing 3.7% of GNP. In 2003, SSIs experienced a deficit of TL13,445 trillion, representing 3.8% of GNP. In 2004, SSIs realized a deficit of TL16,290 trillion, which is 3.8% of GNP. In 2005, SSIs realized a deficit of TL20,057 trillion, which is 4.1% of GNP. For 2006, the estimated deficit is TL17,879 trillion, amounting to 3.2% of GNP. The low premium collection rates and the increasing rate of health and insurance expenditures are the main factors for the increasing deficit of the social security system.

The following table summarizes the revenues and expenditures of the SSIs for the years indicated:

Table No. 42

Revenues and Expenditures of Social Security Institutions


	2002			2003			2004			2005			2006(1)
	*(in billions of Turkish Lira)*
Revenues		19,748,947			27,394,534			33,967,610			39,024,474			50,674,000
Expenditures		28,016,012			45,747,646			50,258,410			59,081,427			68,553,000
Revenue-Expenditure Differences		(8,267,065	)		(13,353,113	)		(16,290,800	)		(20,056,953	)		(17,879,000	)
Budget Transfers		8,295,000			13,312,000			16,087,000			19,919,000			18,656,000
Deficits after Budget Transfers		27,935			(41,113	)		(203,800	)		(137,953	)		777,000
Fixed Capital Investments		(129,964	)		(107,842	)		(117,001	)		(66,000	)		(40	)
Other		—			—			—			—			—
Borrowing Requirement		(102,029	)		(148,954	)		(320,801	)		(203,953	)		737,000

Source: SPO, UT.

PUBLIC SECTOR FIXED INVESTMENT

The following table summarizes public sector fixed investment, including that of the SOEs and the EBFs, by economic sector for the years indicated:

Table No. 43

PUBLIC SECTOR FIXED INVESTMENT


	2001		2002		2003		2004		2005		2006(1)
	*(percentage of total)(2)*
Agriculture		10.0		9.2		7.7		9.1		8.0		6.9
Mining		1.5		0.7		1.0		1.5		1.5		2.2
Manufacturing		4.0		3.2		2.5		2.6		1.7		1.6
Energy		13.7		20.8		18.8		13.3		12.4		10.8
Transport and communication		27.1		27.5		26.1		33.5		34.4		33.1
Tourism		0.6		0.8		0.7		0.7		0.4		0.4
Housing		0.9		0.8		1.0		1.0		1.7		1.3
Education		13.7		12.1		14.0		13.7		11.4		11.2
Health		5.9		5.1		5.6		5.1		5.8		5.7
Other services		22.5		19.8		22.9		19.4		22.7		26.9

Total		100.0		100.0		100.0		100.0		100.0		100.0
Total (billions of TL)		11,300,047		17,307,674		17,287,520		18,051,594		24,444,006		27,832,000


(1)		Provisional.

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(2)		At current prices.

Source: SPO.

PUBLIC SECTOR BORROWING REQUIREMENT

In 2001, the consolidated budget deficit was TL30,790 trillion, representing 17.4% of GNP. Consolidated budget primary surplus as a share of GNP increased from 5.3% in 2000 to 5.8% in 2001. PSBR was 16.4% of GNP in 2001, due to the increase in the consolidated budget deficit.

In 2002, the consolidated budget deficit was TL40,744 trillion, representing 14.8% of GNP. Primary surplus as a share of GNP decreased to 4.0% in 2002 from 5.8% in 2001. PSBR was 12.7% of GNP in 2002, due to a decline in consolidated budget deficit.

In 2003, the consolidated budget deficit was recorded as TL40,204 trillion, representing 11.3% of GNP. Consolidated budget primary surplus as a share of GNP increased to 5.2% in 2003 from 4.0% in previous year. PSBR was 9.4% of GNP in 2003, due to a decline in the consolidated budget deficit as a share of GNP and improvement in the financial balances of SOEs.

In 2004, the consolidated budget deficit was TL30,300 trillion, representing 7.1% of GNP. Due to a decline in the consolidated budget deficit and an improvement in the overall economic performance, PSBR declined to 4.7% of GNP in 2004.

In 2005, the consolidated budget deficit was YTL8,117 million, representing 1.7% of GNP. Total PSBR declined to -0.4% of GNP in 2005.

In 2006, the consolidated budget deficit was YTL3,046 million, representing 0.5% of GNP. Total PSBR declined to –3.1% of GNP in 2006.

The net debt of the public sector increased from 63.2% of GNP in 2000 to 126.8% of GNP in 2001. The debt stock figures include the full cost of bank restructuring. The sharp rise in the debt ratio in 2001 was partially a result of temporary factors such as the real depreciation of the Turkish Lira, the decline in GNP, exceptionally high interest rates in the first quarter of 2001, and the high cost of bank restructuring. The stock of government securities issued for bank restructuring increased to approximately 31.5% of GNP in 2001. These figures exclude the swaps that were completed on July 18, 2001. Already existing debt of the public sector (17% of GNP) has been taken over fully by the Treasury.

In 2003, total public debt stock (gross)as a percentage of GNP declined to 83.2%. The net debt of the public sector declined to 70.3% in 2003 from 78.4% in 2002. Nominal interest rates on government securities (on an annual compounded basis) declined to 46.0% in 2003 from 62.7% in 2002.

In 2004, total public debt stock (gross) as a percentage of GNP declined to 77.3%. The net debt of the public sector declined to 63.4% in 2004 from 70.3% in 2003. Nominal interest rates on TL denominated zero coupon government securities (cumulative average) declined to 24.7% in 2004 from 46.0% in 2003.

In 2005, total public debt stock (gross) as a percentage of GNP declined to 71.6%. The net debt of the public sector declined to 55.3% in 2005.

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The following table sets forth information as to Turkey’s public sector borrowing requirement for the years indicated

Table No. 44

Public Sector Borrowing Requirement


	2001			2002			2003			2004			2005			2006(1)
	*(percentage of GNP)*
Consolidated budget		17.4			14.8			11.3			7.1			1.7			0.6
Local administrations		0.3			0.1			0.4			(0.1	)		(0.1	)		(0.1	)
SSI, UIF and Revolving Funds		(1.2	)		(1.2	)		(1.4	)		(1.3	)		(1.3	)		(1.4	)
Social Security Institutions (SSI)		(0.1	)		0.0			0.0			0.0			0.0			(0.1	)
Unemployment Insurance Fund (UIF)		(1.0	)		(1.0	)		(1.1	)		(1.0	)		(1.0	)		(1.0	)
Revolving Funds		(0.1	)		(0.2	)		(0.3	)		(0.3	)		(0.3	)		(0.3	)
Regulatory & Supervisory Agencies		0.0			0.0			0.0			0.0			0.0			0.0
EBFs and SOEs		(0.1	)		(1.0	)		(0.9	)		(1.0	)		(0.1	)		(0.4	)
SOEs not under privatization		0.0			(1.1	)		(0.4	)		(0.4	)		(0.1	)		0.0
EBFs and SOEs under privatization		(0.1	)		0.1			(0.6	)		(0.6	)		0.0			(0.4	)

Total		16.4			12.7			9.3			4.7			(0.4	)		(3.1	)


(1)		Provisional estimate.

Source: SPO.

DEBT

GENERAL

In Turkey, the Treasury conducts domestic and external borrowing operations and issues government securities through direct sales, TAP, public offerings and auctions. The Treasury issues various borrowing instruments such as discounted securities, inflation and foreign exchange-indexed securities, foreign exchange-denominated securities, Government Bonds with fixed coupon payments and floating rate notes.

The Treasury issues two kinds of domestic borrowing securities: (1) Treasury Bills, which have a maturity shorter than one year and (2) Government Bonds, which have a maturity longer than one year. These are considered “marketable” instruments. Auctions are the primary means of borrowing in domestic markets and fixed rate government bonds are the primary external borrowing instruments utilized by Turkey.

The Treasury issues Government securities through public offerings, direct sales, TAP sales and auctions. A TAP sale is non-auction borrowing method used by the Government to enhance market access pursuant to which the Treasury is permitted to reissue bills or bonds of a specific amount and maturity at any time.

Turkey has not defaulted on any principal or interest of any external debt represented by bonds issued in public international markets since it began issuing such bonds in 1988. In 1978, 1979 and 1980, Turkey rescheduled an aggregate amount of approximately $3.95 billion of its external debt consisting of commercial and government credits, which represented 20.6% of Turkey’s total outstanding external debt at that time. Turkey initiated the rescheduling to avoid a possible default under its external debt. Since that rescheduling, Turkey has always paid when due the full amount of principal and interest on its direct and indirect external debt. Turkey completed all payments under the rescheduling in July 1992.

The total gross outstanding external debt of Turkey was approximately $184 billion at the end of the first quarter of 2006, approximately $191.4 billion at the end of the second quarter of 2006, approximately $196.4 billion at the end of the third quarter of 2006 and approximately $206.5 billion at the end of the fourth quarter of 2006.

Turkey has issued the following external debt in 2006:

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	•		$1.5 billion of global notes on January 17, 2006, which mature on March 17, 2036 and have a 6.875% interest rate.

	•		EUR750 million of Eurobonds on March 1, 2006, which mature on March 1, 2016 and have a 5.0% interest rate.

	•		$500 million of global notes on July 19, 2006, which mature on January 15, 2014 and have a 9.50% interest rate.

	•		$1.5 billion of global notes on September 26, 2006, which mature on September 26, 2016 and have a 7.00% interest rate.

	•		EUR500 million of Eurobonds on October 19, 2006, which mature on February 16, 2017, and have a 5.5% interest rate.

	•		$1.25 billion of global notes on November 1, 2006, which mature on February 5, 2025 and have a 7.375% interest rate.

	•		$750 million of global notes on November 14, 2006, which mature on March 17, 2036 and have a 6.875% interest rate.

The aggregate amount of scheduled repayment of principal and interest on the medium-term and long-term external debt of Turkey as of December 31, 2006 was $42.3 billion, $32.1 billion and $24.5 billion for 2007, 2008 and 2009, respectively.

On September 14, 2006, Turkey announced that, in accordance with its invitation (the “Invitation”) to holders of 11.375% Notes due 2006, 10% Notes due 2007, 10.5% Notes due 2008, 9.875% Notes due 2008, 12% Notes due 2008, 12.375% Notes due 2009 and 11.75% Notes due 2010 (collectively, the “old notes”) to submit one or more offers to exchange or tender for purchase such old notes for 7% Notes due 2016 (the “2016 Notes”), on the terms and subject to the conditions set forth in the prospectus supplement dated September 6, 2006 to the prospectus dated August 10, 2006, it expected to issue $1,169,720,000 aggregate principal amount of 2016 Notes. In addition, Turkey announced that it expected to issue $330,280,000 aggregate principal amount of 2016 Notes for cash (the “Cash Offering” and together with the Invitation, the “Global Notes Offering”). After confirmation by the exchange agent that the above definitive amounts were the final amounts of 2016 Notes to be issued pursuant to the Invitation, Turkey issued $1,500,000,000 aggregate principal amount of 2016 Notes pursuant to the Global Note Offering. In addition, Turkey paid an aggregate amount of $29,033,206 in cash for accrued but unpaid interest (to but not including September 26, 2006, the settlement date) on the outstanding principal amount of old notes exchanged pursuant to the Invitation and an aggregate amount of $116,536 in cash as a result of rounding down to the nearest integral multiple of $1,000 of the aggregate principal amount of the 2016 Notes issuable to each holder of old notes exchanged pursuant to the Invitation.

Turkey’s consolidated budget domestic debt was approximately YTL251,470 million on December 31, 2006, compared with TL244,782 trillion on December 31, 2005. Prior to the February 2001 financial crisis, Turkey’s domestic debt was approximately TL44,428 trillion. The increase in debt stock is mainly because of the securitization of the previously unsecuritized portion of the duty loss stock of public banks and the securities issued for the rehabilitation of banks under the supervision of Savings Deposit Insurance Fund (“SDIF”), which were fully covered by the Treasury as of May 2001.

Turkey’s total external debt was approximately $207.4 billion as of December 31, 2006, compared to $168.8 billion as of December 31, 2005.

DOMESTIC DEBT

Within the framework of the government’s economic program, aimed at sustainable growth, continued disinflation and a viable debt position, there has been substantial improvement in both the level and structure of the Treasury’s domestic debt stock in recent years as a result of the strong fiscal performance and improving market sentiment. The ratio of domestic debt stock to GNP, which was 69.2% at the end of 2001, has declined progressively to 43.7% in 2006.

The financial crisis in February 2001 caused a deterioration in the financial position of the government as well the banking sector. The Treasury’s domestic borrowing cost, which stood at 38% in 2000, rose to 99% in 2001, while the annual average maturity of cash borrowing from the market reduced to 4.8 months from 14.2 months during the same period. In June 2001, the Treasury conducted a major bond swap operation in which short-term securities were exchanged for longer-term bonds in an effort to increase the maturity of debt stock and thus reduce the roll-over risk.

In continuing efforts to improve the macroeconomic environment, the government launched an economic program in 2001, supported by the IMF, an important aim of which was to rehabilitate the banking sector. As part of this rehabilitation plan, the

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Treasury issued securities to public banks to cover their duty losses and issued securities to banks under the supervision of the SDIF to improve their balance sheets. The ratio of total domestic debt stock to GNP was affected by the issuance of these “non-cash” securities, and the stock to GNP ratio increased from 29% in 2000 to 69% in 2001.

As a whole, these banking sector rehabilitation operations did not change the total borrowing requirement of the overall public sector because the banks were already using the market as a source of funding. However, the operations did manage to transform short-term borrowing activity into longer-term holdings for the Treasury and also provided control, flexibility and effective management of the Government’s debt.

As the economic program continued, several key reforms have been implemented in the area of debt management during the last several years:

	•		“The Law on Regulating Public Finance and Debt Management” (Law No. 4749) was enacted in 2002 to establish the legal and institutional infrastructure in public debt management.

	•		With the confidence both in domestic and international markets, the downward trend in the inflation and the elimination of technical and operational difficulties caused by Turkish lira through the introduction of new Turkish Lira (“YTL”), foreign investors’ YTL denominated issues have been increased rapidly. All these developments have prepared the grounds for Treasury to increase the maturity of the debt stock, by the issuances of five-year Floating Rate Notes (“FRN”) and fixed couponed Government Bonds.

	•		To further enhance the liquidity of domestic debt, the primary dealership system for government securities continued to be implemented with a new contract in September 2003. In the last three years, the system contributed to the efficiency in both the primary and secondary market for government securities. The system provides greater depth and reduces volatility in the secondary market and helps to reduce roll-over risk. The primary dealership system aims to create a highly liquid, transparent, and dependable secondary market, which in turn is expected to lead to decreased costs in the primary market.

	•		In order to lengthen maturity and smooth out the domestic debt service profile, switching (exchange) auctions were introduced in October 2003. These auctions have been carried out successfully since that time.

Market sentiment improved as a result of a strong fiscal performance and from the improvements in debt management, which in turn improved borrowing with respect to cost and maturity. The average maturity of cash borrowing increased to 9.0 months in 2002, 11.5 months in 2003 and 14.6 months in 2004 and 27.4 months in 2005, while the cost of borrowing in YTL terms was reduced to 45.1%, 25.6% and 17.1% in 2003, 2004 and 2005, respectively.

In June 2001, the Treasury undertook a major bond swap operation in which short term securities held by the market were exchanged into longer term bonds to increase the maturity of debt stock and thus reduce the roll-over risk.

There has also been an improvement in the structure of the domestic debt stock. The portion of foreign currency denominated or linked debt in the domestic stock, which was 36% in 2001, has declined to 13.8% in 2006 paving the way for decreased exchange rate risk. As a result of strategic benchmarks which have been set in accordance with debt strategies based on risk analysis, the share of fixed interest rate instruments in total domestic debt stock has also increased to 48.1% in 2006 from 36.3% in 2002. Since 2002 the composition of domestic debt stock continued to change and the share of the public sector in outstanding domestic debt stock has decreased from 52.8% in 2002 to 28.4% in 2006, as a result of the redemption of non-cash securities.

The Treasury aims to increase maturity of borrowing in the upcoming years while pursuing policies to mitigate market and liquidity risks and to enhance liquidity and efficiency in both the primary and secondary markets. These, together with continued strong fiscal policies, are intended to ensure a sustainable path for domestic debt. The following tables show the domestic debt securities auctioned in years 2001-2005:

124

Table No. 45

Treasury Auctions

AUCTIONS FOR DISCOUNTED TREASURY NOTES IN 2001


													Sales Amount
	Auction		Value		Maturity		Average Interest Rate (%)						Net Bid
	Date		Date		Date		Term		Simple		Compound		Amount		Nominal		Net
													*(in billions of Turkish Lira)*
January														2,931,699		2,859,333		2,070,151
14 Month G. Bond		05.01.01		08.01.01		20.02.02		75.29		67.17		64.99		382,294		935,999		534,976
6 Month T. Bill		05.01.01		08.01.01		11.07.01		29.78		58.91		67.47		1,810,942		1,488,787		1,147,175
3 Month T. Bill		23.01.01		24.01.01		25.04.01		12.00		47.98		57.33		738,463		434,546		388,000

February														2,810,834		3,212,612		2,955,249
3 Month T. Bill		13.02.01		14.02.01		16.05.01		14.26		57.03		70.43		1,163,103		916,350		802,000
1 Month T. Bill		20.02.01		21.02.01		21.03.01		7.11		92.43		144.23		1,647,731		2,296,263		2,153,249

March														5,480,992		4,391,649		3,285,876
3 Month T. Bill		20.03.01		21.03.01		27.06.01		33.65		124.99		193.71		5,480,992		4,391,649		3,285,876

April														4,984,114		4,863,840		3,330,408
4 Month T. Bill		03.04.01		04.04.01		08.08.01		37.32		107.83		150.00		1,368,834		1,482,688		1,079,694
6 Month T. Bill		10.04.01		11.04.01		10.10.01		57.50		115.00		148.06		840,939		794,091		504,184
8 Month T. Bill		17.04.01		18.04.01		05.12.01		64.88		102.24		119.89		1,200,100		1,203,620		729,995
3 Month T. Bill		24.04.01		25.04.01		25.07.01		20.50		82.00		110.83		404,171		253,049		210,000
6 Month T. Bill		24.04.01		25.04.01		10.10.01		40.15		87.00		107.80		1,170,069		1,130,393		806,535

May														6,117,635		5,711,088		4,145,959
5 Month T. Bill		01.05.01		02.05.01		19.09.01		28.85		75.00		93.28		1,182,999		848,843		658,804
10 Month T. Bill		08.05.01		09.05.01		06.03.02		69.96		84.60		89.91		588,798		957,700		565,492
3 Month T. Bill		15.05.01		16.05.01		15.08.01		17.37		69.48		89.78		1,485,948		884,976		753,999
6 Month T. Bill		22.05.01		23.05.01		21.11.01		32.29		64.58		75.00		1,745,040		1,936,967		1,464,192
10 Month T. Bill		22.05.01		23.05.01		06.03.02		53.62		68.00		72.37		1,036,935		1,072,010		697,846
13 Month G. Bond		29.05.01		30.05.01		26.06.02		88.31		82.00		79.98		77,914		10,593		5,625

June														4,580,248		6,295,272		5,064,868
3 Month T. Bill		05.06.01		06.06.01		05.09.01		16.39		65.56		83.50		470,644		144,625		124,260
6 Month T. Bill		12.06.01		13.06.01		05.12.01		32.62		67.85		79.90		251,028		190,698		143,792
3 Month T. Bill		19.06.01		20.06.01		26.09.01		17.05		63.34		79.47		1,201,994		1,546,774		1,321,440
4 Month T. Bill		26.06.01		27.06.01		07.11.01		26.98		73.85		92.29		2,656,582		4,413,175		3,475,375

July														3,492,450		2,922,595		2,117,977
5 Month T. Bill		03.07.01		04.07.01		05.12.01		31.73		75.00		91.82		240,780		266,403		202,233
8 Month T. Bill		10.07.01		11.07.01		06.03.02		54.75		83.74		95.00		874,718		1,190,140		769,056
7 Month T. Bill		17.07.01		18.07.01		06.02.02		49.19		88.20		104.89		149,088		557,459		374,693
3 Month T. Bill		24.07.01		25.07.01		24.10.01		17.69		70.78		91.88		2,227,865		908,593		771,995

August														3,062,418		3,554,965		2,802,390
5 Month T. Bill		07.08.01		08.08.01		09.01.02		31.15		73.63		89.83		2,004,925		2,415,006		1,841,394
3 Month T. Bill		14.08.01		15.08.01		14.11.01		18.62		74.49		98.00		1,057,493		1,139,958		960,996

September														1,914,877		1,271,774		1,019,949
4 Month T. Bill		04.09.01		05.09.01		26.12.01		21.33		69.00		86.96		605,182		321,643		265,314
3 Month T. Bill		11.09.01		12.09.01		26.11.01		19.40		67.25		84.91		655,808		474,068		397,042
5 Month T. Bill		25.09.01		26.09.01		06.03.02		33.13		74.90		90.97		653,888		476,063		357,594

October														2,567,490		2,276,262		1,839,275
6 Month T. Bill		02.10.01		03.10.01		03.04.02		39.12		78.25		93.56		522,922		604,658		434,616
3 Month T. Bill		09.10.01		10.10.01		09.01.02		17.79		71.15		92.49		580,154		524,577		445,355
3 Month T. Bill		23.10.01		24.10.01		23.01.02		15.61		62.43		78.62		1,043,690		795,376		688,000
5 Month T. Bill		30.10.01		31.10.01		03.04.02		29.62		70.00		84.62		420,723		351,652		271,303

November														6,030,585		7,259,364		5,535,800
5 Month T. Bill		06.11.01		07.11.01		03.04.02		27.58		68.30		82.80		2,461,775		2,800,047		2,194,677
8 Month T. Bill		06.11.01		07.11.01		26.06.02		48.23		76.00		85.94		514,646		1,125,995		759,618
3 Month T. Bill		13.11.01		14.11.01		13.02.02		14.90		59.61		74.31		1,442,461		1,240,944		1,079,994
7 Month T. Bill		20.11.01		21.11.01		26.06.02		39.35		66.01		74.48		1,611,703		2,092,378		1,501,512

December														4,633,445		5,367,631		4,132,659
7 Month T. Bill		04.12.01		05.12.01		10.07.02		41.00		68.77		77.95		1,149,963		1,697,976		1,204,238
5 Month T. Bill		11.12.01		12.12.01		08.05.02		24.94		61.75		73.55		1,485,986		1,478,800		1,183,632
3 Month T. Bill		14.12.01		19.12.01		20.03.02		14.35		57.42		71.01		923,176		859,950		752,000
6 Month T. Bill		25.12.01		26.12.01		10.07.02		34.06		63.25		72.34		1,074,320		1,330,905		992,789

2001 TOTAL														48,606,787		49,986,384		38,300,560

Source: UT.

125

AUCTIONS FOR DISCOUNTED TREASURY NOTES IN 2002


													Sales Amount
	Auction		Value		Maturity		Average Interest Rate (%)						Net Bid
	Date		Date		Date		Term		Simple		Compound		Amount			Nominal		Net
															*(in billions of Turkish Lira)*
January														5,392,889			6,202,107		4,759,796
5 Month T. Bill		08.01.02		09.01.02		29.05.02		22.91		59.58		70.99		1,311,100			1,553,115		1,263,584
8 Month T. Bill		08.01.02		09.01.02		04.09.02		42.20		64.54		71.34		2,412,070			3,236,380		2,275,920
4 Month T. Bill		15.01.02		16.01.02		08.05.02		18.00		58.50		71.24		845,131			501,845		425,293
3 Month T. Bill		21.01.02		23.01.02		24.04.02		14.56		58.25		72.25		824,589			910,768		795,000

February														3,698,570			2,772,878		1,963,802
1 Year G. Bond		05.02.02		06.02.02		05.02.03		69.54		69.54		69.54		1,474,205			1,316,505		776,501
3 Month T. Bill		12.02.02		13.02.02		15.05.02		13.98		55.92		68.78		1,409,566			661,082		580,000
6 Month T. Bill		26.02.02		27.02.02		28.08.02		30.96		61.91		71.49		814,800			795,292		607,301

March														5,055,605			6,020,883		4,341,125
6 Month T. Bill		05.03.02		06.03.02		28.08.02		28.99		60.30		69.80		1,716,055			2,035,694		1,578,192
11 Month T. Bill		05.03.02		06.03.02		05.02.03		61.69		66.83		68.30		1,599,436			2,433,182		1,504,801
7 Month T. Bill		12.03.02		13.03.02		23.10.02		37.74		61.32		68.25		795,483			705,386		512,132
3 Month T. Bill		18.03.02		20.03.02		19.06.02		13.49		53.95		65.88		944,630			846,621		746,000

April														9,273,857			9,892,266		7,334,611
7 Month T. Bill		02.04.02		03.04.02		23.10.02		30.87		55.35		62.00		3,281,257			4,169,314		3,185,815
1 Year G. Bond		09.04.02		10.04.02		09.04.03		58.00		58.00		58.00		2,436,575			2,555,806		1,617,595
8 Month T. Bill		16.04.02		17.04.02		11.12.02		34.00		52.00		56.46		2,013,254			2,075,926		1,549,201
3 Month T. Bill		22.04.02		24.04.02		24.07.02		11.12		44.49		52.48		1,542,771			1,091,220		982,000

May														6,197,793			6,875,038		5,260,826
11 Month T. Bill		07.05.02		08.05.02		09.04.03		48.74		52.80		53.74		1,936,322			2,462,975		1,655,907
6 Month T. Bill		07.05.02		08.05.02		06.11.02		24.33		48.65		54.57		1,056,378			1,161,571		934,298
3 Month T. Bill		13.05.02		15.05.02		14.08.02		11.59		46.35		55.05		1,350,574			1,401,535		1,256,000
5 Month T. Bill		28.05.02		29.05.02		06.11.02		22.27		50.35		57.55		1,003,629			1,008,001		824,404
9 Month T. Bill		28.05.02		29.05.02		05.03.03		42.48		55.23		58.45		850,890			840,957		590,217

June														6,231,819			7,906,571		6,262,311
3 Month T. Bill		17.06.02		19.06.02		18.09.02		14.13		56.50		69.64		1,527,491			1,650,207		1,445,961
7 Month T. Bill		18.06.02		19.06.02		08.01.03		36.15		64.82		73.90		1,398,152			2,148,200		1,577,810
4 Month T. Bill		25.06.02		26.06.02		06.11.02		21.65		59.25		70.97		2,065,580			2,434,437		2,001,205
6 Month T. Bill		25.06.02		26.06.02		08.01.03		35.27		65.50		75.25		1,240,595			1,673,727		1,237,336

July														9,492,323			9,084,819		7,101,419
5 Month T. Bill		02.07.02		03.07.02		11.12.02		27.10		61.27		71.97		411,044			378,389		297,713
5 Month T. Bill		09.07.02		10.07.02		11.12.02		27.18		64.25		76.53		2,557,845			3,311,700		2,603,891
8 Month T. Bill		09.07.02		10.07.02		05.03.03		46.69		71.40		79.67		1,015,227			1,105,724		753,805
3 Month T. Bill		23.07.02		24.07.02		23.10.02		12.97		51.89		62.89		2,897,732			1,247,218		1,104,000
7 Month T. Bill		23.07.02		24.07.02		05.03.03		42.10		68.42		77.00		1,413,107			1,825,890		1,284,897
4 Month T. Bill		30.07.02		31.07.02		13.11.02		15.02		52.07		62.44		1,197,368			1,215,898		1,057,114

August														8,963,207			7,045,950		5,310,854
9 Month T. Bill		06.08.02		07.08.02		07.05.03		47.56		63.42		68.00		1,406,353			1,162,417		787,735
3 Month T. Bill		12.08.02		14.08.02		13.11.02		12.25		48.99		58.75		1,888,620			1,190,944		1,061,000
9 Month T. Bill		13.08.02		14.08.02		07.05.03		46.04		63.00		67.90		1,892,273			1,758,960		1,204,448
5 Month T. Bill		27.08.02		28.08.02		22.01.03		21.21		52.51		61.00		2,365,253			1,620,546		1,337,015
8 Month T. Bill		27.08.02		28.08.02		07.05.03		42.62		61.57		67.00		1,410,708			1,313,083		920,655

September														4,346,705			4,809,349		3,847,546
5 Month T. Bill		03.09.02		04.09.02		22.01.03		20.25		52.64		61.50		1,885,436			1,996,731		1,660,542
10 Month T. Bill		03.09.02		04.09.02		02.07.03		53.95		65.24		68.50		980,523			1,317,310		855,672
3 Month T. Bill		16.09.02		18.09.02		18.12.02		12.32		49.27		59.14		1,480,746			1,495,308		1,331,333

October														6,906,543			8,443,149		5,923,621
9 Month T. Bill		08.10.02		09.10.02		02.07.03		47.76		65.35		70.61		1,782,454			2,832,077		1,916,721
3 Month T. Bill		21.10.02		23.10.02		22.01.03		11.67		46.68		55.50		2,487,587			1,319,933		1,182,000
10 Month T. Bill		22.10.02		23.10.02		27.08.03		51.90		61.34		63.90		2,636,501			4,291,139		2,824,900

November														8,169,442			7,822,416		6,241,333
4 Month T. Bill		05.11.02		06.11.02		19.03.03		17.09		46.77		54.00		2,373,848			2,791,085		2,383,726
8 Month T. Bill		05.11.02		06.11.02		02.07.03		34.02		52.03		56.50		2,328,771			1,995,085		1,488,613
3 Month T. Bill		12.11.02		13.11.02		05.02.03		9.51		41.20		48.23		1,740,160			1,473,970		1,346,000
1 Year G. Bond		26.11.02		27.11.02		03.12.03		52.72		51.72		51.50		1,726,664			1,562,276		1,022,994

December														7,842,928			10,009,019		7,638,605
6 Month T. Bill		02.12.02		03.12.02		21.05.03		20.34		43.81		49.00		1,459,040			1,578,787		1,311,941
5 Month T. Bill		10.12.02		11.12.02		21.05.03		19.90		45.00		50.74		1,429,359			2,099,133		1,750,677
12 Month T. Bill		10.12.02		11.12.02		03.12.03		50.13		51.11		51.33		2,046,262			3,525,376		2,348,253
3 Month T. Bill		16.12.02		18.12.02		19.03.03		9.82		39.28		45.45		1,685,164			1,429,842		1,302,000
12 Month T. Bill		17.12.02		18.12.02		03.12.03		48.63		50.57		51.00		1,223,103			1,375,880		925,734

2002 TOTAL														81,571,680			86,884,446		65,985,848


Source:		UT.

126

AUCTIONS FOR DISCOUNTED TREASURY NOTES IN 2003


													Sales Amount
	Auction		Value		Maturity		Average Interest Rate (%)						Net Bid
	Date		Date		Date		Term		Simple		Compound		Amount			Nominal		Net
															*(in billions of Turkish Lira)*
January														8,737,178			11,402,022		8,219,679
5 Month T. Bill		07.01.03		08.01.03		18.06.03		22.12		50.00		57.10		955,586			1,369,368		1,121,376
9 Month T. Bill		07.01.03		08.01.03		08.10.03		42.00		56.00		59.61		719,788			1,553,085		1,093,729
5 Month T. Bill		14.01.03		15.01.03		18.06.03		21.03		49.70		57.00		1,335,994			1,254,146		1,036,251
3 Month T. Bill		20.01.03		22.01.03		24.04.03		10.87		43.00		50.41		2,119,007			1,626,440		1,467,000
12 Month G. Bond		21.01.03		22.01.03		28.01.04		59.91		58.78		58.50		3,606,804			5,598,983		3,501,324

February														7,373,019			10,669,089		7,427,460
3 Month T. Bill		03.02.03		05.02.03		14.05.03		10.93		40.60		47.00		1,701,338			1,059,381		955,000
12 Month T. Bill		04.02.03		05.02.03		28.01.04		57.10		58.22		58.49		2,485,384			4,889,345		3,112,312
5 Month T. Bill		04.02.03		05.02.03		16.07.03		20.80		47.03		53.31		1,456,239			1,872,451		1,550,015
12 Month G. Bond		25.02.03		26.02.03		03.03.04		57.33		56.25		55.99		1,730,058			2,847,913		1,810,133

March														7,930,395			11,866,641		8,056,915
9 Month T. Bill		04.03.03		05.03.03		08.10.03		31.60		53.00		58.50		451,050			618,717		470,163
12 Month G. Bond		04.03.03		05.03.03		03.03.04		62.50		62.50		62.50		2,286,975			3,862,449		2,376,874
3 Month T. Bill		17.03.03		19.03.03		18.06.03		12.18		48.70		58.34		1,140,069			1,193,004		1,063,515
5 Month T. Bill		18.03.03		19.03.03		13.08.03		19.51		48.30		55.47		867,866			1,020,572		853,984
12 Month T. Bill		18.03.03		19.03.03		03.03.04		57.09		59.37		59.95		3,184,436			5,171,899		3,292,379

April														9,169,974			13,608,238		9,635,825
4 Month T. Bill		07.04.03		09.04.03		13.08.03		16.76		48.43		56.48		1,434,743			1,914,745		1,639,845
6 Month T. Bill		08.04.03		09.04.03		08.10.03		25.29		50.59		56.99		918,119			1,458,563		1,164,108
12 Month G. Bond		08.04.03		09.04.03		28.04.04		67.43		63.75		62.79		2,812,235			5,511,471		3,291,837
10 Month T. Bill		22.04.03		24.04.03		18.02.04		44.63		54.15		56.48		2,170,537			3,469,722		2,399,035
3 Month T. Bill		22.04.03		24.04.03		23.07.03		9.88		39.96		46.39		1,834,340			1,253,736		1,141,000

May														11,365,061			15,492,078		10,852,833
6 Month T. Bill		05.05.03		07.05.03		05.11.03		22.15		44.30		49.20		1,043,367			1,254,738		1,027,217
10 Month T. Bill		06.05.03		07.05.03		18.02.04		40.85		51.80		54.40		1,825,448			2,694,891		1,913,372
12 Month G. Bond		06.05.03		07.05.03		26.05.04		57.44		54.31		53.59		3,226,679			4,672,361		2,967,650
3 Month T. Bill		12.05.03		14.05.03		13.08.03		9.15		36.62		41.96		1,735,753			1,676,618		1,536,000
6 Month T. Bill		20.05.03		21.05.03		05.11.03		19.57		42.40		47.29		715,592			926,604		774,956
14 Month G. Bond		20.05.03		21.05.03		07.07.04		62.01		54.66		53.00		2,818,222			4,266,866		2,633,638

June														8,656,777			9,805,395		7,315,978
5 Month T. Bill		03.06.03		04.06.03		05.11.03		17.35		41.00		45.95		397,753			505,374		430,670
13 Month G. Bond		10.06.03		11.06.03		07.07.04		52.98		49.20		48.40		2,495,865			2,979,842		1,947,863
3 Month T. Bill		16.06.03		18.06.03		17.09.03		8.68		34.71		39.49		2,082,639			1,723,613		1,586,000
11 Month T. Bill		16.06.03		18.06.03		09.06.04		48.21		49.15		49.35		2,440,116			3,303,118		2,228,746
5 Month T. Bill		17.06.03		18.06.03		05.11.03		15.21		39.54		44.50		1,240,404			1,293,448		1,122,700

July														10,444,057			15,032,604		11,088,623
5 Month T. Bill		01.07.03		02.07.03		19.11.03		15.21		39.54		44.50		1,951,271			2,411,019		2,092,717
14 Month G. Bond		01.07.03		02.07.03		18.08.04		59.57		52.50		50.96		4,774,943			8,704,628		5,455,103
4 Month T. Bill		15.07.03		16.07.03		19.11.03		13.33		38.50		43.54		1,685,517			1,976,205		1,743,804
3 Month T. Bill		22.07.03		23.07.03		22.10.03		8.00		32.00		36.05		2,032,326			1,940,752		1,797,000

August														10,732,462			10,217,888		7,815,672
3 Month T. Bill		11.08.03		13.08.03		12.11.03		7.65		30.60		34.29		2,373,744			1,932,310		1,795,000
8 Month T. Bill		12.08.03		13.08.03		07.04.04		25.54		39.06		41.60		1,358,269			1,596,898		1,272,041
14 Month G. Bond		12.08.03		13.08.03		22.09.04		47.63		42.70		41.80		3,607,196			3,069,725		2,079,309
8 Month T. Bill		26.08.03		27.08.03		07.04.04		21.85		35.50		37.86		1,008,350			976,036		801,043
13 Month G. Bond		26.08.03		27.08.03		22.09.04		41.46		38.50		38.00		2,384,902			2,642,918		1,868,279

September														2,866,154			1,999,126		1,718,168
3 Month T. Bill		15.09.03		17.09.03		17.12.03		6.93		27.73		30.75		1,639,077			1,240,416		1,160,000
13 Month G. Bond		16.09.03		17.09.03		22.09.04		35.93		35.25		35.14		1,227,077			758,710		558,168

October														6,504,693			7,088,956		5,859,303
6 Month T. Bill		07.10.03		08.10.03		07.04.04		14.25		28.50		30.53		1,416,466			1,699,216		1,487,272
13 Month G. Bond		07.10.03		08.10.03		27.10.04		32.29		30.53		30.29		3,027,957			3,804,726		2,876,031
3 Month T. Bill		20.10.03		22.10.03		21.01.04		5.95		23.80		26.01		2,060,270			1,585,014		1,496,000

November														10,498,214			12,442,825		10,161,006
9 Month T. Bill		04.11.03		05.11.03		21.07.04		20.46		28.75		29.90		1,720,845			2,392,640		1,986,274
14 Month G. Bond		04.11.03		05.11.03		15.12.04		33.71		30.22		29.75		3,715,982			4,694,543		3,511,096
3 Month T. Bill		11.11.03		12.11.03		11.02.04		5.94		23.75		25.95		2,290,158			1,934,404		1,826,000
6 Month T. Bill		18.11.03		19.11.03		05.05.04		11.86		25.71		27.50		1,536,726			1,731,904		1,548,218
13 Month G. Bond		18.11.03		19.11.03		15.12.04		31.02		28.80		28.51		1,234,504			1,689,335		1,289,419

December														4,519,419			5,364,883		4,348,117
5 Month T. Bill		02.12.03		03.12.03		05.05.04		10.93		25.84		27.79		752,709			777,810		701,164
14 Month G. Bond		02.12.03		03.12.03		26.01.05		34.05		29.51		28.91		2,576,642			3,453,707		2,576,466
3 Month T. Bill		16.12.03		17.12.03		17.03.04		5.87		23.50		25.65		1,190,068			1,133,366		1,070,487

2003 TOTAL														98,797,400			124,989,744		92,499,580


Source:		UT.

127

AUCTIONS FOR DISCOUNTED TREASURY NOTES IN 2004


													Sales Amount (Inc. Switching)
	Auction		Value		Maturity		Average Interest Rate (%)						Net Bid
	Date		Date		Date		Term		Simple		Compound		Amount			Nominal		Net
															*(in billions of Turkish Lira)*
January														8,267,706.4			11,522,077.7		9,612,900.2
3 Month T. Bill		19.01.04		21.01.04		21.04.04		6.31		25.25		27.74		2,464,395.2			2,452,634.0		2,306,996.5
14 Month G. Bond		20.01.04		21.01.04		23.03.05		29.68		25.30		24.80		2,425,596.4			3,121,679.2		2,407,251.7
7 Month T. Bill		27.01.04		28.01.04		11.08.04		13.20		24.52		25.90		1,642,885.2			2,487,200.4		2,197,093.3
14 Month G. Bond		27.01.04		28.01.04		23.03.05		28.10		24.35		23.94		1,734,829.5			3,460,564.2		2,701,558.7

February														7,848,214.7			8,275,023.5		6,907,296.9
3 Month T. Bill		10.02.04		11.02.04		12.05.04		5.83		23.30		25.42		2,732,879.5			1,651,934.7		1,561,000.0
7 Month T. Bill		17.02.04		18.02.04		08.09.04		13.03		23.37		24.57		1,306,406.3			1,724,836.0		1,525,967.6
14 Month G. Bond		17.02.04		18.02.04		27.04.05		28.22		23.66		23.18		3,808,929.0			4,898,252.9		3,820,329.3

March														8,814,550.4			12,109,532.6		9,691,466.4
18 Month G. Bond		01.03.04		03.03.04		24.08.05		38.17		25.78		24.40		2,103,906.2			4,364,184.6		3,158,531.1
7 Month T. Bill		02.03.04		03.03.04		13.10.04		14.57		23.69		24.74		1,629,546.9			2,870,986.5		2,505,769.8
14 Month G. Bond		02.03.04		03.03.04		27.04.05		28.71		24.88		24.45		1,977,204.4			3,468,897.2		2,695,165.5
3 Month T. Bill		15.03.04		17.03.04		16.06.04		5.52		22.06		23.95		1,332,000.0			1,405,464.2		1,332,000.0

April														13,514,756.5			13,244,677.3		10,837,029.1
8 Month T. Bill		06.04.04		07.04.04		24.11.04		14.22		22.41		23.31		1,493,031.4			2,373,037.6		2,077,544.5
17 Month G. Bond		06.04.04		07.04.04		24.08.05		31.49		22.75		21.86		2,017,342.1			3,580,479.0		2,722,923.1
3 Month T. Bill		20.04.04		21.04.04		21.07.04		5.39		21.57		23.38		2,187,000.0			2,304,934.6		2,187,000.0
7 Month T. Bill		27.04.04		28.04.04		24.11.04		13.31		23.08		24.19		831,093.5			1,235,084.5		1,089,962.8
17 Month G. Bond		27.04.04		28.04.04		05.10.05		35.93		24.91		23.72		2,033,346.5			3,751,141.6		2,759,598.7

May														14,073,900.9			11,902,717.8		9,846,287.3
7 Month T. Bill		04.05.04		05.05.04		24.11.04		13.99		25.08		26.45		674,596.2			944,774.4		828,858.7
3 Month T. Bill		10.05.04		12.05.04		11.08.04		6.12		24.49		26.84		1,675,000.0			1,777,569.9		1,675,000.0
7 Month T. Bill		11.05.04		12.05.04		24.11.04		14.91		27.69		29.44		324,370.8			502,781.8		437,551.7
17 Month G. Bond		11.05.04		12.05.04		05.10.05		46.00		32.77		30.94		997,821.5			1,841,739.7		1,261,468.9
6 Month T. Bill		25.05.04		26.05.04		10.11.04		12.37		26.81		28.76		2,013,632.7			3,137,458.1		2,791,990.4
12 Month G. Bond		25.05.04		26.05.04		25.05.05		29.70		29.70		29.70		1,910,536.2			3,698,393.9		2,851,417.6

June														8,201,307.4			6,513,759.9		5,492,805.1
5 Month T. Bill		08.06.04		09.06.04		10.11.04		10.76		25.44		25.44		1,271,449.9			2,047,566.9		1,848,608.0
12 Month T. Bill		08.06.04		09.06.04		25.05.05		26.84		27.92		27.92		1,386,842.5			2,457,906.8		1,937,765.4
3 Month T. Bill		14.06.04		16.06.04		15.09.04		5.72		22.90		22.90		912,000.0			964,204.9		912,000.0
13 Month G. Bond		15.06.04		16.06.04		06.07.05		31.42		29.71		29.71		515,014.4			1,044,081.3		794,431.8

July														11,352,445.1			11,504,730.0		9,346,466.8
7 Month T. Bill		06.07.04		07.07.04		09.02.05		15.11		25.35		26.62		1,524,921.6			2,916,778.4		2,533,918.0
17 Month G. Bond		06.07.04		07.07.04		07.12.05		39.02		27.42		26.05		2,041,853.4			4,210,155.5		3,028,366.4
3 Month T. Bill		20.07.04		21.07.04		20.10.04		5.76		23.04		25.11		1,970,000.0			2,083,483.7		1,970,000.0
12 Month T. Bill		20.07.04		21.07.04		06.07.05		26.47		27.52		27.66		1,099,977.9			2,294,312.3		1,814,182.3

August														15,825,799.6			16,919,941.9		13,661,321.5
3 Month T. Bill		09.08.04		11.08.04		10.11.04		5.64		22.55		24.52		2,579,000.0			2,724,361.0		2,579,000.0
11 Month T. Bill		10.08.04		11.08.04		06.07.05		23.44		25.93		26.23		620,307.9			2,149,783.0		1,741,601.9
18 Month G. Bond		10.08.04		11.08.04		22.02.06		41.05		26.68		25.05		922,865.5			3,798,963.8		2,693,222.5
6 Month G. Bond		17.08.04		18.08.04		23.02.05		11.95		23.01		24.28		1,543,572.5			4,246,629.7		3,793,380.8
18 Month G. Bond		17.08.04		18.08.04		22.02.06		40.16		26.43		24.88		1,559,268.8			4,000,204.4		2,854,116.2

September														9,634,526.6			9,441,863.2		7,415,976.6
15 Month G. Bond		07.09.04		08.09.04		07.12.05		33.77		27.01		26.21		2,769,858.8			2,640,015.0		1,973,600.7
3 Month T. Bill		14.09.04		15.09.04		15.12.04		4.80		19.18		20.61		2,551,253.3			1,494,388.5		1,426,000.0
7 Month T. Bill		20.09.04		22.09.04		06.04.05		13.69		25.42		26.90		1,277,137.8			1,827,086.4		1,607,119.1
19 Month G. Bond		21.09.04		22.09.04		12.04.06		44.46		28.54		26.63		3,036,276.7			3,480,373.2		2,409,256.8

October														9,646,075.7			11,896,455.5		9,849,833.4
10 Month T. Bill		12.10.04		13.10.04		27.07.05		18.42		23.37		23.92		2,911,458.5			2,513,380.4		2,122,345.1
3 Month T. Bill		19.10.04		20.10.04		19.01.05		4.90		19.59		21.07		2,731,992.8			2,072,761.6		1,976,000.0
10 Month T. Bill		26.10.04		27.10.04		10.08.05		18.03		22.87		23.40		1,922,805.5			3,089,115.2		2,617,250.7
18 Month G. Bond		26.10.04		27.10.04		12.04.06		34.68		23.73		22.59		2,079,818.9			4,221,198.3		3,134,237.6

November														13,376,794.7			16,516,308.5		13,309,387.6
3 Month T. Bill		08.11.04		10.11.04		09.02.05		4.90		19.58		21.07		3,734,520.2			2,334,979.4		2,226,000.0
11 Month T. Bill		09.11.04		10.11.04		28.09.05		20.63		23.33		23.62		2,019,721.4			2,434,521.5		2,018,115.6
19 Month G. Bond		09.11.04		10.11.04		24.05.06		37.87		24.62		23.21		2,512,630.0			4,869,010.9		3,531,557.1
7 Month T. Bill		23.11.04		24.11.04		29.06.05		13.14		22.05		23.01		2,213,981.2			3,313,295.2		2,928,418.7
18 Month G. Bond		23.11.04		24.11.04		24.05.06		36.82		24.54		23.24		2,895,941.9			3,564,501.5		2,605,296.0

December														7,175,634.9			11,640,662.8		9,014,870.0
3 Month T. Bill		13.12.04		15.12.04		16.03.05		4.97		19.87		21.40		2,607,854.3			1,434,908.8		1,367,000.0
7 Month T. Bill		14.12.04		15.12.04		27.07.05		13.98		22.72		23.69		1,157,839.1			1,848,071.2		1,621,387.9
19 Month G. Bond		14.12.04		15.12.04		05.07.06		38.68		24.83		23.36		3,409,941.5			8,357,682.7		6,026,482.1

2004 TOTAL														127,731,712.9			141,487,750.6		114,985,640.9


Source:		UT.

128

AUCTIONS FOR DISCOUNTED TREASURY NOTES IN 2005


															Sales Amount (Inc. Switching)
	Auction		Value		Maturity		Average Interest Rate (%)						Net Bid
	Date		Date		Date		Term		Simple		Compound		Amount		Nominal		Net
													*(in thousands of New Turkish Lira)*
January														10,186,978.03		12,456,112.04		10,316,598.92
3 Month T. Bill		18.01.2005		19.01.2005		20.04.2005		4.31		17.25		18.40		3,775,878.50		2,250,007.78		2,157,000.00
10 Month T. Bill		25.01.2005		26.01.2005		09.11.2005		15.19		19.26		19.64		1,805,668.59		3,847,532.66		3,340,199.53
19 Month G. Bond		25.01.2005		26.01.2005		09.08.2006		31.94		20.76		19.74		4,605,430.93		6,358,571.61		4,819,399.39

February														8,695,725.96		8,627,744.12		7,303,114.29
3 Month T. Bill		08.02.2005		09.02.2005		11.05.2005		4.08		16.31		17.33		3,149,965.24		1,931,663.75		1,856,000.00
20 Month G. Bond		08.02.2005		09.02.2005		27.09.2006		30.38		18.58		17.62		3,494,219.97		4,681,965.95		3,591,114.29
6 Month T. Bill		21.02.2005		23.02.2005		24.08.2005		8.52		17.04		17.76		2,051,540.74		2,014,114.41		1,856,000.00

March														4,785,312.74		4,632,206.64		3,958,259.15
3 Month T. Bill		15.03.2005		16.03.2005		15.06.2005		3.83		15.34		16.24		2,085,088.16		1,128,685.21		1,087,000.0
8 Month T. Bill		22.03.2005		23.03.2005		09.11.2005		10.75		16.94		17.45		858,956.10		1,016,932.62		918,238.1
18 Month G. Bond		22.03.2005		23.03.2005		27.09.2006		27.32		17.98		17.23		1,841,268.48		2,486,588.80		1,953,021.1

April														13,087,731.63		13,362,439.81		11,395,941.31
9 Month T. Bill		05.04.2005		06.04.2005		04.01.2006		13.20		17.60		17.98		1,930,586.69		2,019,695.80		1,784,198.8
3 Month T. Bill		19.04.2005		20.04.2005		20.07.2005		3.72		14.87		15.72		3,214,427.01		2,265,200.11		2,184,000.0
19 Month G. Bond		19.04.2005		20.04.2005		08.11.2006		29.38		18.86		17.98		2,260,195.05		2,139,067.98		1,653,282.2
7 Month T. Bill		25.04.2005		27.04.2005		23.11.2005		9.28		16.08		16.62		2,217,477.38		2,736,436.97		2,504,133.7
19 Month G. Bond		26.04.2005		27.04.2005		08.11.2006		28.49		18.52		17.70		3,465,045.50		4,202,038.96		3,270,326.6

May														6,643,901.14		10,940,390.19		8,822,558.45
9 Month T. Bill		09.05.2005		11.05.2005		08.02.2006		12.46		16.61		16.94		1,372,665.09		1,724,750.22		1,533,719.2
19 Month G. Bond		10.05.2005		11.05.2005		08.11.2006		26.98		17.99		17.26		1,766,667.36		2,054,493.52		1,617,936.1
6 Month T. Bill		24.05.2005		25.05.2005		23.11.2005		7.89		15.78		16.41		846,245.47		1,326,071.83		1,229,081.1
20 Month G. Bond		24.05.2005		25.05.2005		24.01.2007		31.37		18.75		17.71		2,658,323.21		5,835,074.62		4,441,822.0

June														3,624,644.35		3,074,516.99		2,839,168.79
3 Month T. Bill		14.06.2005		15.06.2005		14.09.2005		3.53		14.13		14.89		2,211,684.36		1,335,557.24		1,290,000.0
9 Month T. Bill		28.06.2005		29.06.2005		05.04.2006		12.25		15.93		16.21		1,412,959.99		1,738,959.75		1,549,168.8

July														11,039,578.36		14,725,045.55		12,432,581.42
9 Month T. Bill		05.07.2005		06.07.2005		05.04.2006		11.91		15.88		16.18		1,230,060.91		1,875,959.91		1,676,356.1
19 Month G. Bond		05.07.2005		06.07.2005		24.01.2007		25.95		16.66		15.97		2,604,122.87		3,956,813.30		3,141,479.3
3 Month T. Bill		19.07.2005		20.07.2005		19.10.2005		3.59		14.37		15.16		3,064,358.28		2,386,744.02		2,304,000.0
9 Month T. Bill		26.07.2005		27.07.2005		03.05.2006		12.41		16.14		16.43		1,415,054.10		2,038,625.85		1,813,521.6
19 Month G. Bond		26.07.2005		27.07.2005		07.03.2007		27.73		17.17		16.36		2,725,982.21		4,466,902.48		3,497,224.4

August														8,113,422.04		6,531,795.52		5,484,470.66
19 Month G. Bond		09.08.2005		10.08.2005		07.03.2007		26.53		16.83		16.10		1,980,547.84		1,796,957.98		1,420,132.7
6 Month T. Bill		22.08.2005		24.08.2005		22.02.2006		7.63		15.27		15.85		3,157,863.90		2,277,511.05		2,116,000.0
19 Month G. Bond		23.08.2005		24.08.2005		07.03.2007		26.12		16.98		16.28		2,975,010.31		2,457,326.49		1,948,338.0

September														4,313,451.06		5,919,512.93		4,942,638.61
3 Month T. Bill		13.09.2005		14.09.2005		14.12.2005		3.38		13.50		14.20		1,450,751.67		1,312,872.68		1,270,000.0
19 Month G. Bond		27.09.2005		28.09.2005		09.05.2007		25.43		15.74		15.06		2,862,699.39		4,606,640.25		3,672,638.6

October														4,614,791.15		6,942,306.96		5,897,623.73
19 Month G. Bond		04.10.2005		05.10.2005		09.05.2007		24.25		15.19		14.57		2,565,486.85		5,025,153.03		4,044,344.4
3 Month T. Bill		17.10.2005		19.10.2005		18.01.2006		3.45		13.78		14.52		2,049,304.30		1,917,153.92		1,853,279.3

November														9,432,522.25		13,808,105.27		11,571,301.72
11 Month T. Bill		08.11.2005		09.11.2005		04.10.2006		12.83		14.19		14.28		2,089,897.95		2,770,211.03		2,455,290.7
20 Month G. Bond		15.11.2005		16.11.2005		27.06.2007		23.87		14.78		14.17		4,147,528.92		5,519,976.27		4,456,165.3
11 Month T. Bill		22.11.2005		23.11.2005		04.10.2006		12.16		14.05		14.17		1,205,923.74		2,172,503.30		1,937,049.7
20 Month G. Bond		22.11.2005		23.11.2005		27.06.2007		22.87		14.33		13.77		1,989,171.63		3,345,414.67		2,722,796.0

December														6,398,755.80		7,340,063.05		6,392,975.41
12 Month G. Bond		05.12.2005		07.12.2005		06.12.2006		14.21		14.21		14.21		1,724,928.42		3,068,042.06		2,686,254.1
19 Month G. Bond		06.12.2005		07.12.2005		27.06.2007		22.40		14.38		13.85		2,141,261.35		2,820,955.48		2,304,721.3
3 Month T. Bill		13.12.2005		14.12.2005		15.03.2006		3.50		14.00		14.75		2,532,566.03		1,451,065.52		1,402,000.0

2005 TOTAL														90,936,814.51		108,360,239.07		91,357,232.46


Source:		UT.

129

AUCTIONS FOR DISCOUNTED TREASURY NOTES IN 2006


													Sales Amount (Inc. Switching)
													Net
	Auction		Value		Maturity		Average Interest Rate (%)						Bid Amount		Nominal		Net
	Date		Date		Date		Term		Simple		Compound		(in thousands of New Turkish Lira)

January														9,003,759.47		5,564,287.97		4,760,791.73
3 month t. Bıll (91 days)(r)		16.01.2006		18.01.2006		19.07.2006		7.11		14.23		14.73		5,183,982.02		1,986,960.51		1,855,000.00
20 month g. Bond (595 days)		17.01.2006		18.01.2006		05.09.2007		23.11		14.14		13.56		3,819,777.45		3,577,327.46		2,905,791.72

February														10,149,886.18		9,138,737.42		7,917,402.80
10 month t. Bıll (308 days)		07.02.2006		08.02.2006		13.12.2006		12.09		14.29		14.44		3,041,812.31		1,839,699.87		1,641,285.57
6 month t. Bıll (182 days)(r)		20.02.2006		22.02.2006		23.08.2006		6.96		13.93		14.41		5,486,040.86		2,421,673.12		2,264,000.00
19 month g. Bond (560 days)(r-o)		21.02.2006		22.02.2006		05.09.2007		21.57		14.02		13.53		1,622,033.00		4,877,364.43		4,012,117.23

March														5,642,028.84		6,453,310.13		5,466,475.11
3 month t. Bıll (91 days)(r)		13.03.2006		15.03.2006		14.06.2006		3.39		13.56		14.27		2,505,039.43		978,070.65		946,000.00
19 month g. Bond (539 days)(r-o)		14.03.2006		15.03.2006		05.09.2007		21.12		14.27		13.81		3,136,989.42		5,475,239.48		4,520,475.11

Aprıl														7,218,864.53		11,148,651.34		8,999,351.59
12 Month G. Bond (378 days)		04.04.2006		05.04.2006		18.04.2007		14.64		14.10		14.06		4,048,578.23		3,877,204.28		3,382,003.83
24 Month G. Bond (728 days)		11.04.2006		12.04.2006		09.04.2008		29.45		14.72		13.77		3,170,286.30		7,271,447.06		5,617,347.75

May														3,910,089.26		5,066,673.73		4,118,839.38
12 Month G. Bond (378 days)		02.05.2006		03.05.2006		16.05.2007		14.65		14.11		14.07		2,731,496.54		2,479,689.56		2,162,901.50
23 Month G. Bond (686 days)(r-o)		23.05.2006		24.05.2006		09.04.2008		32.26		17.12		15.99		1,178,592.72		2,586,984.17		1,955,937.88

June														3,569,172.30		3,842,894.43		3,241,689.22
12 Month G. Bond (371 days)		06.06.2006		07.06.2006		13.06.2007		18.98		18.62		18.59		1,388,712.39		1,816,660.94		1,526,835.31
3 Month T. Bıll (91 days)(r)		12.06.2006		14.06.2006		13.09.2006		3.94		15.76		16.72		1,673,613.88		1,023,814.30		985,000.00
22 Month G. Bond (665 days)(r-o)		13.06.2006		14.06.2006		09.04.2008		37.34		20.44		18.97		506,846.04		1,002,419.19		729,853.91

July														7,274,385.86		10,038,926.35		8,178,976.58
3 Month T. Bıll (91 days)(r)		03.07.2006		05.07.2006		04.10.2006		5.21		20.86		22.55		1,360,744.88		1,309,620.84		1,244,710.76
12 Month G. Bond (364 days)		04.07.2006		05.07.2006		04.07.2007		21.17		21.17		21.17		1,944,912.02		3,064,231.02		2,528,815.30
6 Month T. Bıll (182 days)(r)		18.07.2006		19.07.2006		17.01.2007		10.73		21.45		22.61		2,494,061.69		2,321,960.15		2,097,000.00
24 Month G. Bond (728 days)		18.07.2006		19.07.2006		16.07.2008		44.82		22.41		20.34		1,474,667.26		3,343,114.33		2,308,450.52

August														11,454,739.03		10,691,619.16		8,319,784.64
11 Month T. Bıll (329 days)		08.08.2006		09.08.2006		04.07.2007		18.82		20.82		21.02		2,069,369.94		2,649,221.58		2,229,580.74
24 Month G. Bond (707 days)(r-o)		08.08.2006		09.08.2006		16.07.2008		42.25		21.75		19.89		2,375,477.52		5,922,144.88		4,163,203.90
6 Month T. Bıll (182 days)(r)		22.08.2006		23.08.2006		21.02.2007		10.03		20.06		21.06		7,009,891.57		2,120,252.70		1,927,000.00

September														12,839,859.95		8,036,334.48		6,263,817.50
6 Month T. Bıll (182 days)(r)		11.09.2006		13.09.2006		14.03.2007		10.37		20.74		21.81		8,228,057.64		2,773,567.38		2,513,000.00
22 Month G. Bond (672 days)(r-o)		12.09.2006		13.09.2006		16.07.2008		40.31		21.84		20.14		4,611,802.31		5,262,767.10		3,750,817.50

October														5,475,272.86		5,216,139.55		3,802,697.25
3 Month T. Bıll (91 days)(r)		02.10.2006		04.10.2006		03.01.2007		4.60		18.38		19.69		2,706,338.14		865,002.12		827,000.00
22 Month G. Bond (679 days)		02.10.2006		04.10.2006		13.08.2008		46.22		24.78		22.59		2,768,934.72		4,351,137.43		2,975,697.25

November														8,106,563.62		9,800,595.09		7,282,477.27
13 Month G. Bond (399 days)		07.11.2006		08.11.2006		12.12.2007		22.98		20.96		20.77		3,469,460.37		2,808,590.71		2,283,830.10
21 Month G. Bond (644 days)(r-o)		07.11.2006		08.11.2006		13.08.2008		39.88		22.54		20.89		4,637,103.25		6,992,004.38		4,998,647.17

December														3,353,940.03		6,032,449.68		4,514,094.82
13 Month G. Bond (371 days)(r-o)		05.12.2006		06.12.2006		12.12.2007		21.46		21.06		21.02		1,152,643.81		1,763,369.36		1,451,749.24
21 Month G. Bond (616 days)(r-o)		05.12.2006		06.12.2006		13.08.2008		39.41		23.29		21.69		2,201,296.22		4,269,080.32		3,062,345.58

2006 TOTAL														87,998,561.93		91,030,619.31		72,866,397.88


Source:		UT.

130

The following tables present the various sales and auctions of securities conducted by Turkey in 2004-2006:

Table No. 46

2004 Sales — Direct Sales and Tap Sales and Public Offers


	Description	Issue Date	Settlement Date	Maturity	Net Amount (1)
January
Direct Sale	3-month-coupon - Indexed To Future Auctions	21.01.2004	15.10.2008	5 years		274,039
Direct Sale	3-month-coupon - Indexed To Future Auctions	28.01.2004	18.01.2006	2 years		513,640
February
Direct Sale	3-month-coupon - Indexed To Future Auctions	18.02.2004	12.11.2008	5 years		214,046
March
Direct Sale	3-month-coupon - Indexed To Future Auctions	17.03.2004	10.12.2008	5 years		256,971
April
Direct Sale	3 month-coupon - Indexed To Future Auctions	14.04.2004	07.10.2009	6 years		182,517
May
Direct Sale	3 month-coupon - Indexed To Future Auctions	12.05.2004	04.11.2009	6 Years		172,053
Direct Sale	Switching - USD	21.05.2004	22.06.2005	13 Months		120.7
June
Direct Sale	3-month-coupon - Indexed To Future Auctions	02.06.2004	25.11.2009	6 Years		130,184
Direct Sale — EURO	Semi-annual coupon - (term interest rate%)3.35	09.06.2004	04.06.2008	4 Years		150
Direct Sale — EURO	Semi-annual coupon - (term interest rate%)3.95	09.06.2004	02.06.2010	6 Years		150
October
Direct Sale — USD	Quarterly coupon - (term interest rate%)1	27.10.2004	24.10.2007	3 Years		1,000
Direct Sale — EURO	Semi-annual - (term interest rate%) 2.75	27.10.2004	22.10.2008	4 Years		250


(1)		Thousand YTL, million USD and Euro

Source:		UT.

2005 Sales — Direct Sales and Tap Sales and Public Offers (2)

Description

Issue Date

Settlement Date

Maturity

Net Amount (1)

February

Direct Sale — EURO

2.5% semi-annually couponed

16.02.2005

10.02.2010

5 Years

300

Direct Sale — EURO

2.5% semi-annually couponed

16.02.2005

10.02.2010

5 Years

122

August

Direct Sale — USD

1% quarterly couponed

03.08.2005

30.07.2008

3 Years

500

December

Direct Sale — USD

1% quarterly couponed

07.12.2005

03.12.2008

3 Years

500


(1)		Million USD and Euro

(2)		There were no direct sales, tap sales and public offers in 2006.

Source:		UT

Table No. 47

Auctions for FX Denominated Discounted Securities in 2004


	Auction		Value		Maturity		Average Interest Rate (%)						Net Bid		Sales Amount (Inc. Switching)
	Date		Date		Date		Term		Simple		Compound		Amount		Nominal		Net
															(in millions of USD)
January 18 Month G. Bond		13.01.04		14.01.04		13.07.05		6.25		4.16		4.12		693.9		966.1		909.3

September 12 Month G. Bond		07.09.04		08.09.04		07.09.05		4.55		4.55		4.55		897.4		1,943.10		1,858.40

October 19 Month G. Bond		12.10.04		13.10.04		26.04.06		7.41		4.82		4.76		484.2		1,176.60		1,095.40

TOTAL														2,521.30		4,085.80		3,863.10

Auctions for FX Denominated Discounted Securities in 2005

Auction Date

Value Date

Maturity Date

Average Interest Rate (%)

Net Bid

Sales Amount (Inc. Switching)

Term

Simple

Compound

Amount

Nominal

Net

(in millions of USD)

September

19 Month G. Bond

06.09.2005

07.09.2005

04.04.2007

7.63

4.84

4.77

1,941.10

2,413.90

2,242.80


Source:		UT

131

Table No. 48

Auctions for FX Denominated Floating Rate Notes in 2004


	Auction		Value		Maturity		Average Interest Rate (%)									Net Bid		Sales Amount (Inc. Switching)
	Date		Date		Date		Term			Simple			Compound(1)			Amount		Nominal		Net
													(in millions of USD)
March 3 Years G. Bond (Semiannually LIBOR+1.85 Couponed)		23.03.04		24.03.04		21.03.07		2.27	%		4.53	%		4.59	%		948.4		773		755
August 3 Years G. Bond (Semiannually LIBOR+1.85 Couponed)		16.08.04		18.08.04		21.03.07		2.03	%		4.06	%		4.10	%		1,350.4		1,547		1,557
November 3 Years G. Bond (Semiannually LIBOR+1.60 Couponed)		30.11.04		01.12.04		28.11.07		2.55	%		5.10	%		5.16	%		2,095.6		2,336		2,284
TOTAL 2004																	4,394.4		4,657		4,596

Auctions for FX Denominated Floating Rate Notes in 2005


	Auction		Value		Maturity		Average Interest Rate (%)									Net Bid		Sales Amount (Inc. Switching)
	Date		Date		Date		Term			Simple			Compound(1)			Amount		Nominal		Net
																(in millions of USD and EURO)
February 3 Years G. Bond (Semiannually LIBOR+1.6 Couponed) — USD		15.02.05		16.02.05		13.02.08		2.50	%		5.00	%		5.06	%		670.9		1,134.6		1,124.6
May 3 Years G. Bond (Semiannually LIBOR+1.6 Couponed) — USD		31.05.05		01.06.05		28.05.08		2.70	%		5.39	%		5.47	%		1,388.2		1,988.8		1,977.3
June 3 Years G. Bond (Semiannually LIBOR+1.6 Couponed) — USD		21.06.05		22.06.05		28.05.08		2.72	%		5.43	%		5.51	%		1,243.1		2,584.3		2,574.3
July 3 Years G. Bond (Semiannually LIBOR+1.6 Couponed) — USD		12.07.05		13.07.05		09.08.08		2.81	%		5.62	%		5.70	%		427.5		807.2		803.2
September 5 Years G. Bond (Semiannually LIBOR+1.6 Couponed) — USD		20.09.05		21.09.05		15.09.10		2.97	%		5.94	%		6.03	%		1,345.0		1,919.6		1,902.9
5 Years G. Bond (Semiannually LIBOR+1.8 Couponed) EURO		20.09.05		21.09.05		15.09.10		2.03	%		4.05	%		4.09	%		1,041.0		690.4		689.4
October 5 Years G. Bond (Semiannually LIBOR+1.6 Couponed) — USD		18.10.05		19.10.05		13.10.10		3.02	%		6.04	%		6.12	%		600.4		649.6		649.2
5 Years G. Bond (Semiannually LIBOR+1.8 Couponed) EURO		18.10.05		19.10.05		13.10.10		2.06	%		4.11	%		4.15	%		403.1		701.8		701.4

Auctions for FX Denominated Floating Rate Notes in 2006


																Net Bid		Sales Amount (Inc. Switching)
	Auction		Value		Maturity		Average Interest Rate (%)									Amount		Nominal		Net
	Date		Date		Date		Term			Simple			Compound(1)					(million)

3 Years G. Bond (Semiannually LIBOR+1 Couponed) - USD		25.04.2006		26.04.2006		22.04.2009		3.11	%		6.22	%		6.32	%		1,587.9		648.9	650.5


( 1 )		This interest rate reflects the term interest rate which is accepted and is the basis for the price accepted at the auction, assumed that the term interest remains the same during the year.

(1)		Based on the assumption that the term interest rate remains the same during the year.

Source:		UT

132

Table No. 49

Fixed Coupon YTL Denominated Treasury Auctions in 2004


	Auction		Value		Maturity		Average Interest Rate (%)						Net Bid		Sales Amount (Inc. Switching)
	Date		Date		Date		Term		Simple		Compound		Amount		Nominal		Net
													(in billions of Turkish Lira)
January
2 Year Semi-Annual Couponed G. Bond		13.01.04		14.01.04		16.11.05		10.53		21.06		22.17		2,577,820.4		1,627,533.9		1,781,986.8
October
2 Year Semi-Annual Couponed G. Bond		19.10.04		20.10.04		17.10.07		10.05		20.09		21.10		2,818,140.5		2,193,284.1		2,188,963.4
TOTAL														5,395,960.9		3,820,818.0		3,970,950.2

Fixed Coupon YTL Denominated Treasury Auctions in 2005


																Net Bid		Sales Amount (Inc. Switching)
	Auction		Value		Maturity		Average Interest Rate									Amount		Nominal		Net
	Date		Date		Date		Term			Simple			Compound			(thousand YTL)
3 Year Semi Annual Couponed G. Bond		18.01.2005		19.01.2005		17.10.2007		8.24	%		16.49	%		17.17	%		1,123,135.4		1,250,345.2		1,405,713.1
5 Year Semi Annual Couponed G. Bond		15.02.2005		16.02.2005		10.02.2010		7.31	%		14.62	%		15.15	%		2,281,660.7		2,728,450.8		2,764,479.3
5 Year Semi Annual Couponed G. Bond		08.11.2005		09.11.2005		10.02.2010		5.97	%		11.93	%		12.29	%		725,931.9		1,381,191.0		1,566,770.1
5 Year Semi Annual Couponed G. Bond		06.12.2005		07.12.2005		10.02.2010		5.90	%		11.79	%		12.14	%		2,104,560.7		3,230,620.3		3,713,499.1
TOTAL																	6,235,289		8,590,607		9,450,462

Fixed Coupon YTL Denominated Treasury Auctions in 2006


																Sales Amount (Inc. Switching)
																Net
	Auction		Value		Maturity		Average Interest Rate									Bid Amount		Nominal		Net
	Date		Date		Date		Term			Simple			Compound			(thousand YTL)
5 Year Semi Annual Couponed G. Bond		24.01.2006		25.01.2006		19.01.2011		6.02	%		12.05	%		12.41	%		1,625,539.6		1,368,899.6		1,467,117.6
5 Year Semi Annual Couponed G. Bond		14.02.2006		15.02.2006		19.01.2011		6.41	%		12.81	%		13.22	%		1,144,161.0		368,307.3		386,869.5
5 Year Semi Annual Couponed G. Bond		28.03.2006		29.03.2006		19.01.2011		6.61	%		13.22	%		13.66	%		968,596.7		528,048.0		554,850.1
5 Year Semi Annual Couponed G. Bond		18.04.2006		19.04.2006		19.01.2011		6.68	%		13.36	%		13.80	%		486,802.2		371,718.9		391,769.4
5 Year Semi Annual Couponed G. Bond		09.05.2006		10.05.2006		19.01.2011		7.01	%		14.02	%		14.50	%		683,229.2		409,877.3		426,023.2
5 Year Semi Annual Couponed G. Bond		26.09.2006		27.09.2006		19.01.2011		9.95	%		19.90	%		20.89	%		619,281.7		775,652.8		666,680.8
5 Year Semi Annual Couponed G. Bond		17.10.2006		18.10.2006		19.01.2011		9.79	%		19.59	%		20.55	%		2,156,369.8		1,448,571.0		1,267,010.3
TOTAL																	7,683,980.3		5,271,074.9		5,160,320.9


Source:		UT

133

Table No. 50

Floating Rate Note Auctions of 2004


	Auction		Value		Maturity		Accepted Interest Rate (%)						Nominal Bid		Total (including switching)
	Date		Date		Date		Term		Simple		Compound(1)		Amount		Nominal		Net
													*(thousand YTL)*
3 Month T-Bill Yield + 6% (annual)		20.01.04		21.01.04		18.01.06		7.42		29.66		33.13		2,812,110		3,389,328		3,467,791
3 Month T-Bill Yield + 6% (annual)		16.02.04		18.02.04		18.01.06		7.34		29.37		32.77		1,968,858		2,255,267		2,368,327
3 Month T-Bill Yield + 6% (annual)		16.03.04		17.03.04		15.03.06		6.68		26.73		29.53		2,548,676		2,342,844		2,390,569
3 Month T-Bill Yield + 6% (annual)		26.04.04		28.04.04		15.03.06		6.69		26.77		29.58		2,216,789		1,830,528		1,923,414
3 Month T-Bill Yield + 6% (annual)		04.05.04		05.05.04		15.03.06		7.20		28.80		32.06		838,816		580,239		595,988
3 Month T-Bill Yield + 6% (annual)		15.06.04		16.06.04		14.06.06		7.88		31.54		35.47		951,390		1,139,290		1,095,575
3 Month T-Bill Yield + 6% (annual)		05.07.04		07.07.04		14.06.06		7.95		31.82		35.82		2,020,467		2,516,580		2,453,283
3 Month T-Bill Yield + 6% (annual)		21.09.04		22.09.04		13.09.06		6.68		26.70		29.50		2,257,790		3,119,049		3,063,309
TOTAL														15,614,895		17,173,124		17,358,257

Floating Rate Note Auctions of 2005


	Auction		Value		Maturity		Accepted Interest Rate (%)									Nominal Bid		Total (including switching)
	Date		Date		Date		Term			Simple			Compound(1)			Amount		Nominal		Net
																*(thousand YTL)*
3 Month T-Bill Yield + 6% (annual)		11.01.05		12.01.05		13.09.06		6.14	%		24.55	%		26.90	%		3,593,548.4		3,446,332.0		3,575,048.2
6 Month T-Bill Yield + 3% (annual)		22.02.05		23.02.05		17.02.10		10.01	%		20.02	%		21.02	%		3,460,088.1		2,492,456.9		2,493,700.0
6 Month T-Bill Yield + 3% (annual)		21.03.05		23.03.05		17.02.10		9.80	%		19.60	%		20.56	%		1,808,918.0		2,953,539.4		3,037,211.3
6 Month T-Bill Yield + 3% (annual)		26.04.05		27.04.05		17.02.10		9.93	%		19.86	%		20.84	%		2,144,911.4		3,201,074.2		3,326,459.6
6 Month T-Bill Yield + 3% (annual)		10.05.05		11.05.05		17.02.10		10.01	%		20.02	%		21.01	%		872,604.8		1,794,369.6		1,869,357.3
6 Month T-Bill Yield + 3% (annual)		28.06.05		29.06.05		17.02.10		9.97	%		19.93	%		20.92	%		1,547,458.3		2,178,677.2		2,334,585.8
3 Month T-Bill Yield + 6% (annual)		09.08.05		10.08.05		13.09.06		4.25	%		17.00	%		18.11	%		2,475,346.3		2,073,024.5		2,200,185.0
6 Month T-Bill Yield + 3% (annual)		23.08.05		24.08.05		18.08.10		9.05	%		18.10	%		18.91	%		3,865,465.5		5,442,430.5		5,471,006.9
6 Month T-Bill Yield + 3% (annual)		13.09.05		14.09.05		18.08.10		8.74	%		17.48	%		18.24	%		2,007,292.9		3,013,642.0		3,119,961.3
6 Month T-Bill Yield + 3% (annual)		18.10.05		19.10.05		18.08.10		8.45	%		16.91	%		17.62	%		5,170,035.5		3,440,768.1		3,684,410.8
6 Month T-Bill Yield + 3% (annual)		13.12.05		14.12.05		18.08.10		7.93	%		15.86	%		16.49	%		4,851,098.8		2,058,365.1		2,331,467.6

134

Floating Rate Note Auctions of 2006


																Sales Amount (Inc. Switching)
																Nominal
	Auction		Value		Maturity		Average Interest Rate									Bid Amount		Nominal		Net
	Date		Date		Date		Term			Simple			Compound (1)			(thousand YTL)
6 Month T-Bill Yield +2% (annual)		17.01.2006		18.01.2006		12.01.2011		7.38	%		14.76	%		15.31	%		8,210,033.3		4,079,001.1		4,284,003.8
6 Month T-Bill Yield +2% (annual)		21.02.2006		22.02.2006		12.01.2011		7.32	%		14.65	%		15.18	%		4,144,754.2		4,215,191.7		4,505,369.0
6 Month T-Bill Yield +2% (annual)		13.03.2006		15.03.2006		12.01.2011		7.30	%		14.61	%		15.13	%		2,169,350.0		1,489,180.7		1,607,257.6
6 Month T-Bill Yield +2% (annual)		10.04.2006		12.04.2006		12.01.2011		7.31	%		14.62	%		15.16	%		2,526,667.2		1,698,579.5		1,851,843.2
6 Month T-Bill Yield +2% (annual)		22.05.2006		24.05.2006		12.01.2011		7.54	%		15.09	%		15.65	%		1,855,206.1		2,238,383.3		2,445,430.1
6 Month T-Bill Yield +2% (annual)		12.06.2006		14.06.2006		12.01.2011		8.03	%		16.06	%		16.70	%		1,139,002.5		1,758,023.8		1,881,225.9
6 Month T-Bill Yield +2% (annual)		12.09.2006		13.09.2006		07.09.2011		11.23	%		22.46	%		23.72	%		1,927,405.4		3,181,174.0		3,207,352.2
3 Month T-Bill Yield + 1% (annual)		04.07.2006		05.07.2006		02.07.2008		5.73	%		22.92	%		24.97	%		2,728,548.8		4,557,076.6		4,551,917.8
3 Month T-Bill Yield + 1% (annual)		22.08.2006		23.08.2006		02.07.2008		5.66	%		22.66	%		24.65	%		2,820,251.5		2,444,345.5		2,525,255.2
6 Month T-Bill Yield + 2% (annual)		02.10.2006		04.10.2006		07.09.2011		11.24	%		22.49	%		23.75	%		1,479,728.0		1,948,289.1		1,987,038.8
6 Month T-Bill Yield + 2% (annual)		21.11.2006		22.11.2006		07.09.2011		10.86	%		21.72	%		22.90	%		3,204,325.6		2,796,765.2		2,997,439.4
TOTAL																	32,205,273		30,406,011		31,844,133


(1)		This interest rate reflects the term interest rate which is accepted and is the basis for the price accepted at the auction, assumed that the term interest remains the same during the year.

(1)		Based on the assumption that the term interest rate remains the same during the year.

Source:		UT

Table No. 51

Fixed Coupon FX Denominated Auctions in 2006


																Sales Amount (Inc. Switching)
																Net
	Auction		Value		Maturity		Average Interest Rate									Bid Amount		Nominal		Net
	Date		Date		Date		Term			Simple			Compound			(million)
3 Years G. Bond-Euro		28.11.2006		29.11.2006		25.11.2009		2.43	%		4.85	%		4.91	%		1,538.2		738.1		741.1


Source:		UT

Table No. 52

Switching Auctions of 2004


Securities Issued
Auction	Value			Interest
Date	Date		Maturity Date	Term			Simple		Comp.
22.01.2004	23.01.2004	2 Years G.Bond	16.11.2005		10.53			21.06		22.17
25.03.2004	26.03.2004	2 Years G.Bond (FRN)	15.03.2006		4.88	*		—		—
20.05.2004	21.05.2004	13 Month G. Bond(Discounted — USD)	22.06.2005		6.51			5.97		5.95

135

Securities Bought Back

Net Bid

Amount Bought Back

(in billions of TRL)

Amount

Nominal

Net

3 — Year — FX Indexed Securities

493,591

261,824

310,249

3 — Year — FX Indexed Securities

888,462

631,348

736,120

3 — Year — FX Indexed Securities

1,588,927

1,102,253

1,456,649

TOTAL

2,970,980

1,995,424

2,503,017

Switching Auctions in 2006

Securities Issued

Interest

Auction Date

Value Date

Maturity Date

Term

Simple

Comp.

27/07/2006

28.07.2006 (*

)

2 Years G.Bond (FRN)

02/07/2008

5.84

23.36

25.49

03/10/2006

04/10/2006

679 Days G. Bond

13/08/2008

46.22

24.78

22.59

20.05.2004

21/05/2004

679 Days G. Bond

13/08/2008

46.22

24.78

Securities Bought Back


*(Thousand YTL)*			Amount Bought Back
	Net Bid Amount		Nominal		Net

2 Years G.Bond (FRN)		1,494,509.4		601,826.2		617,437.6

567 Days G. Bond		690,383.7		722,100.5		688,758.5

560 Days G. Bond		1,085,148.2		1,155,226.4		1,083,182.6

TOTAL		3,270,041.3		2,479,153.1		2,389,378.7


(*)		Investors bid for price of issued security which auctioned with the value date July 28, 2006, while they bid for price of bought-back securities which auctioned with the value date October 4, 2006.

136

The following table presents Turkey’s internal public debt at the end of the years listed:

Table No. 53

Internal Public Debt


	2001		2002		2003		2004		2005		2006 (1)
	(In millions of YTL)
Total Domestic Debt		122,157.3		149,869.7		194,386.7		224,482.9		244,782		251.470
Securitized Debt		122,157.3		149,869.7		194,386.7		224,482.9		244,782		251.470
Cash		57,879.9		89,271.0		130,484.0		165,579.2		194,153		208.376
Bonds		40,226.7		52,251.1		105,841.9		135,306.9		176,335		198.783
Bills		17,653.2		37,019.9		24,642.1		30,272.2		17,818		9.594
Non-Cash		64,277.4		60,598.7		63,902.7		58,903.8		50,629		43.094
Bonds		61,901.2		60,598.7		63,131.7		58,903.8		50,629		43.094
Bills		2,376.2		0.0		771.0		—		—		—


(1)		Provisional.

Source: UT.

EXTERNAL DEBT AND DEBT MANAGEMENT

Turkey’s gross nominal external debt has increased from $113.6 billion to $207.4 billion during the last five years. One of the main factors is the increase in private sector debt. The private sector debt was $43.1 billion in 2001 and it reached $121.9 billion in 2006. The other factor is the depreciation of the US Dollar with respect to the other currencies causing an increase of debt in dollar terms.

Opposite to the increase in the level of debt, the ratio of external debt to GNP has been decreasing regularly during last five years. The debt to GNP ratio was 51.9% as of December 31,2006 while it was 78% as of December 31, 2001. The public sector debt to GNP ratio has decreased by 14.1 points from 31.6% in 2001 to 17.5% in 2006 and Central Bank’s debt to GNP has also decreased from 16.7% to 3.9% while the private sector debt to GNP has increased from 29.6% in 2001 to 30.5% in 2006.

In addition, the maturity composition of the total debt hasn’t changed much during the five year period. At the end of 2001 the short term and long term debt ratios were %14.4 and % 85.6 respectively and have reached %20.3 and %79.7 in 2006.

However, the sectoral breakdown of the debt has changed such that the shares of the public sector and monetary authorities’s debt in the gross external debt have decreased respectively 6.9 and 13.9 points during this period. At the end of 2006, the ratio of the public debt was %33.6, the ratio of the Central Bank’s debt was %7.6 and the ratio of private sector debt was %58.8. The private sector external debt had its largest share in the total debt for the last two years.

The central government external debt was approximately $66.6 million as of December 31, 2006, 95.4% of public sector external debt compared to $64.6 million as of December 31, 2005. At the end of 2006, Treasury-guaranteed external debt stock totaled $4.2 billion, representing a decrease of approximately $1.9 billion from the level at the end of 2001.

The following table sets forth information as to the external public and private debt of Turkey at the end of the periods indicated:

137

Table No. 53

Total Gross Outstanding External Debt of Turkey (1)


	2001		2002		2003		2004		2005		2006
	*(in millions of U,S, dollars)*
Outstanding External Debt by Maturity & Borrower
GROSS EXTERNAL DEBT		113,592		129,720		144,319		160,835		168,849		207,436
SHORT TERM (2)		16,403		16,424		23,013		31,880		37,103		42,046
PUBLIC SECTOR		0		0		0		0		0		0
GENERAL GOVERNMENT		0		0		0		0		0		0
CENTRAL BANK		752		1,655		2,860		3,287		2,763		2,563
CBRT Loans		20		15		11		1		1		1
Dresdner Bank Scheme		732		1,640		2,849		3,286		2,762		2,562
PRIVATE SECTOR		15,651		14,769		20,153		28,593		34,340		39,483
Banks		7,997		6,344		9,692		14,529		17,741		19,830
Other Sector		7,654		8,425		10,461		14,064		16,599		19,653
MEDIUM-LONG TERM		97,189		113,296		121,306		128,955		131,746		165,390
PUBLIC SECTOR		46,110		63,619		69,506		73,814		68,215		69,792
GENERAL GOVERNMENT		40,961		58,855		65,165		70,100		65,869		67,809
Central Government		38,729		56,773		63,346		68,583		64,643		66,576
(Treasury)		38,692		56,746		63,327		68,578		64,643		66,576
Local Administrations		1,709		1,461		1,285		1,098		908		986
Extra Budgetary Funds		522		621		534		418		318		247
FINANCIAL INSTITUTIONS (3)		1,495		984		765		656		320		453
NON-FINANCIAL INSTITUTIONS		3,654		3,780		3,577		3,058		2,026		1,530
SOE’s		3,435		3,561		3,313		2,840		1,881		1,421
Other (4)		219		219		264		218		145		109
CENTRAL GOVERNMENT		23,591		20,340		21,504		18,114		12,654		13,106
CBRT Loans		13,643		8,068		7,272		2,995		0		0
Dresdner Bank Scheme		9,948		12,272		14,232		15,119		12,654		13,106
PRIVATE SECTOR (5)		27,488		29,338		30,295		37,028		50,877		82,492
FINANCIAL INSTITUTIONS		4,789		4,728		5,168		8,451		15,954		28,812
Banks		3,211		3,030		3,142		5,757		12,244		22,063
Non-Bank Financial Enterprises		1,578		1,698		2,026		2,694		3,710		6,749
NON-FINANCIAL		22,699		24,610		25,127		28,577		34,923		53,680
Outstanding External Debt by Maturity & Lender (6)
GROSS EXTERNAL DEBT		113,592		129,720		144,319		160,835		168,849		207,436
SHORT TERM (2)		16,403		16,424		23,013		31,880		37,103		42,046
COMMERCIAL BANK CREDITS		7,775		5,187		8,260		12,661		16,363		18,609
PRIVATE LENDER CREDITS		8,628		11,237		14,753		19,219		20,740		23,437
MEDIUM-LONG TERM		97,189		113,296		121,306		128,955		131,746		165,390
OFFICIAL CREDITORS		30,530		39,980		42,563		40,970		32,006		29,096
GOVERNMENTAL ORGANIZATIONS		8,524		9,253		9,426		8,753		7,158		6,556
MULTILATERAL ORGANIZATIONS		22,005		30,727		33,137		32,217		24,848		22,540
PRIVATE CREDITORS		66,660		73,316		78,743		87,986		99,740		136,294
LOAN		45,628		49,721		51,631		57,907		68,179		99,948

138


	2001		2002		2003		2004		2005		2006
	*(in millions of U,S, dollars)*
COMMERCIAL BANKS		27,548		28,349		28,475		32,769		41,931		68,371
NONBANK FINANCIAL INSTITUTIONS		3,371		3,316		2,970		2,784		3,299		5,115
NON-MONETARY INSTITUTIONS		3,941		4,674		4,349		4,410		6,019		7,585
OFF-SHORE BANKS		731		1,010		1,508		2,787		4,222		5,711
PRIVATE INVESTMENT & DEVELOPMENT BANKS		81		92		88		29		46		50
DRESDNER		9,948		12,272		14,232		15,119		12,654		13,106
NGTA		8		8		9		9		8		9
BOND ISSUE		21,031		23,595		27,112		30,079		31,560		36,347


(1)		Provisional.

(2)		Source: CBT.

(3)		Public Deposit Banks and Public Development & Investment Banks.

(4)		Public Corporations, Regulatory Institutions and Organizations.

(5)		Since October 01, 2001, CBT is responsible for monitoring private sector debt.

(6)		Classified by the class of the leader creditors

Source: UT, CBT.

Table No. 54

Currency Composition of Outstanding External Debt (1)(2)


	2001		2002		2003		2004		2005		2006
	In Percent, (%)
USD		50.44		46.78		45.54		48.62		54.36		55.32
DEM		0.73		0.00		0.00		0.00		0.00		0.00
EUR/ECU		30.07		30.65		33.30		33.87		31.98		32.36
SDR		12.42		16.97		16.64		13.33		8.68		5.19
CHF		0.60		0.55		0.60		0.65		0.52		0.46
GBP		0.62		0.56		0.44		0.42		0.34		0.42
JPY		4.56		4.09		3.13		2.13		1.66		1.32
FRF		0.02		0.00		0.00		0.00		0.00		0.00
NLG		0.02		0.00		0.00		0.00		0.00		0.00
OTHER (USD)		0.52		0.39		0.36		0.97		2.46		4.93

TOTAL		100.0		100.0		100.0		100.0		100.0		100.0


(1)		Provisional.

(2)		reflects figures at the end of the periods indicated

Source: UT

The following tables present the relationship of Turkey’s public and private external debt to other financial indicators for, or at the end of, the periods indicated:

Table No. 55

Debt Ratios


	2001		2002		2003		2004		2005		2006
Disbursed Outstanding Debt / GNP (%)
Total		78.0		71.7		60.3		53.7		46.8		51.9

Short Term		11.3		9.1		9.6		10.6		10.3		10.5
Medium-Long Term		66.7		62.6		50.7		43.1		36.5		41.4

Public Sector		31.6		35.2		29.1		24.6		18.9		17.5

139


	2001		2002		2003		2004		2005		2006
Central Bank		16.7		12.2		10.2		7.1		4.3		3.9
Private Sector (1)		29.6		24.4		21.1		21.9		23.6		30.5


OTHER FINANCIAL RATIOS (%)
T.External Debt / Exports (Fob)		362.5		359.7		305.4		254.6		229.8		242.6
External Debt Servıce / Gnp		16.9		15.9		11.6		10.2		10.1		12.8
External Debt Servıce / Exports (Fob)		78.6		80.0		58.9		48.3		49.8		44.9
Interest / Gnp		4.9		3.5		2.9		2.4		2.2		2.0
Interest / Exports (Fob)		22.8		17.8		14.8		11.3		10.8		9.4
Internatıonal Reserves (Net) / T. External Debt		17.4		21.6		24.4		23.4		31.1		30.5
Internatıonal Reserves (Net) / Short Term Debt		120.7		170.9		152.8		118.1		141.3		150.5
Internatıonal Reserves (Gross) / T. External Debt		16.5		20.7		23.3		22.4		29.9		29.4
Internatıonal Reserves (Gross) / Short Term Debt		114.5		163.2		146.1		113.0		136.1		144.9
Tcmb Reserves (Gross) / Imports (Cıf)		-45.4		-52.0		-48.5		-36.9		-43.3		-44.0
Tcmb Reserves (Net) / Imports (Cıf)		-47.8		-54.4		-50.7		-38.6		-44.9		-45.8
Current Account Balance / Tcmb Reserves (Gross)		18.1		-5.7		-23.9		-43.3		-44.7		-52.0
Current Account Balance / Tcmb Reserves (Net)		17.1		-5.4		-22.9		-41.4		-43.1		-50.0
Current Account Balance / Gnp		2.3		-0.8		-3.4		-5.2		-6.3		-7.9


(1)		Since Oct 01,2001, CBT is responsible for monitoring private sector long term debt.

(2)		Excluding Shuttle Trade and Other Goods.

(3)		12-months’ total.

Source: UT, CBT, TURKSTAT.

Table No. 56

External Debt Service (1)


	2001		2002		2003		2004		2005		2006
	(in millions of US dollars)
Total External Debt Service		24,623		28,851		27,804		30,480		36,650		39,656
principal(*)		17,489		22,450		20,824		23,338		28,653		30,317
interest		7,134		6,401		6,980		7,142		7,997		9,339


(1)		Provisional.

(2)		Repayments through bond issues are included.

Source: CBT.

The aggregate amount of scheduled repayment of principal and interest on the medium and long-term external public and private debt of Turkey (disbursed and undisbursed) is set forth below for the periods indicated:

140

Table No. 57

Medium and Long-Term External Debt Service (1)


Medium and Long-Term External Debt Service (1,2,3)
(in Million US Dollars)
	Principal		Interest		Total
2007 (Q2 - Q4)
Public Sector		9,058		3,208		12,265
Private Sector		15,935		3,665		19,600
Total		24,993		6,873		31,865
2008
Public Sector		8,873		4,321		13,194
Private Sector		19,105		5,332		24,437
Total		27,978		9,653		37,631
2009
Public Sector		7,476		3,643		11,119
Private Sector		12,499		5,811		18,310
Total		19,975		9,454		29,429
2010
Public Sector		6,252		3,140		9,392
Private Sector		9,650		4,407		14,057
Total		15,902		7,547		23,449
2011
Public Sector		3,823		2,698		6,520
Private Sector		9,770		3,642		13,412
Total		13,593		6,340		19,932
2012+
Public Sector		35,905		20,851		56,757
Private Sector		25,072		10,500		35,572
Total		60,977		31,351		92,329
Total
Public Sector		71,386		37,861		109,247
Private Sector		92,031		33,357		125,388
Grand Total		163,417		71,218		234,635


(1)		Provisional.

(2)		Excluding NGTA and Dresdner Accounts’ Repayments.

(3)		Interest payments include the fee/charge payments.

Source: UT, CBT (Cross rates based on: 03/31/2006).

Table No. 58


	Central Government External Debt Of Turkey (as of December 31, 2006)
	(issued between January 1, 2001 and December 31, 2006)
				Outstanding	Amount
	Agreement Date	Currency	Maturity (years)	(USD)

Bond					28,165,129,000

Monetary Institutions	Various (01.15.2002 - 09.14.2006)	Various (1)	Various (5.0 - 30.2)		26,189,329,000
Non-Monetary Institutions	(02.15.2005)	EUR	(12.0)		1,975,800,000

141


	Central Government External Debt Of Turkey (as of December 31, 2006)
	(issued between January 1, 2001 and December 31, 2006)
				Outstanding Amount
	Agreement Date	Currency	Maturity (years)	(USD)

Loan					19,887,586,687

Govermental Organizations	Various (01.30.2001 - 11.09.2005)	Various (2)	Various (2.50 - 40.0)		403,510,441
Monetary Institutions	Various (02.09.2001 - 11.03.2006)	Various (3)	Various (3.60 - 35.60)		4,101,801,121
International Organizations	Various (03.23.2001 - 07.07.2006)	Various (4)	Various (5.0 - 30.0)		15,382,275,125
Total					48,052,715,687


(1)		EUR, USD

(2)		EUR, USD, JPY, KWD, SAR

(3)		EUR, USD, JPY, GBP, CHF, AED

(4)		EUR, USD, SDR

Source: UT

Table No. 59

External Debt of Turkey (Public Guaranteed)


Agreement Date	Currency	Debt Disbursed and Outstanding ($)		Maturity (Year)		Interest Type	Interest Rate / Margin
09.02.2001	USD		5,074,723.01		10.1	LIUSD3MD		2.25
09.02.2001	USD		40,520,511.81		12.5	LIUSD3MD		1.00
30.04.2001	EUR		4,775,438.50		11.4	FIXED		5.58
20.06.2001	USD		904,213.33		5.9	LIUSD6MD		2.00
20.06.2001	USD		4,641,000.00		6.9	FIXED		5.51
10.07.2001	EUR		129,864,987.34		11.9	FIXED		4.00
14.12.2001	EUR		91,466,695.01		20.5	EIB3MD		2.50
14.12.2001	USD		24,193,548.40		19.5	LIUSD6MD		1.00
27.02.2002	USD		22,540,000.00		11.8	LIUSD6MD		0.15
15.03.2002	USD		621,839.48		4.7	LIUSD3MD		1.75
15.03.2002	USD		43,653,531.25		12.3	LIUSD3MD		0.35
02.07.2002	USD		4,922,264.22		5.6	LIUSD6MD		1.75
02.07.2002	USD		42,749,456.60		11.1	FIXED		5.30
07.08.2002	EUR		662,622.43		5.0	LIEUR6MD		1.75
07.08.2002	USD		1,621,079.52		5.0	LIUSD6MD		1.75
07.08.2002	EUR		3,217,641.60		7.8	LIEUR6MD		0.25
02.04.2003	EUR		255,440,738..96		12.0	EURIBOR6MD		2.33
20.02.2004	USD		289,723,074.67		15.9	WBFSLRUSD		0.50
04.03.2004	EUR		327,116,302.82		14.3	EURIBOR6MD		2.40
30.11.2004	EUR		119,556,207.27		11.3	FIXED		2.40
15.12.2004	USD		1,502,357.14		5.0	LIUSD6MD		1.75
15.06.2005	EUR		6,230,304.01		16.8	LIEUR6MDIS		0.75
09.11.2005	USD		123,845,711.63		15.2	EURIBOR6MD		0.75
09.12.2005	EUR		147,644,182.20		11.3	EURIBOR6MD		0.25
14.12.2005	EUR		4,033,566.92		13.2	EURIBOR6MD		0.20
14.12.2005	EUR		9,556,721.11		16.8	EURIBOR6MD		0.95
02.02.2006	USD		1,312,500.00		12.7	WBFSLRUSD		0.50
08.02.2006	EUR		1,876,351.40		16.4	WBFSLREUR		0.50
27.03.2006	USD		8,970,000.00		12.8	LIUSD6MD		0.20
27.03.2006	USD		12,033,595.85		5.0	LIUSD6MD		1.50
27.03.2006	USD		13,550,062.89		5.0	LIUSD6MD		1.50
13.04.2006	EUR		411,625.00		14.9	LIEUR6MDIS		0.75
19.07.2006	USD		10,000,000.00		17.4	LIUSD6MD		0.85
19.07.2006	USD		24,740,573.50		10.0	LIUSD6MD		1.63
12.09.2006	EUR		922,040.00		14.5	WBSCLDE6A98		0.00

142

RISK MANAGEMENT

When the Law on Regulating Public Finance and Debt Management (Law No. 4749) came into effect in April of 2002, regulations regarding debt management came under a unique legal regulation. A debt authority was created by delegating authority to the Minister, who is in charge of the Undersecretariat of Treasury, so as to provide the realizations of operations which would create liabilities in the name of general government. Under Law No. 4749, the operations concerning debt and receivable management will be announced to the public with quarterly Debt Management Reports. Thus, transparency, accountability and efficiency have been increased in debt management, and regulations relating to fiscal and quasi-fiscal operations coming out of the budget have increased fiscal discipline.

Moreover, the Law No. 4749 implements an active risk management strategy and takes measures to limit the potential effects of contingent liabilities incurred by the state. In this context, to establish the necessary legal and organizational infrastructure for the management of public debt and receivables on the basis of risk analysis, a Risk Management unit (one of the most fundamental and important units of the organizations responsible for public debt management) was created. In addition, a Debt Management Committee has been set up within the Undersecretariat of the Treasury to ensure coordination and efficiency in debt management.

With the help of this institutional infrastructure, the risk management unit has been fully operational from the beginning of 2004 and continues to produce its routine assigned duties such as providing monthly short-term risk monitoring notes to the Debt Management Committee and publishing monthly debt management reports (in December 2006, the 17th report was published). Furthermore, the Risk Management Unit formulated a debt sustainability model for the medium-term and produces valuation of the portfolio of explicit contingent liabilities of the state. Also, the Risk Management Unit is able to produce cash flow reports, duration reports, medium-term and long-term borrowing scenarios in order to evaluate financial risks.

The performance-based borrowing strategy aims to enhance transparency and the effectiveness of public debt management at a minimum cost with a prudent level of risk. This strategic benchmarking was implemented from the beginning of 2004. Major components of this strategy, which are determined in accordance with the aforementioned cost and risk analysis, are as follows:

	•		to raise funds mainly in YTL;

	•		to use fixed-rate YTL instruments as a major source of domestic borrowing;

	•		to increase the average maturity of domestic borrowing taking into account market conditions; and

	•		to keep a certain level of cash reserves throughout the year to reduce the liquidity risk associated with cash and debt management.

Within this framework, the debt management strategy actively emphasizes the basic principles of transparency, accountability and predictability. Continued fiscal discipline, a strong primary surplus in 2005 and the implementation of strategic benchmarks have made an effective debt management structure possible, which in turn has reduced risk premiums.

Important progress has been achieved in reducing the public debt ratio. After reaching its highest level of 90.5% in 2001, the net public debt stock to national income ratio declined to 45% at the end of 2006. Moreover, as a result of borrowing policies aimed to reduce high interest rates and the foreign exchange sensitivity of the debt stock, the share of floating rate and foreign currency denominated debt decreased gradually. To illustrate, the share of floating rate debt stock fell to 46% at the end of 2006, from 55% at the same time in 2002, and the share of foreign currency denominated debt stock fell to 36.7% from 58% during the same period.

143

	•		For incremental employees, an exemption for the employer portion of social security capped at the current minimum contribution base (currently above minimum wage). Again, this effectively acts as a unit subsidy of the minimum monthly social security contribution;

	•		100% of these two exemptions can be used in the organized industrial zones. Only 80% of the exemption can be used outside the organized industrial zones;

	•		Free land; and

	•		Electricity subsidy.