INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT

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1 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008

2 T.C. Baþbakanlýk Hazine Müsteþarlýðý Ýnönü Bulvarý No: Emek/ ANKARA Tel:+90 (312)

3 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008

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5 TABLE OF CONTENTS TABLE OF CONTENTS FOREWORD INTRODUCTION EXECUTIVE SUMMARY Section 1 INVESTMENT ADVISORY COUNCIL FOURTH MEETING RECOMMENDATIONS 1. Ensuring the Proper Functioning of the Foreign Exchange Market and Vigilant Implementation of the Inflation Targeting Regime 2. Further Progress in Fiscal Consolidation and Strengthening Efforts to Restructure Expenditures 3. Strengthening The Labor Market-Education Linkage and Supporting The Participation of Disadvantaged Groups in Labor 4. Reducing Labor Costs and Increasing Flexibility in The Labor Market 5. Social Security Reform 6. Supporting R&D and Innovation Activities 7. Protecting Intellectual Property Rights 8. Reducing Informality in the Economy, Tax Reforms and Strengthening Corporate Governance 9. Strengthening Efforts in Land Planning and Management 10. Establishing the Review and Measurement Mechanisms to Reduce Administrative Burdens 11. Developing Transportation, Energy and Information Technologies Infrastructure Developing Transportation Infrastructure Developing Energy Infrastructure, Liberalizing and Restructuring The Energy Market and Improving Energy Efficiency Improving Information and Communication Technologies Infrastructure 12. Improving the Image of the Country Section 2 OTHER IMPROVEMENTS IN THE INVESTMENT ENVIRONMENT OF TURKEY Invest Further in Education and Training 2. Continue with Privatization and Deregulation to Improve Competition 3. Increase the Efficiency of Judicial Process 4. Deepen Financial Market Development 5. Harmonizing Standards and Regulations with the EU 6. Enhancing Competitiveness of SME s 7. Accelerate the Reduction of Administrative Barriers, Particularly; Licensing Requirements, R&D Approval Process and Restrictions on Imports Licensing Requirements R&D Approval Process Restrictions on Imports

6 4 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008 LIST OF TABLES Table 1: The CBRT s Net Foreign Exchange Purchases and Sales (USD million) 18 Table 2: The Inflation Targets and Realization Levels for the Implicit Inflation Targeting Period ( ) (%) 19 Table 3: The Inflation Targets and Realization Levels for the Full Fledged Inflation Targeting Term ( ) (%) 19 Table 4: Central Government Budget Realizations in Table 5: Budget Targets for Table 6: Gross and Net Debt Stock in Table 7: Public Sector Fixed Capital Investments in Turkey 23 Table 8: R&D Expenditures in Countries (Billion USD-PPP) 32 Table 9: R&D Expenditures by Sectoral Division 32 Table 10: TUBITAK TRA Budget 34 Table 11: Applications made to Sixth and Seventh Framework Programs and the Number of Funded Turkish Partners 35 Table 12: TEYDEB Supports 36 Table 13: Supports by Turkish Technology Development Foundation 38 Table 14: Number of TEKMER 38 Table 15: The Materials Retrieved 39 Table 16: List of Double Taxation Agreements signed by Turkey 46 Table 17: Allocation of OIZs by Geographical Regions 50 Table 18: Allocation of TDZs by Provinces 50 Table 19: Motorways planned to be financed via BOT method 53 Table 20: Indicators about Information and Communication Technologies Infrastructure 58 Table 21: The Distribution of TV Spots on Investment Opportunities of Turkey 60 Table 22: Number of Students and Schooling Rates by Education Stages 62 Table 23: Total Education Budget 63 Table 24: Privatization Implementations in Table 25: The Number of Courts of Justice 67 Table 26: The Adaptation Ratio of EU Standards 70 Table 27: KOSGEB Supports Allocated For SME s 72 Table 28: Employment Credit Supports to SME s 73 Table 29: Export Credit Supports to SME s 73 Table 30: The Customs Clearance Registered Electronically 76 LIST OF GRAPHICS Graphic 1: GDP and R&D Expenditures Annually 31 Graphic 2: Full Time R&D Human Resources 32 Graphic 3: R&D Expenditures and Public Incentives 34 Graphic 4: DTM - TUBITAK Technology and Innovation Supports 37 Graphic 5: The Applications and Coverage in Terms of TUBITAK Incentives 40 Graphic 6: The Distribution of Patent Applications and Registrations 40 Graphic 7: Distribution of Utility Model Applications and Registrations 41 Graphic 8: The International Patent Applications of Turkish Residents 41 Graphic 9: Length of Divided Highways - General Directorate of Highways 52 Graphic 10: Airline Passenger Traffic 54 Graphic 11: Privatization Implementations 64

7 5 ABBREVIATIONS BILGE BOT CBRT CEN CENELEC CMB CPI DHMI DTM EDI EES EU GAP GDP GNP IAC IPA ISE ISKUR KADIM KGF KOSGEB LNG MNE NABUCCO OECD OIZ PCT PHC R&D San-Tez SME Customs Automation System Build-Operate-Transfer Central Bank of the Republic of Turkey European Committee for Standardization European Committee for Electrotechnical Standardization Capital Markets Board of Turkey Consumer Price Index General Directorate of State Airports Authority Undersecretariat of Prime Ministry for Foreign Trade Electronic Data Interchange European Employment Strategy European Union South East Anatolia Project Gross Domestic Product Gross National Product Investment Advisory Council Instrument for Pre-Accession Assistance Istanbul Stock Exchange The Turkish Employment Agency The Project of Fight Against the Unregistered Employment Credit Guarantee Fund Small and Medium Industry Development Organization Liquefied Natural Gas Ministry of National Education Turkey-Bulgaria-Romania-Hungary- Austria Natural Gas Pipeline Organisation for Economic Cooperation and Development Organized Industrial Zone Patent Cooperation Treaty Privatization High Council Research and Development Industry Thesis Small and Medium Enterprises SPO SSI SVET TAKBIS TBMM TCDD TDZ TEKMER TEYDEB TISPA TKAD TLT TPI TRA TSE TTGV TUBITAK TURKAK TurkDEX TURKSTAT UYAP VAT VEDOP VERIA WIPO YOIKK YOK State Planning Organization Social Security Institution Strengthening Vocational Education Systems Land Registry and Cadastre Information System Project The Grand National Assembly of Turkey Turkish State Railways Technology Development Zone Technology Development Center The Presidency of Technology and Innovation Support Programs Investment Support and Promotion Agency of Turkey Project of Supporting the Quality Infrastructure of Turkey Trademark Law Treaty Turkish Patent Institute Turkish Research Area Turkish Standards Institution Technology Development Foundation of Turkey The Scientific and Technological Research Council of Turkey Turkish Accreditation Agency Turkish Derivatives Exchange Turkish Statistical Institute The National Judiciary Network Project Value Added Tax Tax Authorities Automation Project Data Storage and Administration Project World Intellectual Property Organization Coordination Council for the Improvement of the Investment Environment Council of Higher Education

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9 7 foreword It is an honor for me to present the fourth volume of the comprehensive Investment Advisory Council Progress Report which highlights progress in addressing issues in Turkey s investment environment, as identified through the Investment Advisory Council meetings since At the fourth meeting of Investment Advisory Council in 2007, the Council members expressed their appreciation of Turkey s achievement in structural reforms which enabled sustainable investment and growth. Moreover, they once again emphasized the importance of macroeconomic stability and competitiveness enhancing reforms as a prerequisite for improving investment climate of Turkey. Our Government remains committed to maintaining policies to sustain macroeconomic stability and prioritize structural reforms that support fiscal discipline, a tight monetary policy and convergence with the European Union. In the last six year-period, with an annual growth rate of 6.8 percent, USD 277 billion foreign trade volume and over USD 50 billion FDI inflows in period, the Turkish economy has significantly strengthened its position as a competitive investment destination in the perspective of both national and international investors. Our Government s determination to implement micro-level reforms that can make macroeconomic achievements sustainable have been realized through the Government s Program and Action Plans. Our Government s priorities, which all coincide with that of the Council recommendations, i.e. reforming social security system, reducing informality, promoting R&D and innovation, increasing the flexibility of the labor market, strengthening the energy and transportation infrastructure and thus creating an attractive investment climate, are among the most important structural reform agenda items increasing the overall competitiveness level of the Turkish economy. I appreciate the opportunity to present this report on the progress made on the Council recommendations, which have been closely monitored by the public and private partnership platform, Coordination Council for the Improvement of the Investment Environment (YOIKK), since the last Council meeting. I believe that our fifth meeting on June 18, 2008 will be a most fruitful opportunity for Council members to continue to share their valuable insights on improving Turkey s competitive position in the global economy. Mehmet ÞÝMÞEK Minister of State for Economic Affairs

10 8 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008 introduction The fourth meeting of Investment Advisory Council was held on June 11, 2007 under the chair of Prime Minister Mr. Recep Tayyip Erdoğan. The meeting gathered the heads of 21 multinational companies, four leading business associations, the International Monetary Fund and World Bank and related cabinet members to take stock of Turkey s achievements in the investment environment over the past year, and identify challenges ahead. The Council members expressed their deep appreciation of the Government for taking decisive actions in response to the Council s recommendations for strengthening Turkey s investment climate. They highlighted key accomplishments, including public/private partnership initiatives such as the YOIKK platform, R&D and innovation support mechanisms, improvement of intellectual property rights protection, facilitation of patent applications, and the reduction of the corporate tax rate from 30 to 20 percent. The Council agreed on thirteen different topics that the Government should focus on, while continuing its strong macroeconomic policies and structural reforms: Further progress in reducing inflation through the vigilant implementation of the inflation targeting regime, while ensuring the proper functioning of the foreign exchange market through the continuation of the free floating exchange rate policy. Further progress in fiscal consolidation which will yield reduction in the debt to GDP ratio, and strengthening efforts to restructure expenditures in order to create more space for priority investments, in particular in public infrastructure. Align the skills of the labor force with the needs of the private sector, by improving the content of education at all levels, especially in languages and other skills, and by promoting increased private sector contributions to vocational education and training to workers. Increasing opportunities for the participation of women and youth in the labor market should also be supported. Increase flexibility of the labor market and containing non-wage labor costs, to cope with rapid technological progress and increasing competition stemming from globalization. Adopt and implement a revised package for pension and universal health insurance reform. Continue to support innovation, technology adoption and the use of quality standards by firms, by fostering the right framework for innovation and strengthening the links between firms, universities and research centers with a view to convert R&D activities into products and services. Further progress in the implementation of the legislation on intellectual property rights, in particular regarding data exclusivity and patent linkage. Reduce informality and improving corporate governance through strengthening tax enforcement and increasing firms financial transparency. Improving accounting and auditing standards and practices are important complementary measures to the recent corporate tax rate reduction. In addition, further steps should be taken to strengthen corporate governance. Strengthen efforts in land management and planning, required to secure the availability of land for investment both in industry and services. Establish permanent mechanisms to reduce administrative burdens on businesses in all their activities, with built-in review and measurement systems. A core task of YOIKK will be to develop and implement these mechanisms.

11 Introduction 9 Further transform Turkey into a bold strategic hub in terms of transportation and energy corridors by further developing logistics and information technology infrastructure and liber alizing and restructuring the energy sector and increasing energy efficiency. Further efforts to develop infrastructure, in areas such as energy and transportation, by involving the private sector with a clear and predictable legal framework. Develop and implement a long term strategic communication program for Turkey, to progressively build its image in Europe and the world, so as to ensure that public perceptions on the country catch up with its changing reality. The Council recommendations each year are incorporated into the working schedule of YOIKK as well as through legal and administrative studies of the investment climate taken through public institutions. The recommendations from all the Investment Advisory Council meetings held since 2004 can be grouped together under nineteen primary issues. In 2005, a Steering Committee was established in order to follow up and coordinate the works of YOIKK Technical Committees, which are the responsible public and private sector platforms for speeding the progress of investment climate reforms. The Steering Committee monitors and evaluates the Technical Committee studies in line with Council recommendations and international investment indices. YOIKK Technical Committee Action Plans for 2008, which were announced in April 2008, set the schedule for the reform agenda of related public and private institutions and provided measurable targets for the technical committees to monitor progress. As a result of prioritizing the international investment indices into the YOIKK Technical Committee agenda, Turkey has achieved significant progress in the rankings of major indices. The 2008 Doing Business Report of World Bank, which is a prominent indicator of investment climate issues in 178 countries, ranked Turkey as 57th, 34 places up when compared to previous report s findings, in terms of Ease of Doing Business Index. According to the 2008 Doing Business Report which comparatively analyses the business procedures in 178 countries in terms of time and cost, Turkey s remarkable progress were explicitly mentioned in Employing Workers, Paying Taxes, Trading Across Borders, Enforcing Contracts and Closing a Business sections. The following Investment Advisory Progress Report presents a compilation of data from all the related public bodies and institutions on the progress achieved on the 2007 Council Meeting recommendations. It also provides a second section which provides the status of progress achieved on issues raised in previous Council meetings.

12 10 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008 executive summary The first section of the Investment Advisory Progress Report highlights the progress achieved on the 2007 Council Meeting recommendations, with data provided from all the related public bodies and institutions. It also provides a second section that reviews the progress achieved on issues raised in previous Council meetings, as part of Turkey s commitment to continually monitor issues directly linked to the investment environment. I. INVESTMENT ADVISORY COUNCIL FOURTH MEETING RECOMMENDATIONS Ensuring the Proper Functioning of the Foreign Exchange Market and Vigilant Implementation of the Inflation Targeting Regime The free floating exchange rate regime will be continued in the forthcoming period since it is a pre-condition of the inflation targeting regime and has significantly contributed to the Turkish economy. Central Bank of the Republic of Turkey continued to announce the annual foreign exchange auction programs to the public in The foreign exchange purchased via daily auctions by Central Bank of the Republic of Turkey was USD 9.9 billion in The full fledged inflation targeting regime was continued in 2007 and this policy will be continued until the price increases in the economy become negligible. The inflation target level, announced to the public for 2007 and 2008, is 4%. The increase in service sector prices, which limited the decline in inflation, has started to diminish in 2007, and it is expected to have a positive impact on the inflation rate in 2008 and beyond. The Monetary Policy Committee decisions and rationales are being declared to the public both in Turkish and English since 2007, in order to ensure the transparency of the inflation targeting policy. The inflation forecasts, previously announced for 1.5 year horizons in the Inflation Report, are now being announced for two-year horizons since Further Progress in Fiscal Consolidation and Strengthening Efforts to Restructure Expenditures In terms of its targets and implementation results, the 2007 budget was an effective budget for ensuring financial discipline. Turkey met one of the Maastricht criteria in 2007 with its budget deficit to GDP ratio being below 3%. On account of the budget implementation results, a high level of budget surplus (excluding interest) was realized in 2007, similar to previous years. The borrowing policy of Turkish Treasury will continue to be pursued according to strategic benchmarks based on risk analyzes. TRY 11.8 billion correspond to 68.8% of TRY 17.1 billion investment appropriations in year 2007 is allocated for general and special budget. The education sector takes the largest share of 23.7% of general and special investments.

13 Executive Summaryii 11 Strengthening the Labor Market-Education Linkage and Supporting the Participation of Disadvantaged Groups in Labor In 2007, there has been around a 5% increase, compared to the previous year, in the number of students continuing vocational education. There has also been an increase of around 12% compared to previous year in participation in the vocational-technical courses opened by Adult Training Centres during the academic year. Within the context of the Employment Package which was approved on May 15, 2008, the consolidation of the provincial Vocational Education Councils and Employment Councils is stipulated as an organ of the Turkish Employment Agency under the name of Provincial Employment and Vocational Education Council. In order to reduce the burden on the government budget and encourage private sector investment in the field of education, legislative changes were made, which facilitated the conditions for opening private education institutions. In 2007, Turkish Employment Agency conducted labor market analyses covering workplaces with 50 or more employees. Efforts for harmonizing Turkey with the European Union s European Employment Strategy with the objective of increasing employment and effectively fighting unemployment are continuing under the coordination of Turkish Employment Agency. The legal infrastructure that will enable effective operation of the Vocational Qualification Agency was completed to a great extent in Reducing Labor Costs and Increasing Flexibility in the Labor Market Employment Package, was adopted by the Grand National Assembly of Turkey on May15, 2008 and the relevant Law was published in the Official Gazette. A Working Group was set up under the YOIKK Employment Technical Committee to identify obstacles to the implementation of part-term employment and develop solutions to overcome these barriers. Social Security Reform Law no making amendments in the Social Insurances and Universal Health Insurance was published in the Official Gazette. Studies are continuing on the Draft Law concerning Social Benefits and Non-Premium Payments. The secondary legislation aiming at effective operation of the Social Security Institution has been completed to a large extent. It is foreseen that other related regulations will be finalized and put into effect by the end of Supporting R&D and Innovation Activities Turkey and China have experienced the highest increase in R&D expenditures out of all countries between The Supreme Council for Science and Technology has set a target to increase the number of full-time scientists to 40,000 until the end of As of 2006, this target was already achieved. The Law on Enhancing Research and Development Activities, aimed at accelerating R&D investments and developing innovation for products and production methods by producing technological knowledge, came into force in March Public funds allocated for supporting R&D and innovation activities have been increased by 124% between 2003 and 2006.

14 12 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008 Within the context of incentives supplied by the Undersecretariat of Foreign Trade, the amount of supports for Industry R&D Projects Support Program increased five times between 2003 and In 2007, the number of applications for Industry Thesis (San-Tez) Program increased four times and reached 186, of which 68 were found appropriate for support. Protecting Intellectual Property Rights Patent applications in Turkey were increased by approximately 20% and the utility model applications were increased by 22% in 2007 compared to Applications for the trademark registration can be submitted electronically by the use of electronic signature since August 2007, in Turkey. The online application of patent and industrial design registration is also possible since March The Hezarfen Project, aimed to improve the innovative structure of Turkish SME s, was completed by the end of The outcomes of this project will be continued at Ankara Chamber of Industry Sincan I. Organized Industrial Zone in The problems facing the determination of licenses for musical works between collecting societies and the hotels was mainly solved by the protocol signed on March 25, Reducing Informality in the Economy, Tax Reforms and Strengthening Corporate Governance A Tax Administration for High Tax-Payers was established on January 1, With a view to sustain compliance to the international accounting and auditing standards, a Draft Law on Turkey Accounting Standards and a Draft Law on Turkey Auditing Standards has been prepared. In the context of the fight against the informal economy, Data Storage and Administration Project (VERIA), Central Risk Analysis Project and Central Risk Analysis Projects have been put into practice by the Tax Revenue Administration. In the context of the legislation made on Value Added Tax; tax rates applied to several agricultural products, foods, custom manufacturing, accommodation in tourism sector have been decreased. The Gürbulak border gate has been added to the list of border gates that will receive a tax exemption from the Special Consumption Tax and Value Added Tax during the delivery of fuel oil to vehicles carrying export products. The drafting process of the Law on Revenue Tax is expected to be finalized in At present, Turkey has signed 72 double taxation agreements, of which 68 have entered into force. A Corporate Governance Index, established within the Istanbul Stock Exchange to encourage corporate governance practices, was started to be calculated on August 31, 2007, with an initial 5 companies with a starting value of 48, Public Disclosure Platform studies, initiated to increase the efficiency of markets and enhance transparency, were continued in A new communiqué that requires companies listed on Istanbul Stock Exchange to have their related party transactions independently reviewed and disclosed was enacted by Capital Markets Board at the beginning of Capital Markets Board has prepared a new draft regulation to eliminate differences between international accounting/financial standards and thereby assure full compliance with the new global standards. The Twinning Project, implemented by Capital Markets Board and the German Finance Ministry to improve the harmonization efforts with European Union legislation, was completed at the end of 2007.

15 Executive Summaryii 13 Studies conducted by the Corporate Governance Technical Committee under YOIKK, continued in Non governmental organizations carried on their efforts to increase awareness of corporate governance and to form conscious on the subject in Strengthening Efforts in Land Planning and Management 87.5% of the cadastral works in Turkey have been completed since 2005, which is a key component of efforts to solve the property right issues of land. As of March 2008, the number of organized industrial zones, the establishment of which was approved by the Ministry of Industry and Trade, reached 251. There were 107 organized industrial zones fully operating with 22,198 acres of land at the end of At the end of 2007, the number of technology development zones that have been initiated has reached technology development zones are fully operational as of May 2008 and infrastructural investments are underway in the rest of them. Establishing the Review and Measurement Mechanisms to Reduce Administrative Burdens Turkey ranked 57 out of 178 countries in ease of doing business, an increase of 34 steps in comparison to the previous year according to the World Bank s Doing Business Report of Developing Transportation, Energy and Information Technologies Infrastructure Trasportation Infrastructure Highway Transportation A Draft Law was prepared with the aim to maintain better use of public-private partnership methods in implementing infrastructure projects. Construction of 7 motorway projects designed to interconnect Istanbul, Ankara and Izmir through a safer access route is foreseen to be completed via build-operatetransfer method. Railway Transportation 20.8 million tons of freight transportation has been realized via railways in 2007, a 6% increase in the amount of freight transportation. In addition, a 12% rise has been realized in freight transportation income. High Speed Train Projects between Ankara-İstanbul and Ankara-Konya are planned to be completed in 2008 whereas the High Speed Train Projects between Ankara- İmir, Bursa-Osmaneli ve Halkalı-Bulgaristan are due to be completed in term. Maritime Transportation With the aim to develop port-railway combined transportation, project works for constructing Filyos Port in Black Sea, Çandarlı Port in Aegean Sea, Mersin Container Port in Mediterranean, Derince Container Port in Marmara have been carried on in Maintenance of hinterland transportation of the ports by railways is given priority in these works. Airway Transportation Domestic passenger traffic, which was 9.1 million in 2003, reached 31.9 million in 2007, a 222% increase. Total passenger traffic which was 58.7 million in 2006 has increased to 70.2 million, representing 13% rise.

16 14 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008 Construction of South East Anatolia Project Airport, Hatay Airport and new international flights terminal of Kayseri Airport were completed in Developing Energy Infrastructure, Liberalizing and Restructuring The Energy Market and Improving Energy Efficiency Electricity 34 privately owned power plants including wind, natural gas and thermal ones have become operational in National Nuclear Technology Development Program has been initiated to constitute the national infrastructure concerning nuclear energy technologies. Works are ongoing for establishment of Sinop Nuclear Technology Center. Natural Gas Natural gas was supplied to 54 provinces in 2007, whereas it was supplied to 29 provinces in billion m3 in natural gas consumption has been realized as of The underground storage facility with a 1.6 billion m3 capacity to store natural gas underground in order to meet the seasonal demand changes became operational in April The Baku-Tbilisi-Erzurum Natural Gas Pipeline was opened in July The Turkey-Greece Natural Gas Pipeline started its operations in November, 2007 and gas exports to Greece began. Engineering tenders for the Turkey-Bulgaria- Romania-Hungary-Austria Natural Gas Pipeline (NABUCCO) Project was concluded in The decision to establish Ceyhan Specialized Energy Industry Region came into effect on October, 2007 with the aim to construct a world wide energy region in Ceyhan. Oil million barrels of oil was transferred from the Baku-Tbilisi-Ceyhan Main Export Pipeline between June 2006 and end of Improving Energy Efficiency With the Energy Efficiency Law, a 1% annual reduction of energy density levels in Turkey until 2020 has been set forth. The year 2008 has been declared as Energy Efficiency Year. Campaigns will be conducted with the aim to increase the social consciousness concerning energy efficiency and gain a 25% energy saving potential in Twinning Project to Improve Energy Efficiency in Turkey has been conducted by French ADEME, Dutch SenterNovem and the Ministry of Energy and Natural Sources of Turkey between July 2005 and November Improving Information and Communication Technologies Infrastructure The market size of information technologies has reached USD 20 billion in 2007, a 25% annual rise. In 2007, the number of mobile telephone subscribers reached 62 million representing a user ratio of 88%. The number of ADSL subscribers, which was 2.7 million in 2006, increased to 4.3 million by the end of 2007, a 60% rise. Improving the Image of the Country Within the scope of investment promotion activities of Investment Support and Promotion

17 Executive Summaryii 15 Agency of Turkey, a representative network of 13 was established and a Portal, became operational in 10 different languages. In June 2007, a document on New Promotion Strategy by European Union was introduced. The Turkey Portal, is operational in four different languages, Turkish, English, French and German. II. OTHER IMPROVEMENTS IN THE INVESTMENT ENVIRONMENT OF TURKEY Invest Further in Education and Training In the last 3 years, schooling rates of every education stage have steadily increased. At the end of 2007, internet connections have been established and computer labs have been opened in 2,939 secondary schools. Allocating the highest budget to education out of all the public services is still one the main priorities of the Government. In 2007 and 2008, 13.6% of the budget resources were allocated to education. By the establishment of the new foundation university -Piri Reis University- on January 30, 2008, the number of universities has been reached 116. In 2008, with the anticipated establishment of 9 new universities in cities which do not yet have a public university, the total number of universities is expected to increase to 125. The Program for Training New Academic Personnel will be implemented country wide in the 2008 Government Plan, which aims to train qualified junior professors in order to cover the personnel deficit in the long run. Continue with Privatization and Deregulation to Improve Competition The public offering of 15% of TURK TELEKOM, which is the fifth-largest public offering in the world in 2008, generated a revenue of USD 1.9 billion. Increase the Efficiency of Judicial Process Turkey ranked 34 out of 70 countries, an increase of 36 steps in comparison to previous year in the indicator of Enforcing Contracts in the World Bank s Doing Business Report of Law No on International Private Law and Procedures Law came into force on December 12, The infrastructure of 78 courts of justice has been completely updated since ,405 attorneys at law have been given the certificate of Lawyer Portal at the end of Deepen Financial Market Development The total traded value in the Istanbul Stock Exchange Stock Markets in 2007 was realized at USD 300,842 million while it was USD 229,642 million in Market Surveillance Project studies, initiated with the cooperation of Istanbul Stock Exchange and Capital Markets Board to activate markets, continued in the year As the single market for derivatives in Turkey, the total trading volume of the Turkish Derivatives Exchange increased seven fold in 2007 in comparison with the previous year and reached to USD 93 billion. Within the framework of the 60th Government Action Plan, it is planned to terminate the

18 16 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008 studies to enable the SME market to be operational until the end of September Within the Istanbul Gold Exchange, the gold imports in 2007 realized at 230,796 kgs represented a 19.8% increase with respect to the previous year. One of the most important indicators for financial deepening, the volume of total loans in the banking sector, has reached to USD billion as of January The total loans to total deposits ratio increased from 71% in 2006 to 81% as of the beginning of The new Insurance Law, prepared to streamline insurance regulations in Turkey consistent with international implementations, came into effect in June Harmonizing Standards and Regulations with the European Union The adaptation ratio of Turkish Standards Institute for European Union Standards is about 97%. As of January 1, 2008, there are no mandatory standards implemented for the product groups of New Approach Directive at the import stage. Enhancing Competitiveness of SMEs The number of SME s, supported on Small and Medium Industry Development Organization s (KOSGEB) zero-interest employment credit was 7 times greater in 2007 than 2006, and additional employment opportunity created by the help of this funding was also 10 times greater in The zero-interest export credit support of KOSGEB, aimed to increase the internalization of SME s, doubled in 2007 and 4,924 SME s were supported by this credit. Studies to enlarge the scope of KOSGEB supports to cover different sectors beside manufacturing are expected to be finalized by the end of Studies for clustering the SME s, developing different policies for each cluster and encouraging the clustering to increase the international competitiveness of SME s, are underway. Accelerate the Reduction of Administrative Barriers, Particularly Licensing Requirements, R&D Approval Processes and Restrictions on Imports The circular aimed at reducing the duration of development plan approvals for coastal foundations, reducing it from a 2-3 year process to 90 days, was promulgated on April 26, Efforts to make the project applications for The Industrial R&D Support Program available on the internet, were initiated by the Scientific and Technological Research Council of Turkey in September The ratio of the customs clearance procedures registered electronically was 99.9% for the first three months of With the communiqué promulgated on August 23, 2007, bureaucracy was reduced by transferring to the offices of general directors the examination authority of applications for The Statute Document of the Approved Person, enabling firms to utilize this simplified procedure. With the communiqué put into force on December 31, 2007, it is provided that import transactions made by the customs administrations having the Customs Automation System (BILGE) can be executed based on the registration of the guarantee document in electronic form without the requirement of the original copy of the document.

19 Ensuring the Proper Functioning of the Foreign Exchange Market and Vigilant Implementation of the Inflation Targeting Regime 17 Section 1 Investment Advisory Council Fourth Meeting Recommendations Ensuring the Proper Functioning of the Foreign Exchange Market and Vigilant Implementation of the Inflation Targeting Regime Further progress in reducing inflation through the vigilant implementation of the inflation targeting regime, while ensuring the proper functioning of the foreign exchange market through the continuation of the freely floating exchange rate policy. In the fourth Investment Advisory Council (IAC) Meeting, Council Members emphasized the importance of continuity of the free floating exchange rate regime and the vigilant implementation of the inflation targeting regime, in order to sustain the enhanced economic growth and the positive economic momentum observed in the last five years. Ensuring the Proper Functioning of the Foreign Exchange Market through the Continuation of the Free Floating Exchange Rate Policy The free floating exchange rate regime, implemented in Turkey since 2001, will be continued in the forthcoming period since it is a precondition for inflation targeting regime and it has significant contributions to Turkish economy. Under this regime, the exchange rate is neither a target nor a policy tool and determined by the demand and supply conditions of foreign exchange markets. However, the Central Bank of the Republic of Turkey (CBRT) can intervene in the foreign exchange markets in both directions, in order to smooth out excessive volatilities, in 2008 and beyond, as in the previous years. Consumer Price Index (CPI) based real effective exchange rate indicates that New Turkish Lira (TRY) has been appreciating in the medium and long term. Nonetheless, TRY tends to depreciate time to time in nominal and real terms particularly in response to external shocks. Having strong foreign exchange reserves plays an important role in eliminating the unfavorable effects of potential internal and external shocks and boosts the confidence in economy. Also, it is necessary to pay the foreign debts of the Treasury and to gradually reduce its remittance accounts in the long run, which comprise a significant part of the liabilities on the CBRT s balance sheet. Thus, the CBRT holds foreign exchange buying auctions to build up reserves when the balance of payments and the currency substitution conditions are convenient. CBRT has been holding foreign exchange buying auctions with pre-announced terms and conditions since April 1, 2002, in order to minimize the impact on the supply and demand conditions in the foreign exchange market. Moreover, the annual auction programs have been announced to the public since In case of unpredictable significant developments in foreign exchange supply, amendments to auction programs can be made with prior notice. The total amount of foreign currency purchased via daily auctions was USD 4.3 billion in 2006 and USD 9.9 billion in The foreign exchange purchased as of May 9, 2008 was USD 4.2 billion. The free floating exchange rate regime will be continued.

20 18 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2008 Table 1 : The CBRT s Net Foreign Exchange Purchases and Sales (USD million) * As of May 9, 2008 Source: CBRT * TOTAL Foreign Exchange Buying Auctions 795 5,652 4,104 7,442 4,296 9,906 4,173 36,368 Foreign Exchange Selling Auctions , ,000 Foreign Exchange Buying Interventions 16 4,229 1,283 14,565 5, ,534 Foreign Exchange Selling Interventions , ,126 Total Net Foreign Exchange Buying 799 9,881 5,378 22,007 7,632 9,906 4,173 59,776 The implementation of free floating exchange rate policy will be continued in Moreover, the foreign exchange buying auctions will also be continued in 2008, unless extraordinary changes take place in foreign exchange liquidity conditions. The CBRT has decreased the maximum daily amount to be purchased in the auctions from USD 90 million with USD 30 million for auctions and USD 60 million for optional selling to USD 45 million with USD 15 million for auctions and USD 30 million for optional selling as of March 10, Vigilant Implementation of the Inflation Targeting Regime Since high inflation is one of the main barriers to permanent, fast and fair development process of countries, the vigilant implementation of the inflation targeting regime is one of the priority areas for Turkey. The inflation targeting regime is aimed to be continued, until price increases in the economy become negligible to the economic decision making process 1. In this regard, the fight against inflation will be supported through both structural and micro reforms to enhance competition in the goods and services sectors. In the context of Transition Program for Strengthening the Turkish Economy, launched in 2001, a monetary policy named as implicit inflation targeting was implemented in the period. Before that, with the amendment of the CBRT Law in 2001, the CBRT was granted with instrument independence, and its primary objective was clearly defined as maintaining price stability 2.In addition, extending credit to the public sector was legally prohibited. Implicit inflation targeting period acted as a transition phase to satisfy the preconditions for the success of full-fledged inflation targeting regime, such as maintaining institutional and technical infrastructure, fiscal discipline and financial stability. In this period, numerical inflation targets were made public and the short term interest rates were used as the main monetary policy tool, which are the fundamentals of the full fledged inflation targeting regime. However, lack of an accountability mechanism to be used when the targets are breached and that the CBRT did not announce its inflation forecasts, were the main differences of implicit targeting regime from full fledged inflation targeting regime. Between , when the implicit inflation target was in implementation: The inflation targets have been achieved; the consumer inflation, which was approximately 70% at the beginning of 2002, declined below 8% by the end of Confidence in Turkey s monetary policy and in the TRY was boosted Annual Program, p.47; 60th Government Action Plan, p.5; The Ninth Development Plan ( ), p Law no on Making Amendment on Central Bank of the Republic of Turkey Law (Official Gazette /24393).

Chart I.1. Difference between Primary Surplus (PS) and Bond Yield Spreads in Selected EU 1 Countries

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