EXPENDITURE MANAGEMENT IN TURKEY

Expenditure Management in Turkey

Expenditure Management in Turkey

1. To Critically Assess the Existing State Of Public Expenditure Management Systems in Turkey (40%)

Turkey's ambitious fiscal adjustment has paved the way for the strong economic performance since the 2000/2001 crisis. Following the 2001 crisis, the Turkish economy rebounded very strongly, with annual real GDP growth averaging 7.4 percent during 2002-2005. Inflation came down to single digits in 2004 and 2005 for the first time in the last 35 years. Resolute fiscal consolidation-primarily based on the revenue side sofar-has been the cornerstone of the economic program, with the public sector primary balance moving to a surplus of 6.9 percent of GDP in2005, from a deficit of 1.6 percent in 1999 (Brandner, et al, 2006). Gross public debt was thus reduced from 106 percent of GDP in 2001 to 71 percent in 2005. Resolute fiscal consolidation relieved the conduct of monetary policy from fiscal dominance, thus enhancing the credibility of the commitment to low inflation and facilitating the implementation of inflation targeting.

Despite progress, the need for continuous fiscal discipline has been recently underscored by existing vulnerabilities. Vulnerabilities have also emerged because, despite fiscal consolidation, strong domestic demand growth, exchange rate appreciation during 2002-2005, and an imported energy bill inflated by record-high oil prices, have all resulted in a widening deficit of the external current account that reached 6.4 percent of GDP in 2005 (Brandner, et al, 2006). As a result of recent global financial market volatility, the lira has depreciated by 20 percent and domestic government bond yields have significantly increased. The disinflation, whose pace had already slowed in the late months of 2005, will likely be further prejudiced in the short term by the pass-through of depreciation of the currency. Owing to higher interest rates and currency depreciation, the debt ratio will also be reduced at a slower pace. In the current environment, maintaining fiscal discipline and a high primary fiscal surplus will be necessary in order to stem pressures on the current account, while an increase in private savings will also work in the same direction. Continuous fiscal discipline will help keep disinflation on track, sustain market confidence, and achieve a reduction of the public debt ratio so as to improve resilience to external shocks (Brandner, et al, 2006).

1. Turkey's ambitious fiscal adjustment has facilitated a substantial decline in the public debt ratio and underpinned the strong economic performance since 2001 but existing vulnerabilities underscore the need for continuous fiscal discipline. Resolute fiscal consolidation-primarily based on the revenue side sofar-has been the cornerstone of the economic program that led to Turkey's strong economic performance, with annual real GDP growth averaging 7.4 percent during 2002-2005; inflation reduced to single digits in 2004 and 2005; and a significant reduction in the public debt ratio. However, despite improved resilience to shocks, vulnerabilities remain, as confirmed by the strong impact of recent global market volatility on Turkey (Brandner, et al, 2006). In the current environment, maintaining continuous fiscal discipline, with a high-primary fiscal ...