EX-99.(D) 2 d249237dex99d.htm EXHIBIT D Exhibit D
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Exhibit D

THE REPUBLIC OF TURKEY

 

LOGO

This description of the Republic of Turkey is dated as of October 3, 2016 and appears as Exhibit D to the Republic of Turkey’s Annual Report on Form 18-K to the U.S. Securities and Exchange Commission for the fiscal year ended December 31, 2015.


Table of Contents

TABLE OF CONTENTS

 

     Page  

FORWARD-LOOKING STATEMENTS

     3   

RECENT DEVELOPMENTS AND SUMMARY

     4   

DESCRIPTION OF THE REPUBLIC

     18   

Location, Area and Topography

     18   

Population

     19   

Government Organization and Political Background

     19   

Foreign Policy

     20   

International Relations

     23   

ECONOMY

     47   

Economic Stimulus Efforts

     47   

Gross Domestic Product

     47   

Principal Industries

     49   

Energy

     50   

Agriculture

     56   

Services

     59   

Employment and Wages

     60   

Inflation

     62   

Education

     63   

Environment

     63   

Competition Law

     64   

Intellectual Property

     66   

Social Security System

     67   

Exchange Rates and Exchange Policies

     68   

International Lending

     72   

FOREIGN TRADE AND BALANCE OF PAYMENTS

     75   

Foreign Trade

     75   

Other Goods, Services and Income

     83   

Balance of Payments

     84   

Current Account

     85   

Foreign Direct Investments

     86   

Future Directions

     88   

Capital Account

     89   

International Reserves

     90   

FINANCIAL SYSTEM

     91   

The Central Bank

     91   

Monetary Policy and Inflation

     92   

Banking System

     96   

Capital Markets

     103   

PUBLIC FINANCE

     108   

General

     108   

Central Government Budget

     109   

Taxation

     111   

State Owned Enterprises

     118   

Privatization Implementations

     121   

Extra-Budgetary Funds

     126   

Local Government

     126   

Public Sector Fixed Investment

     127   

Public Sector Borrowing Requirement

     127   

DEBT

     129   

General

     129   

Domestic Debt

     129   

External Debt and Debt Management

     153   

Risk Management

     160   

 

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FORWARD-LOOKING STATEMENTS

Turkey has made forward-looking statements in this Annual Report on Form 18-K. 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:

 

    interest rates in financial markets outside Turkey;

 

    the impact of changes in the credit rating of Turkey;

 

    the impact of changes in the international prices of commodities;

 

    economic conditions in Turkey’s major export markets;

 

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

 

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

 

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

 

    Internal factors, such as:

 

    general economic and business conditions in Turkey;

 

    present and future exchange rates of the Turkish currency;

 

    foreign currency reserves;

 

    the level of domestic debt;

 

    domestic inflation;

 

    the ability of Turkey to effect key economic reforms;

 

    the level of foreign direct and portfolio investment; and

 

    the level of Turkish domestic interest rates.

 

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RECENT DEVELOPMENTS AND SUMMARY

GENERAL

The Republic’s GDP increased by 3.1% in the second quarter of 2016. See “—Economic Developments.”

In 2015, there were a series of raids against opposition media outlets and businesses associated with the U.S.-based Islamic cleric Fethullah Gulen throughout Turkey. For example, in January 2015, several policemen were arrested for illegal wiretapping and political spying charges. On September 1, 2015, Turkish police raided the Ankara-based offices of a media group affiliated with Fethullah Gulen. Six people were arrested and a warrant was issued for the conglomerate’s chief executive, Akin Ipek. On September 16, 2015, Turkish police issued warrants against eleven executives on charges of organized theft. The arrests took place in the central city of Kayseri, where police raided a university with alleged links to Fethullah Gulen. On October 26, 2015, an Ankara court appointed administrators to take control of Koza İpek Holding, which the Ankara Chief Public Prosecutor’s Office identified as a Gulen-associated business. On March 23, 2016, a court in Istanbul appointed trustees to run the Feza media group, which owns the Zaman Daily and Cihan News Agency. The court accused the Feza media group of supporting the movement of Fethullah Gulen.

On July 15, 2016, a coup d’état was attempted in Turkey against the Government by a faction within the army that is linked to the Gulen movement (which was officially designated by the Government as a terrorist group called FETÖ). The coup plotters attempted to overthrow the Government by seizing control of several key institutions and buildings in Ankara, Istanbul, and elsewhere, but failed to do so as there was strong public opposition against the coup plotters. During the coup attempt, around 250 people were killed and more than 2,200 were injured while many government buildings, including the Turkish Parliament and the Presidential Palace, were damaged. On July 21, 2016, the Parliament approved the declaration of a three-month state of emergency in order to enable the authorities to take swift and effective action against those responsible for the failed coup, which also resulted in the temporary suspension of the European Convention on Human Rights. On August 7, 2016, several million people gathered in Istanbul for an anti-coup rally organized by the Turkish authorities, showing solidarity and political cohesion against the attempt. The President, Prime Minister and the two leaders of the opposition parties participated in the anti-coup rally.

As of August 17, 2016, approximately 40,000 people have been detained in connection with the failed coup. Of those detained, a substantial number have been military personnel (approximately 10,000 people, including 178 generals). Around 20,000 people have been arrested as of August 17, 2016, including police officers, soldiers, judiciary members, local administrators and civilians. As of August 17, 2016 nearly 80,000 government officials have been fired or suspended from various public institutions, including approximately 3,000 judges and prosecutors, deans of all universities have been asked to resign and the licenses of approximately 21,000 teachers working at private institutions have been terminated due to their alleged links to the Gulen movement. In addition, more than 100 media outlets have been closed, such as newspapers, TV channels, radio stations and magazines. Following the coup, there have also been raids on businesses with suspected links to the Gulen movement, greater civilian control of the military, a planned overhaul of military hierarchy and command structure and the release of prisoners to increase capacity of prisons to house those arrested for their involvement in the failed coup. On September 28, 2016, prosecutors in Istanbul decided to include Ergenekon, Balyoz, and Military Espionage investigations and prosecutions in the main July 15, 2016 coup attempt investigation.

On April 27, 2016, a suicide bomber detonated an explosive in the northwestern Turkish city of Bursa. On May 2, 2016, the Minister of Interior Efkan Ala announced the identity of the suicide bomber to be a member of the PKK (the Kurdistan Workers’ Party).

Since May 2016, dozens of police officers, soldiers and civilians have been killed and hundreds of people wounded in several terrorist bomb attacks carried out by the PKK in the eastern part of Turkey.

On May 20, 2016, Turkey’s legislature voted to lift the immunity of 138 deputies from all parties, including 46 of the 59 deputies of the Kurdish People’s Democratic Party, who face potential prosecution on allegations such as supporting terrorism. On June 8, 2016, President Erdoğan approved lifting of the deputies’ immunity.

On June 28, 2016, three suicide attackers armed with guns and bombs attacked Atatürk Airport in Istanbul. More than 40 people were killed, in addition to the three attackers, and more than 250 people were injured. President Erdoğan blamed DAESH (a synonym for the Islamic State terrorist group ISIS/ISIL) for the attack and called on the international community to make the attack a turning point in the global fight against terrorism. The airport became operational within a few hours after the attack.

 

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On August 20, 2016, a suicide bomber targeted a wedding ceremony in Gaziantep. A total of 54 people were killed while 66 people were injured in the attack. While there has been no claim of responsibility, President Erdoğan has said that DAESH is the primary suspect for the attack.

On August 25, 2016, the main opposition Republican People’s Party (“CHP”) leader, Kemal Kılıçdaroğlu, and his convoy were attacked by a group of PKK militants in the northeastern province of Artvin. One soldier who was guarding him was killed by the militants while two others were injured.

The Republic is continuing its humanitarian efforts to provide shelter to refugees fleeing the conflict in Syria. As of August 29, 2016, 254,034 Syrian refugees occupied accommodation centers throughout Turkey. As of August 2016, the Republic has spent approximately U.S.$12 billion for Syrian refugees in Turkey.

On March 18, 2016, the EU agreed on a wide range of proposals with Turkey to manage the migration crisis, including the return of all irregular migrants, accelerating the visa-liberalization process for Turkish citizens and sharing the work of hosting Syrian refugees. According to the agreement, the EU will allocate €6 billion (U.S.$6.6 billion) for reducing illegal migration and making passage to Europe safe. On April 4, 2016 the agreement went into effect and the first group of Syrian refugees arrived in Germany from Istanbul while the first group of migrants, including Syrian refugees, returned to Turkey from Greece. Since the implementation of the agreement, the Turkish Parliament has approved the entry into force of the provisions of the agreement and the relevant law was signed by the President’s office on May 18, 2016. Since May 2, 2016, a Turkish liaison officer has also been stationed with Europol. Turkish authorities have set up units on migrant smuggling and human trafficking and are taking legislative steps to put in place higher penalties for smugglers. The Republic and the EU have been in discussions regarding visa-free travel for Turkish citizens, if the Republic fulfils a set of conditions, including revising its legislation and practices on terrorism in line with European standards.

On December 10, 2015, the Republic announced a structural reform agenda to be completed by January 2017 (the “Economic Reform Agenda”). The main objectives of the structural reform agenda are reaching a high-income level with strong and sustainable growth and ‘Inclusive Growth’ which will enable all parts of the society to benefit from strong and sustainable growth. In June 2016, the Government introduced a comprehensive package of economic reform to improve the investment climate in Turkey, proposing a range of new legal amendments to eliminate obstacles faced by foreign direct investors and to ease employment restrictions on foreigners. On August 10, 2016, the parliament, in an effort to boost domestic savings, approved a new law that will require workers under the age of 45 to be automatically enrolled in a private pension plan. On August 26, 2016, the Parliament approved a bill to set up a sovereign wealth fund to finance large projects in Turkey and ease the burden of Turkish banks. The new wealth fund, with initial capital of TL 50 million, which will be paid out of Turkey’s privatization fund, may get additional financing from the Government’s asset sales program, cash surpluses from the privatization fund and other government institutions.

POLITICAL CONDITIONS

On May 5, 2016, the Republic’s former Prime Minister Mr. Ahmet Davutoğlu announced his resignation. On May 22, 2016, the ruling Justice and Development Party held an extraordinary congress and elected Mr. Binali Yıldırım as its new chairman and therefore, as Prime Minister of the Republic. On the same day, President Mr. Recep Tayyip Erdoğan accepted the resignation of Prime Minister Ahmet Davutoglu and his cabinet. On May 24, 2016, Mr. Yıldırım formed the 65th Turkish government.

Following the election of Prime Minister Binali Yildirim in May 2016, the Government has indicated that it will focus on revising the constitution and newly elected Prime Minister Binali Yildirim has indicated that he is supportive of a presidential model.

On May 24, 2016, Prime Minister Binali Yildirim announced members of the new cabinet, including 9 new ministers and 4 re-seated ministers. Deputy Prime Minister in charge of Economic and Financial Affairs Mr. Mehmet Şimşek and Minister of Finance Mr. Naci Ağbal retained their posts.

On August 31, 2016, Minister of Interior Efkan Ala resigned and Minister of Labor and Social Security Süleyman Soylu replaced him. The former Minister of Health Mehmet Müezzinoğlu was appointed as Minister of Labor and Social Security.

 

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The following table sets forth the composition of the Assembly by total number of seats as of September 2, 2016:

 

     Number of
Seats
 

Justice and Development Party (AKP)

     317   

Republican People’s Party (CHP)

     133   

People’s Democratic Party (HDP)

     59   

Nationalist Action Party (MHP)

     40   

Independent

     1   
  

 

 

 

Total

     550   
  

 

 

 

 

Source: The Grand National Assembly of Turkey

INTERNATIONAL RELATIONS

On March 15, 2016, the fifth Turkey and Azerbaijan High Strategic Cooperation Council meeting was held in Ankara. During the meeting, six cooperation agreements were signed alongside a declaration to increase efforts to complete the Trans Anatolian Pipeline Project before the scheduled date.

On March 16, 2016, Turkey ratified the new Trade Facilitation Agreement, becoming the 71st World Trade Organization member to do so.

On April 14, 2016, the European Parliament released a report criticizing Turkey over democracy, human rights and the rule of law while calling for an end to military operations in the Kurdish populated southeast. On April 15, 2016, Turkey’s European Union Affairs Minister announced that the report is considered null and void and stated that it would be sent back to the European Parliament.

United States

On July 19, 2016, Turkey filed an official request with the United States for the extradition of Fethullah Gulen, a Pennsylvania-based preacher accused of masterminding the failed military coup on July 15, 2016. On August 2, 2016, Turkey filed a second request for the extradition of Fethullah Gulen. On August 23, 2016, a delegation from the United States visited Turkey to discuss the extradition of Fethullah Gulen with officials from relevant government institutions. On August 24, 2016, U.S. Vice President Biden met with President Erdoğan in Ankara to ease the tensions between Turkey and the United States over the extradition of Fethullah Gulen. After the meeting, Vice President Biden stated that the United States had no interest whatsoever in shielding anyone who has done harm to an ally but the United States government needs to meet the legal standard requirement under the law. On another visit to the US by the Turkish delegation in September 2016, relevant Turkey and US counterparts re-exchanged views.

Russia

On June 27, 2016, President Erdoğan sent a letter to Russian President Vladimir Putin to commence the process of overcoming the crisis in bilateral relations. On June 29, 2016, both leaders held a phone conversation, during which both parties emphasized the importance of normalizing relations between the two countries. On June 30, 2016, Russia started the implementation of a government order to lift the ban on charter flights to Turkey.

On August 9, 2016, President Erdoğan met with Russian President Vladimir Putin in St. Petersburg to discuss reinforcing bilateral relations, where Turkey and Russia agreed to establish a joint investment fund and increase cooperation in the defense sector.

On August 28, 2016, the Russian government stated that its ban on charter flights from Russia to Turkey, which it had announced on November 28, 2015, would no longer be in effect. These charter flights bring the majority of tourists from Russia to Turkey.

On September 15, 2016, the Turkish and Russian military chiefs came together in Ankara on seeking joint perspective on contentious issues in the Middle East. The meeting came after Russia’s top general arrived in Ankara for the first time in 11 years.

 

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Cyprus

On April 5, 2016, the prime minister of the Turkish Cypriot administration submitted the resignation of his government following the withdrawal of the government’s coalition partner. Turkish Cypriot President Mustafa Akıncı has assigned National Unity Party Chairman Hüseyin Özgürgün to form a new government. On April 18, 2016, the new cabinet which was formed by the National Unity Party leader Hüseyin Özgürgün and the Democrat Party leader Serdar Denktaş with the support of the independent deputies was approved by President Mustafa Akıncı.

Syria

On February 14, 2016, Saudi military jets landed at Turkey’s Incirlik air base in the southern Adana province to carry out missions against DAESH.

On August 24, 2016, Turkey launched a major military operation called “Operation Euphrates Shield” with U.S. and Russian support in Syria in an effort to improve security, support coalition forces and eliminate the terror threat along Turkey’s border. “Operation Euphrates Shield” is consistent with Turkey’s right to self-defense arising from international treaties and a mandate given to Turkey’s armed forces by Parliament in 2014, which was extended for another year in September 2015. As of September 23, 2016, “Operation Euphrates Shield” is still ongoing.

Israel

On June 27, 2016, Turkey and Israel signed a reconciliation agreement to re-start the normalization of bilateral relations after a six-year hiatus. According to the reconciliation agreement, Israel will transfer $20 million to a humanitarian fund that will compensate the families of the Turkish nationals killed and wounded during a 2010 Gaza flotilla raid on the Mavi Marmara. In addition to compensation, Israel has agreed to allow Turkey to build infrastructure projects in Gaza and to transfer unlimited humanitarian aid to Gaza through the Ashdod Port. On August 31, 2016, President Erdoğan approved the procedural agreement regarding compensation between Turkey and Israel.

ECONOMIC DEVELOPMENTS

The following table sets forth the percentage of GDP represented by economic sector (at constant prices and expressed in percentages) for the periods indicated:

 

GDP by Economic Sector (in %)

   2016
Q1
     2016
Q2
 

1.

   Agriculture, forestry and fishing      4.5         7.1   

2.

   Mining and quarrying      0.5         0.6   

3.

   Manufacturing      25.8         25.8   

4.

   Electricity, gas, steam and air conditioning supply      1.5         1.8   

5.

   Water supply, sewerage, waste management and remediation      0.4         0.5   

6.

   Construction      5.8         6.2   

7.

   Wholesale and retail trade      13.1         13.1   

8.

   Transportation and storage      12.2         12.4   

9.

   Accommodation and food service activities      1.4         1.3   

10.

   Information and communication      2.7         2.7   

11.

   Financial and insurance activities      14.4         13.0   

12.

   Real estate activities      4.9         4.6   

13.

   Professional, scientific and technical activities      3.7         2.6   

14.

   Administrative and support service activities      2.3         1.9   

15.

   Public administration and defense; compulsory social security      3.0         2.8   

16.

   Education      2.4         2.1   

17.

   Human health and social work activities      1.5         1.2   

18.

   Arts, entertainment and recreation      0.2         0.2   

19.

   Other service activities      0.9         0.8   

 

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GDP by Economic Sector (in %)

   2016
Q1
     2016
Q2
 

20.

   Activities of household as employers      0.2         0.1   

21.

   Sectoral total      101.4         100.7   

22.

   Financial intermediation services indirectly measured      10.6         9.7   

23.

   Taxes-Subsidies      9.2         9.0   

24.

   Gross Domestic Product (Purchaser’s Price)      100.0         100.0   

 

Source: TURKSTAT

The following table sets forth increases or decreases in GDP (at constant prices and expressed in percentages) for the periods indicated:

 

GDP growth rates (in %)

   Q1      Q2  

2016

     4.7         3.1   

 

Source: TURKSTAT

For the month of September 2016, CPI decreased by 0.18% and domestic PPI increased by 0.29% as compared to the previous month.

In September 2016, the Republic’s annual CPI and domestic PPI increased by 7.28% and 1.78%, respectively, as compared to the same month of the previous year.

On September 28, 2016, the Government offered an interest rate of 9.94% for its 10-year Government Bond, compared to 10.54% on October 7, 2015.

The calendar adjusted industrial production index decreased by 4.9% in July 2016 compared to July 2015 (year on year).

The following table indicates unemployment figures for 2016:

 

2016    Unemployment
rate (in %)
     Number of
unemployed
 

January

     11.1         3,290,000   

February

     10.9         3,224,000   

March

     10.1         3,023,000   

April

     9.3         2,824,000   

May

     9.4         2,895,000   

June

     10.2         3,127,000   

 

Source: TURKSTAT

On January 11, 2016, the Medium Term Program covering the 2016-2018 period (the “2016-2018 Medium Term Program”) was announced. The main objectives of the 2016-2018 Medium Term Program are increasing stable and inclusive growth, reducing inflation, preserving the decreasing trend in the current account deficit, increasing competitiveness, employment and productivity, and improving fiscal discipline and strengthening public finance. The 2016-2018 Medium Term Program set a central government budget deficit target of 1.3% of GDP by the end of 2016, 1.0% of GDP by the end of 2017, and 0.8% of GDP by the end of 2018. In the 2016-2018 Medium Term Program, the government announced that real GDP target growth is 4.5% in 2016, and 5.0% in 2017 and 2018. The primary surplus to GDP ratio target is 0.6% for 2016, 1.1% for 2017, and 1.3% for 2018. The general government deficit to GDP target is 0.7% for 2016, 0.7% for 2017 and 0.4% for 2018. The EU defined general government debt to GDP ratio target is 31.7% for 2016, 30.5% for 2017 and 29.5% for 2018. The current account deficit to GDP ratio target is 3.9% for 2016, 3.7% for 2017, and 3.5% for 2018. The domestic savings to GDP ratio target is 16.5% for 2016, 17.2% for 2017 and 17.8% for 2018. The CPI inflation target is 7.5% for 2016, 6.0% for 2017 and 5.0% for 2018. The unemployment target is 10.2% for 2016, 9.9% for 2017 and 9.6% for 2018.

 

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TOURISM

In August 2016, the number of foreign visitors visiting the Republic decreased by approximately 37.96% to 3,183,003 as compared to the same month of 2015. Between January and August 2016, the number of foreign visitors visiting the Republic decreased by approximately 31.81% to 17,391,431 as compared to the same period in 2015. According to the Turkish Statistical Institute, in the second quarter of 2016, tourism revenues decreased by 35.6% compared to the same period of 2015.

EMPLOYMENT AND WAGES

As of June 2016, total civilian employment was approximately 27.65 million of whom approximately 20.2% were employed in agriculture, 19.3% in industry, 7.5% in construction and 53.1% in services sectors. In June 2016, the labor force participation rate was at 52.4%, compared to 52.1% in June 2015. There were approximately 3,622,000 public sector workers at the end of the second quarter of 2016.

As of July 2016, the total asset value of the Unemployment Insurance Fund amounted to TL 98.3 billion. The monthly return of the fund for July 2016 was 0.68% As of July 2016, approximately 91.6% of the Unemployment Insurance Fund was invested in bonds and 7.1% of the assets were held in deposits.

As of September 6, 2016, the number of pension funds offered to the public equaled 250. The total net asset value of these funds increased to approximately TL 57.1 billion as of September 6, 2016 from TL 47.8 billion on December 31, 2015.

FOREIGN TRADE AND BALANCE OF PAYMENTS

In August 2016, the trade balance (according to provisional data) posted a deficit of U.S.$4.687 billion as compared to a deficit of U.S.$4.947 billion in the same period in 2015. In August 2016, total goods imported (c.i.f.), including gold imports, increased by 3.7% to approximately U.S.$16.554 billion, as compared to approximately U.S.$15.969 billion during the same period in 2015. In August 2016, the import of capital goods, which are used in the production of physical capital, increased by approximately 13% over the same period in 2015; the import of intermediate goods such as partly finished goods and raw materials, which are used in the production of other goods, decreased by approximately 2% over the same period in 2015; and the import of consumption goods decreased by approximately 0.3% over the same period in 2015. In August 2016, total goods exported (f.o.b.), increased by 7.7% to approximately U.S.$11.867 billion, as compared to approximately U.S.$11.022 billion during the same period of 2015. Between January and July 2016, the current account produced a deficit of approximately U.S.$21.701 billion, as compared to a deficit of approximately U.S.$25.011 billion in the same period of 2015.

According to provisional data, net foreign direct investment inflows into Turkey amounted to U.S.$400 million in July 2016.

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

 

in millions of U.S. dollars*

   January-July
2016
 

CURRENT ACCOUNT

     -21,701   

Trade Balance

     -24,057   

Goods Exports

     85,809   

Goods Imports

     109,866   

Services

     6,522   

Primary Income

     5,108   

Secondary Income

     942   

CAPITAL ACCOUNT

     26   

FINANCIAL ACCOUNT

     -24,989   

Direct Investment (net)

     -2,989   

 

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in millions of U.S. dollars*

   January-July
2016
 

Portfolio Investment (net)

     -9,653   

Assets

     -382   

Liabilities

     9,271   

Other Investment (net)

     -12,347   

Assets

     1,310   

Liabilities

     13,657   

RESERVE ASSETS

     6,773   

NET ERRORS AND OMISSIONS

     3,459   

 

* Provisional

Source: CBRT

In June 2016, the volume of crude oil imports decreased by 12.69% compared to June 2015. In June 2016, natural gas imports decreased by 0.88% to 3,173.14 million cubic meters compared to 3,201.40 million cubic meters in June 2015. In June 2016, liquefied petroleum gas imports decreased by 4.5% to 294,038 tons compared to 307,898 tons in June 2015.

As of July 2016, total gross international reserves were approximately U.S.$141,810 million (compared to U.S.$140,996 million as of July 2015). As of July 2016, gold reserves were approximately U.S.$19,791 million (compared to U.S.$18,107 million as of July 2015) and the Central Bank gross foreign exchange reserves were approximately U.S.$99,927 million (compared to approximately U.S.$102,533 million as of July 2015).

As of September 29, 2016, the Central Bank held approximately TL 129.6 billion in public sector deposits.

MONETARY POLICY

The Central Bank set the annual inflation target rate for 2016 at 5.0%. The following table sets forth the quarterly inflation path and uncertainty band for 2016:

Inflation Path Consistent with the Year-End Inflation Target and the Uncertainty Band for 2016

 

     March      June      September      December  

Uncertainty Band (Upper Limit)

     7.0         7.0         7.0         7.0   

Path Consistent with the Target

     5.0         5.0         5.0         5.0   

Uncertainty Band (Lower Limit)

     3.0         3.0         3.0         3.0   

 

Source: Central Bank

On October 3, 2016, the Central Bank foreign exchange buying rate for U.S. dollars was TL 3.0036 per U.S. dollar.

The following table displays the period-end exchange rate of Turkish Lira per U.S. Dollar, Euro, and Japanese Yen and against the U.S. Dollar-Euro currency basket:

Period-End Exchange Rates

 

     2016**  

Turkish Lira per U.S. Dollar

     3.00   

Turkish Lira per Euro

     3.37   

Turkish Lira per 100 Japanese Yen

     2.96   

Turkish Lira per Currency Basket (*)

     3.19   

 

  (*) The basket consists of U.S.$0.5 and EUR 0.5.
  (**) As of October 3, 2016.

Source: CBRT

 

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A team from the International Monetary Fund (the “IMF”) visited the Republic between January 20, 2016 and February 1, 2016 for the annual evaluation of the economy as part of the regular consultations under Article IV of the IMF’s Articles of Agreement. The IMF periodically consults with each member state in order to ensure that each member state has in place a sound macroeconomic framework and corresponding policies to promote financial stability, economic growth and free exchange rates. On February 2, 2016, the IMF published a concluding statement with its preliminary findings. In its statement, the mission highlighted that a tighter monetary policy stance is needed to bring inflation back to the 5% target in the medium-term. The IMF also emphasized that a tighter fiscal stance would contribute to reducing external imbalances and lowering inflation. On March 25, 2016, the Executive Board of the IMF concluded the Article IV consultation with Turkey. Executive Directors of the IMF remarked on the Turkish economy’s resilient growth notwithstanding shocks in 2015. At the same time, they noted that high inflation, external imbalances, and dependence on external financing pose vulnerabilities. They, therefore, underscored the need to rebalance the economy through macroeconomic policies and structural reforms aimed at increasing domestic savings and raising potential growth.

In 2015, Turkey requested for a Financial Sector Assessment Program (“FSAP”) update to be performed in 2016. The FSAP Mission, composed of IMF and World Bank staff, visited Turkey in April and June 2016 to consult with the relevant authorities, public and private institutions and non-governmental organizations on a broad range of issues, including banking, insurance and financial market infrastructures, systemic risks, Islamic finance, capital markets and financial inclusion. As of September 2016, the process is still underway.

On January 19, 2016, the Monetary Policy Committee held another meeting at which it kept short-term interest rates constant compared to the prior meeting on December 22, 2015. At the meeting, the Committee noted that future monetary policy decisions will be conditional on the inflation outlook. The Committee further noted that, taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained. The Committee also assessed the heightened global volatility since the beginning of the year and the January Inflation Report forecasts.

On February 23, 2016, the Monetary Policy Committee held another meeting at which it kept short-term interest rates constant compared to the prior meeting on January 19, 2016. The Committee stated that annual loan growth continues at reasonable rates in response to the tight monetary policy stance and macro-prudential measures. The Committee noted the favorable developments in the terms of trade and the moderate course of consumer loans contributing to the improvement in the current account balance. The Committee also noted that demand from the European Union economies continues to support exports at an increasing pace, despite elevated geopolitical risks in other export markets. The Committee determined that the implementation of announced structural reforms would contribute to potential growth significantly. The Committee stated that energy price developments affect inflation favorably, while other cost factors limit the improvement in the core indicators. Considering the wage developments and the impact of the uncertainty in global markets on inflation expectations and pricing behavior and taking into account the volatility in energy and unprocessed food prices, the Committee stated that the tight liquidity stance will be maintained as long as deemed necessary. The Committee again noted that future monetary policy decisions will be conditional on the inflation outlook. The Committee further noted that, taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.

On March 24, 2016, the Monetary Policy Committee held another meeting at which it decided to reduce the marginal funding rate from 10.75% to 10.5%. The Committee kept the borrowing rate and one-week repo rate constant at 7.25% and 7.5%, respectively, compared to the prior meeting held on February 23, 2016. The Committee stated that annual loan growth continues at reasonable rates in response to the tight monetary policy stance and macroprudential measures. The Committee also noted that favorable developments in the terms of trade and the moderate course of consumer loans contribute to the improvement in the current account balance. The Committee recognized that demand from the European Union economies continues to support exports at an increasing pace, despite elevated geopolitical risks in other export markets. The Committee assessed that the implementation of announced structural reforms would contribute to potential growth significantly. The Committee noted that recently, global volatility has eased to some extent. The Committee further noted that with the effective use of the policy instruments laid out in the road map published in August 2015, the need for a wide interest rate corridor has been reduced. In this respect, the Committee decided to take a measured step towards simplification. However, the Committee stated that improvement in the underlying core inflation trend remains limited, necessitating the

 

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maintenance of a tight liquidity stance. The Committee acknowledged that future monetary policy decisions will be conditional on the inflation outlook. The Committee further acknowledged that taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.

On April 20, 2016, the Monetary Policy Committee held another meeting at which it decided to reduce the marginal funding rate from 10.5% to 10.0%. The Committee kept the borrowing rate and one-week repo rate constant at 7.25% and 7.5%, respectively, compared to the prior meeting held on March 24, 2016. The Committee stated that annual loan growth continues at reasonable rates in response to the tight monetary policy stance and macroprudential measures. The Committee also noted that favorable developments in the terms of trade and the moderate course of consumer loans contribute to the improvement in the current account balance. The Committee recognized that demand from the European Union economies continues to support exports at an increasing pace, despite elevated geopolitical risks in other export markets. The Committee also noted that recent data and the leading indicators show that economic activity displays a moderate and stable course of growth. The Committee assessed that the implementation of structural reforms would contribute to potential growth significantly and the recent decline in global volatility has continued and global financial conditions have improved. The Committee further assessed that along with these developments, the effective use of the policy instruments laid out in the road map published in August 2015 has reduced the need for a wide interest rate corridor. In this respect, the Committee decided to take a measured step towards simplification. The Committee stated that recently, inflation displayed a marked decline, which was mainly due to unprocessed food prices, and this decline is expected to continue in the short run. However, improvement in the underlying core inflation trend remains limited, necessitating the maintenance of a tight liquidity stance. The Committee acknowledged that future monetary policy decisions will be conditional on the inflation outlook and taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.

On May 24, 2016, the Monetary Policy Committee held another meeting at which it decided to reduce the marginal funding rate from 10.0% to 9.5% The Committee kept the borrowing rate and one-week repo rate constant at 7.25% and 7.5%, respectively, compared to the prior meeting held on April 20, 2016. The Committee also decided to reduce the late liquidity window lending rate from 11.5% to 11% The Committee stated that annual loan growth continues at reasonable rates in response to the tight monetary policy stance and macroprudential measures. The Committee also noted that favorable developments in the terms of trade and the moderate course of consumer loans contribute to the improvement in the current account balance. The Committee recognized that demand from the European Union economies continues to support exports, while domestic demand continues to have a positive impact on growth. The Committee also noted that economic activity displays a moderate and stable course of growth. The Committee assessed that the implementation of structural reforms would contribute to potential growth significantly. The Committee further assessed that the tight monetary policy stance, the cautious macroprudential policies and the effective use of the policy instruments laid out in the road map published in August 2015 increase the resilience of the economy against shocks. In this respect, the Committee decided to take a measured step towards simplification. The Committee stated that recently inflation has displayed a marked decline, which was mainly due to unprocessed food prices. However, it is noted that the improvement in the underlying core inflation trend remains limited, necessitating the maintenance of a tight liquidity stance. The Committee acknowledged that future monetary policy decisions will be conditional on the inflation outlook and taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.

On June 21, 2016, the Monetary Policy Committee held another meeting at which it decided to reduce the marginal funding rate from 9.5% to 9.0%. The Committee kept the borrowing rate and one-week repo rate constant at 7.25% and 7.5%, respectively, compared to the prior meeting held on May 24, 2016. The Committee also decided to reduce the late liquidity window lending rate from 11.0% to 10.5% The Committee stated that annual loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures. The Committee assessed that economic activity in Turkey remains on a moderate and steady growth track and consumer spending spurred domestic demand while investments remained weak. The Committee further assessed that global financial markets remain volatile amid ongoing concerns over global growth, developments regarding the UK’s exit from the EU and continued uncertainty about global monetary policies. The Committee stated that the sharp decline in food inflation since the beginning of the year helped to bring consumer inflation down markedly, although the underlying services inflation trend remains elevated. The Committee acknowledged that in the upcoming period, the monetary policy stance will be conditional on the inflation outlook and taking into account inflation expectations, the pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.

 

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On July 19, 2016, the Monetary Policy Committee held another meeting at which it decided to reduce the marginal funding rate from 9.0% to 8.75% The Committee kept the borrowing rate and one-week repo rate constant at 7.25% and 7.5%, respectively, compared to the prior meeting held on June 21, 2016. The Committee also decided to reduce the late liquidity window lending rate from 10.5% to 10.25% The Committee stated that the recent hikes in unprocessed food prices and the tobacco price adjustments would cause an upsurge in inflation in the short term. The Committee also noted that food prices may see a downward correction in the upcoming periods, and that owing to the measures taken by the Food and Agricultural Product Markets Monitoring Committee accompanied by the seasonal decline in food demand caused by the tourism sector, the year-end food price inflation is expected to prove lower compared to the previous reporting period. The Committee recognized that financial conditions continue to be tight despite the recent rise in the global risk appetite, which slightly eased conditions. The Committee also recognized that global financial markets and capital flows remain highly volatile. The Committee also noted recent terrorist attacks and domestic developments pose a downside risk to economic activity especially through the tourism sector. The Committee assessed that the current account deficit may widen slightly in the short term even though external balances continue to recover. The Committee further assessed that recent exchange rate developments pose an upside risk to inflation through the cost channel. The Committee stated that it would closely monitor the developments in both global and domestic markets and take necessary stabilizing measures by utilizing its large variety of tools. The Committee acknowledged that simplification of the monetary policy is planned to be finalized within a reasonable schedule and the pace and timing of simplification would depend on the developments regarding inflation and financial stability.

On August 23, 2016, the Monetary Policy Committee held another meeting at which it decided to reduce the marginal funding rate from 8.75% to 8.50% The Committee kept the borrowing rate and one-week repo rate constant at 7.25% and 7.5%, respectively, compared to the prior meeting held on July 19, 2016. The Committee also decided to reduce the late liquidity window lending rate from 10.25% to 10.0%. The Committee stated that annual inflation in food items excluding fresh fruits and vegetables registered a decline. The Committee also noted that unprocessed food prices, which saw notable increases in the last couple of months, may display a downward correction in the short term. The Committee recognized that financial conditions remain tight while the moderate course of annual loan growth rates continues. The Committee also noted economic activity maintains a moderate and stable course of growth, and consumption spending has slowed down slightly, while investment remains relatively sluggish. The Committee also noted that domestic developments in July 2016, geopolitical factors, waning global growth and a sluggish tourism sector pose a downside risk to economic activity. The Committee assessed that the volatility in global financial markets has recently eased, and portfolio inflows to emerging markets gained momentum amid the increased risk appetite. The Committee stated that the ultimate aim of monetary policy simplification is to achieve a narrow and symmetrical corridor and provide funding via a single rate. The Committee acknowledged that in the upcoming period, the monetary policy stance will be conditional on the inflation outlook and taking into account inflation expectations, the pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.

On September 22, 2016, the Monetary Policy Committee held another meeting at which it decided to reduce the marginal funding rate from 8.50% to 8.25% The Committee kept the borrowing rate and one-week repo rate constant at 7.25% and 7.5%, respectively, compared to the prior meeting held on August 23, 2016. The Committee also decided to reduce the late liquidity window lending rate from 10.0% to 9.75%. The Committee stated that recently released data and indicators regarding the third quarter display a deceleration in economic activity. The Committee assessed that current financial conditions are tight and while developments in tourism revenues will have a short-term negative impact, the lagged effects of the developments in the terms of trade and the moderate course of consumer loans will continue to contribute to the improvement in the current account balance. The Committee also noted that the demand from the European Union economies continues to support exports. With the supportive measures and incentives provided recently, domestic demand is expected to recover starting in the final quarter of 2016. The Committee assessed that the implementation of the structural reforms would contribute to the potential growth significantly. The Committee also stated that the slowdown in aggregate demand contributes to the gradual fall in core inflation and, with the help from falling food prices, headline inflation is expected to display a decline in the short term. Yet, the recent tax adjustment in fuel prices and other cost factors limit the improvement in inflation and thus necessitate the maintenance of a cautious monetary policy stance. In light of these assessments, and considering its contribution to the effectiveness of monetary policy, the Committee decided to take a measured and cautious step towards simplification. The Committee also noted that future monetary policy decisions will be conditional on the inflation outlook and taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the cautious monetary policy stance will be maintained.

 

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On July 17, 2016, following the failed coup attempt, the Central Bank of the Republic of Turkey announced that it had taken several measures for the efficient functioning of markets:

i. The Central Bank will provide banks with needed liquidity without limits.

ii. The commission rate for the Intraday Liquidity Facility will be zero.

iii. Banks will be allowed to place foreign exchange deposits as collateral without limits for needed Turkish lira liquidity.

iv. Banks’ current foreign exchange deposit limits of approximately U.S.$50 billion may be increased and utilization conditions (collateral and cost) may be improved if deemed necessary.

v. All markets and systems (the Electronic Fund Transfer and the Electronic Security Transfer and Settlement systems) will be left open until final settlement of transactions.

vi. Market depth and prices will be closely monitored.

vii. All measures will be taken to ensure financial stability, if deemed necessary.

As of September 22, 2016, the one-week repo auction rate of the Central Bank was 7.5%, the Central Bank overnight borrowing interest rate was 7.25% and the Central Bank marginal funding rate was 8.25%.

BANKING SYSTEM

The Republic has a relatively strong, well-capitalized and profitable banking system. The banking system in the Republic had a capital adequacy ratio of 15.80% and a relatively low non-performing loan ratio of 3.17% as of July 2016. This ratio takes into account a moderate increase in non-performing retail loans.

As of July 2016, the loan to deposit ratio and net income margin of the banking sector were 123.77% and 0.94%, respectively.

On February 26, 2016, Turkey’s second state-owned participation bank, Vakıf Participation Bank, officially began operating with an initial capital of TL 805 million.

As of October 3, 2016, the RRRs for Turkish Lira deposits/participation accounts were between 4.0% and 7.5% depending on maturity. Furthermore, as of that date RRRs were 10.5% for Turkish Lira demand deposits, notice deposits and private current accounts, and deposits/participation accounts with maturities up to one month and three months (including 1 and 3 months).

In February 2015, the Turkish Banking Regulation and Supervision Agency (the “BRSA”) ordered the seizure of Asya Katilim Bankasi, a publicly traded bank in Turkey that trades as Bank Asya, as a result of which the Turkish Savings and Deposits Insurance Fund assumed management control of the bank. The BRSA announced it was taking such action due to Bank Asya’s violation of a provision of the Banking Law that requires banks to have a transparent and open shareholding and organizational structure that does not obstruct the efficient auditing of the bank by the BRSA. On May 29, 2015, the management of Bank Asya was transferred to the Savings Deposit Insurance Fund. On May 23, 2016, the Savings Deposit Insurance Fund decided to sell Bank Asya via an auction. The auction took place on July 15, 2016 but the only qualified bidder did not present an offer and the sale was unsuccessful. Subsequent to the inconclusive resolution process, on July 21, 2016, the Board of Savings Deposit Insurance Fund requested the BRSA to cancel the banking license of Bank Asya. On July 22, 2016, the banking license of Bank Asya was cancelled by the BRSA. After this decision, the liquidation process of Bank Asya started.

PUBLIC FINANCE AND BUDGET

During the period from January – August in 2016, the central government consolidated budget expenditures were approximately TL 363.5 billion and the central government consolidated budget revenues were approximately TL 368.4 billion, compared to central government consolidated budget expenditures of approximately TL 319.7 billion and consolidated budget revenues of approximately TL 320.4 billion during the same period in 2015. During the period from January – August in 2016, the central government consolidated budget surplus was approximately TL 4.9 billion, compared to a central government consolidated budget surplus of approximately TL 639 million during the same period in 2015.

 

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During the period from January – August in 2016, the central government consolidated budget primary surplus reached approximately TL 40.3 billion, compared to the central government consolidated budget primary surplus of approximately TL 39.0 billion during the same period in 2015.

In August 2016, the central government consolidated budget expenditures were approximately TL 47.3 billion and the central government consolidated budget revenues were approximately TL 50.9 billion, compared to central government consolidated budget expenditures of approximately TL 37.5 billion and central government consolidated budget revenues of approximately TL 42.8 billion during the same period in 2015.

In August 2016, the central government consolidated budget surplus was approximately TL 3.6 billion, compared to a central government consolidated budget surplus of approximately TL 5.2 billion during the same period in 2015.

In August 2016, the central government consolidated budget primary surplus reached approximately TL 8.4 billion, compared to a central government consolidated budget primary surplus of approximately TL 8.9 billion during the same period in 2015.

The following table sets forth the details of the central government budget for the period from January-August 2016 and for August 2016.

 

Central Government Budget (Thousand TL)

   January – August 2016
(cumulative)
     August
2016
 

Budget Expenditures

     363,538,820         47,273,113   

1-Excluding Interest

     328,101,659         42,424,195   

Compensation of Employees

     100,959,780         11,671,457   

Social Security Contributions

     16,552,053         1,993,155   

Purchase of Goods and Services

     30,087,071         4,060,450   

Current Transfers

     145,473,689         18,090,358   

Capital Expenditures

     23,688,918         5,053,298   

Capital Transfers

     3,826,540         592,280   

Lending

     7,513,608         963,197   

2-Interest

     35,437,161         4,848,918   

Budget Revenues

     368,409,092         50,865,003   

1-General Budget Revenues

     354,370,510         49,482,879   

Taxes

     298,090,158         45,425,215   

Property Income

     18,828,405         899,180   

Grants and Aids and Special Revenues

     1,822,881         69,931   

Interest, Shares and Fines

     23,853,683         2,918,151   

Capital Revenues

     10,950,320         131,268   

Collections from Loans

     825,063         39,134   

2-Special Budget Institutions

     10,830,592         1,233,622   

3-Regularity & Supervisory Institutions

     3,207,990         148,502   

Budget Balance

     4,870,272         3,591,890   

Balance Excluding Interest

     40,307,433         8,440,808   

 

Source: Ministry of Finance

According to the Constitution, the budget law should be submitted to the Parliament at least 75 days prior to the year-end. Moreover, the budget law (either provisional or not) should be enacted before the beginning of the fiscal year. However, due to the busy election calendar, the Parliament was not able to negotiate the budget in 2015. Under these circumstances, according to article 19 of the Law 5018 named Public Management and Control, a provisional budget should be enacted. The provisional budget, which covered the period between January 1, 2016 and March 31, 2016, was approved by the Parliament and published in the Official Gazette on December 23, 2015.

Following Parliamentary negotiations that took place in January and February of 2016, the final 2016 Budget Law was approved on March 9, 2016 and published in the Official Gazette on March 16, 2016.

 

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PRIVATIZATION

The Republic’s plans for privatization include, among others, the remaining shares of Turk Telekom A.S., Turk Hava Yollari A.O., electricity generators/distributors, bridges and ports, toll roads, Halkbank, and the national lottery.

In 2015, the privatization implementations of Turkey amounted to an aggregate U.S.$2 billion in value. In 2016, the privatization implementations of Turkey amounted to U.S.$681.5 million in value as of October 3, 2016.

The following table sets out a summary of the most significant privatization implementations completed in 2016:

 

Name of The Company or Asset

   Date of
Privatization
     Amount (U.S.
Dollars)
 

EÜAŞ — Manavgat Hydroelectric Power Plant and its immovable fixed assets

     4/4/2016         131,219,633   

EÜAŞ — Doğankent, Kürtün ve Torul Hydroelectric Power Plant and its immovable fixed assets

     4/29/2016         435,204,263   

 

Note: Only privatizations worth U.S.$100 million or more are listed above.

Total privatization proceeds realized by the Turkish Privatization Administration (PA) since 1985 amounted to U.S.$67.5 billion as of October 3, 2016.

DEBT

On January 29, 2016, the Treasury revised the 2016 financing program based on the new medium-term program projections. According to the revised program, the total amount of debt service is projected to be TL 120.4 billion, comprising payments of TL 70.9 billion in principal and TL 49.5 billion in interest. Total domestic debt service is expected to be TL 94.0 billion while total external debt service is expected to be TL 26.5 billion. On the external financing front, the Treasury announced that up to U.S.$4.5 billion equivalent external financing is planned in 2016 through bond and lease certificate issuances in international markets and the total amount of external financing is planned to reach at most U.S.$5.5 billion, with the inclusion of project and program loans from the World Bank, European Investment Bank and other international financial institutions.

The Central Government’s total domestic debt stock was approximately TL 458.4 billion as of the end of August 2016, compared to approximately TL 435.0 billion as of the end of August 2015. In August 2016, the average maturity of the Republic’s domestic cash borrowing was 80.9 months, as compared to 41.6 months in August 2015. The average annual interest rate on domestic cash borrowing in local currency (including discounted treasury bills/government bonds) on a compounded basis was 9.92% in August 2016, compared to 8.84% in August 2015.

The total gross outstanding external debt of the Republic was approximately U.S.$421,434 million (at then-current exchange rates) at the end of the second quarter of 2016. The table below summarizes the gross external debt profile of the Republic (at period end).

 

     2016  

Gross Extern Debt Profiles

   Q1      Q2  
     (Million USD)  

GROSS EXTERNAL DEBT

     411,502         421,434   

SHORT TERM

     106,640         107,469   

Public Sector

     17,559         16,486   

Central Bank

     173         157   

Private Sector

     88,908         90,826   

LONG TERM

     304,862         313,965   

Public Sector

     100,614         105,014   

Central Bank

     1,131         1,010   

Private Sector

     203,117         207,941   

 

Source: Undersecretariat of Treasury

 

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SUMMARY OF KEY ECONOMIC INDICATORS

The following table summarizes the key economic indicators of Turkey for the periods indicated:

 

     2011      2012      2013      2014      2015     2016  

Nominal GDP (billion TL)

     1,298         1,417         1,567         1,748         1,953        1,024 ** 

Real GDP Growth (%)

     8.8         2.1         4.2         3.0         4.0        3.9 ** 

Unemployment (%)

     9.2         8.4         9.1         9.9         10.3        10.2 *** 

Consumer Price Index (%)

     10.45         6.16         7.40         8.17         8.81        7.28 ****** 

Domestic Manufacturing Producer Price Index (%)

     13.3         5.5         4.5         11.4         5.9        1.78 ****** 

Current Account Deficit (million USD)

     74,402         47,961         63,608         43,552         32,241        21,701 **** 

Public Sector Budget Primary Balance /GDP (%)

     1.8         0.8         1         0.6         0.8     0.6

Central Government External Debt Stock (million USD)

     79,184         81,710         85,663         85,162         81,705        85,474 ***** 

Public Sector Borrowing Requirement/GDP (%)

     0.1         1         0.5         0.6         0     0.3

 

Sources: TURKSTAT, CBRT, Treasury

 

* 2016-2018 Medium Term Program target
** Second quarter
*** As of June
**** As of July
***** As of August
****** As of September

From May 23, 2016 to October 3, 2016, the Istanbul Stock Exchange National 100 Index (since April 5, 2013 the Istanbul Stock Exchange has carried out its operations under the title of “Borsa Istanbul”) increased by 0.46%.

 

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DESCRIPTION OF THE REPUBLIC

Turkey has a democratically elected parliamentary form of government. Since its founding 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 International Monetary Fund (“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”).

Since 1980, the Turkish Government has 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 of the Republic of Turkey (the “Central Bank” and “CBRT”) 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. According to the Ministry of Development, in 2015, agriculture, industrial sector and services sector accounted for 8.6%, 21.5% and 69.9% of GDP respectively. The average GDP growth rate during the 2011-2015 period was 4.4%. See “Economy—Services,” “Economy—Industry” and “Economy—Agriculture.”

LOCATION, AREA AND TOPOGRAPHY

 

LOGO

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 Bosporus, the Sea of Marmara and the Dardanelles.

 

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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 Ministry of Development, the population of Turkey was 78,741,053 on December 31, 2015. The annual population growth rate for Turkey in 2015 was 1.34%, compared to an annual growth rate of 1.33% in 2014. Turkey’s population is relatively young compared to other European countries, 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 TURKSTAT, in 2015, 92.1% of the population lived in urban areas and 7.9% lived in rural areas. In 2015, the median age of the population in Turkey was 31, with a median age of 30.4 for males and 31.6 for females. Persons of working age, the age group of 15-64, constituted 67.8% of the total population in 2015.

The largest city in Turkey, with a population of about 14.7 million, is Istanbul, the country’s commercial center. Ankara, the capital city of Turkey, with a population of about 5.27 million is the second largest city. Izmir, with a population of about 4.2 million, is third largest. Other cities with populations in excess of one million are (in alphabetical order) Adana, Antalya, Aydin, Balikesir, Bursa, Diyarbakir, Gaziantep, Hatay, Kahramanmaraş, Kayseri, Kocaeli, Konya, Manisa, Mersin, Samsun, Sanliurfa and Van.

In 2015, total employment was 26,621million, with approximately 20.6% employed in agriculture, 20% in industry and 59.4% in services (including construction). See “Economy-Employment and Wages.” The unemployment rate was 10.3% in 2015.

Turkey has made significant progress in improving social welfare over the last decade. Life expectancy increased from an average of 67.4 years in 1990 to an average of 78 years for the period of 2013-2014. The infant mortality rate decreased from 51.5 per thousand live births for the year 1990 to 10.7per thousand live births for the year 2015. According to the Address Based Population Registration System, the adult literacy rate among individuals aged 6 years and over increased sharply from 80.5% in 1990 to 96.2 in 2015.

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

Overview

A popular nationalist movement began in Turkey before the turn of the 20th 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.

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. Pursuant to a 2007 amendment to the Constitution, the President is elected by the absolute majority vote of the public. Prior to this amendment, the President was elected by the Assembly. The President is elected for a five-year term, and can serve a maximum of two terms. 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 four-year terms. The Constitution provides for a system of proportional representation and forbids the formation of political parties based on class, religion or ethnic identity. The Law No. 2839 provides that parties whose nationwide vote in general elections is less than 10% are not eligible for seats 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.

 

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The Turkish military establishment has historically been an important factor in Turkish government and politics, successfully 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. On July 15, 2016, a coup d’état was attempted against the Government by a faction within the army that is linked to the Gulen movement (which was officially designated by the Government as a terrorist group called FETÖ in May 2016). The coup plotters attempted to overthrow the Government by seizing control of several key institutions and buildings in Ankara, Istanbul, and elsewhere, but failed to do so as there was strong public opposition against the coup plotters. During the coup attempt, approximately 250 people were killed and more than 2,200 were injured while many government buildings, including the Turkish Parliament and the Presidential Palace, were damaged. On July 21, 2016, the Parliament approved the declaration of a three-month state of emergency in order to enable the authorities to take swift and effective action against those responsible for the failed coup, which also resulted in the temporary suspension of the European Convention on Human Rights. On August 7, 2016, several million people gathered in Istanbul for an anti-coup rally organized by the Turkish authorities, showing solidarity and political cohesion against the attempt. The President, Prime Minister and the two leaders of the opposition parties participated in the anti-coup rally.

Significant Events

On July 25, 2008, the 13th Penal Court of Istanbul agreed to hear a case against 86 people (including two senior retired army officials, one political party leader and a number of journalists and non-governmental organization members) accused of, among other things, inciting an armed insurrection, aiding a terrorist group and plotting to overthrow the government. Over time, the investigation continued and additional defendants were charged. On August 5, 2013, 254 of the 275 defendants were convicted. In March 2014, the former chief of staff, sentenced to life imprisonment, was released by a decision of the Constitutional Court, on the grounds that he had been ‘unlawfully deprived of his freedom’. As a result of the court’s decision, more than 50 people convicted in the case were also released. In May 2015, the Supreme Court of Appeals Prosecutor’s Office requested the reversal of the decision. On July 21, 2016, the Supreme Court of Appeals overturned convictions of all 275 defendants. The Court stated in its ruling that convictions by a local court were invalid, as the cases lacked concrete evidence pointing to the existence of the alleged terrorist organization. The Court cited a number of violations in the case such as illegal wiretapping, dubious statements of secret witnesses and unlawful searches.

On September 21, 2012, in a separate case involving a plot to overthrow the government in 2003, over 300 military officials were sentenced to prison terms ranging from six years to twenty years. On October 9, 2013, the Supreme Court of Appeals ordered the retrial of 88 convicted suspects, while approving the convictions of 237 suspects in the case. After merging 230 separate individual appeals that were filed by the convicts, on June 18, 2014, the Constitutional Court ruled that the convicted suspects’ rights were violated concerning “digital data and defendants’ testimony,” requiring the cases of the suspects to be retried in local courts in order to eliminate the violations. On March 31, 2015, all suspects in the case were acquitted.

On May 13, 2014, an explosion at a coalmine in Soma, Manisa, caused an underground mine fire. 301 people died in that disaster. Following the incident, an investigation was initiated and 24 people were taken into custody. On November 10, 2014, the indictment of the case was presented to the court by the chief public prosecutor. The indictment has been rejected by the court on four grounds, including lack of testimony, lack of evidence, violation of the principle of individual criminal responsibility and submission of charges without including the necessary technical details. On March 7, 2015, the court approved a revised bill of indictment implicating 45 people in connection with the mining incident. The lawsuit is ongoing.

On December 14, 2014, Turkish authorities made over two dozen arrests of media representatives during raids of a newspaper and TV station with close ties to the U.S.-based Islamic cleric Fethullah Gulen, the spiritual leader of the Gulen movement, an opposition movement in Turkey. The arrests were made on charges of forgery, fabricating evidence and forming an illegal organization to oppose the state. On December 14, 2014, European Union officials Federica Mogherini and Johannes Hahn issued a joint statement stating that such actions were incompatible with the freedom of media, which is a core principle of democracy. On December 15, 2014, Turkish President Recep Tayyip Erdoğan issued a statement that such steps were necessary and within the rule of law against elements that threaten national security. Following the arrests, several detainees have been released with the remaining subject to further interrogation. On December 19, 2014, the 1st Istanbul Penal Court of Peace issued an arrest warrant for Fethullah Gulen. On February 24, 2015, an Istanbul Court issued a second arrest warrant for Mr. Gulen. On September 17, 2015, a Turkish prosecutor sought a jail sentence for Fethullah Gulen of up to 34 years. On October 19, 2015, Istanbul’s High Penal Court issued an arrest warrant for Gulen and Sinan Dursun for “attempting to stage a coup, establishing and masterminding an armed organization and political espionage”. On November 9, 2015, the Istanbul 14th Criminal Court ordered the arrests of Fethullah Gulen and former police officer Emre Uslu over illegal wiretapping, along with 112 suspects. On December 28, 2015, another arrest warrant was issued for Gulen, along with 60 suspects.

In 2015, a series of raids were carried out against opposition media outlets and Gulen-associated businesses throughout Turkey. For example, in January 2015, several policemen were arrested for illegal wiretapping and political spying charges. On September 1, 2015, Turkish police raided the Ankara-based offices of a media group affiliated with Fethullah Gulen. Six people were arrested and a warrant was issued for the conglomerate’s chief executive, Akin Ipek. On September 16, 2015, Turkish police issued warrants against eleven executives on charges of organized theft. The arrests took place in the central city of Kayseri, where police raided a university with alleged links to Fethullah Gulen. On October 26, 2015, an Ankara court appointed administrators to take control of Koza İpek Holding, which the Ankara Chief Public Prosecutor’s Office identified as a Gulen-associated business. On March 23, 2016, a court in Istanbul appointed trustees to run the Feza media group, which owns the Zaman Daily and Cihan News Agency. The court accused the Feza media group of supporting the movement of Fethullah Gulen.

As of August 17, 2016, approximately 40,000 people have been detained in connection with the failed coup of July 2016. Of those detained, a substantial number have been military personnel (approximately 10,000 people, including 178 generals). Around 20,000 people have been arrested as of August 17, 2016, including police officers, soldiers, judiciary members, local administrators and civilians. As of August 17, 2016, nearly 80,000 government officials have been fired or suspended from various public institutions, including approximately 3,000 judges and prosecutors, deans of all universities have been asked to resign and the licenses of approximately 21,000 teachers working at private institutions have been terminated due to their alleged links to the Gulen movement. In addition, more than 100 media outlets have been closed, such as newspapers, TV channels, radio stations and magazines. Following the coup, there have also been raids on businesses with suspected links to the Gulen movement, greater civilian control of the military, a planned overhaul of military hierarchy and command structure and the release of prisoners to increase capacity of prisons to house those arrested for their involvement in the failed coup.

Elections & Executive Powers

The most recent local elections for municipalities were held on March 30, 2014. The AKP received 42.87% of the votes cast for the seats in councils of the municipalities. The CHP, the MHP and the Peace and Democracy Party (BDP) received 26.34%, 17.82% and 4.16% of the votes, respectively.

On August 10, 2014, the presidential elections were held. Recep Tayyip Erdogan was elected by absolute majority vote to a five-year term as president. Recep Tayyip Erdoğan received 51.79% of the total votes, whereas Ekmeleddin Ihsanoglu, the joint candidate of the Republic’s two largest opposition parties, claimed 38.44% and Selahattin Demirtas, candidate of the pro-Kurdish Democratic Regions Party (formerly the Peoples’ Democracy Party), won 9.76%.

The latest general elections were held on November 1, 2015. The AKP, the CHP, the MHP and the HDP received 49.50%, 25.32%, 11.90% and 10.76% of the votes, respectively. After the elections, on November 24, 2015, the AKP formed a single party government.

Following the November 2015 elections, the Government started negotiations to form a new constitution with an aim to replace the existing constitution, which was enacted after the military coup in 1980, with a more democratic one. On July 25, 2016, the Government held a meeting with CHP and MHP representatives, where it was agreed they would negotiate a small-scale change to the constitution in order to amend the existing bylaws regarding High Council of Judges and Prosecutors.

On May 5, 2016, the Republic’s former Prime Minister Mr. Ahmet Davutoğlu announced his resignation. On May 22, 2016, the ruling Justice and Development Party held an extraordinary congress and elected Mr. Binali Yıldırım as its new chairman and therefore, as Prime Minister of the Republic. On the same day, President Mr. Recep Tayyip Erdoğan accepted the resignation of Prime Minister Ahmet Davutoglu and his cabinet. On May 24, 2016, Mr. Yıldırım formed the 65th Turkish government.

The following table sets forth the composition of the Assembly by total number of seats as of September 22, 2016:

 

     Number of
Seats
 

Justice and Development Party (AKP)

     317   

Republican People’s Party (CHP)

     133   

People’s Democratic Party (HDP)

     59   

Nationalist Action Party (MHP)

     40   

Independent

     1   
  

 

 

 

Total

     550   
  

 

 

 

 

Source: The Grand National Assembly of Turkey

Legislation

On March 27, 2015, the Assembly approved the new domestic security law (Law No. 6638). Law No. 6638 was published in the Official Gazette on April 4, 2015 (No. 29316). The new law expands the powers of the Turkish police and increases penalties for people participating in unauthorized demonstrations.

FOREIGN POLICY

Since the foundation of the Republic, Turkey’s foreign policy has been guided by the principle of “peace at home, peace in the world.” Over the years, the country’s foreign policy has developed based on this principle and in line with changes in the domestic and international environment.

As a democratic, secular and economically thriving country located at the center of a strategic and dynamic region, Turkey actively pursues a responsible, constructive and multidimensional foreign policy. Facing a multitude of opportunities and challenges in surrounding regions, Turkey seeks to be a positive influence and to help generate stability, security and prosperity in its region and beyond.

 

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In pursuit of creating peace and prosperity in the surrounding region, Turkey aims to further develop its relations with neighboring countries through initiatives towards strengthening political dialogue, economic interdependence and social-cultural interaction among regional countries. The key element of this policy is fostering an environment where all regional actors can become part of the solution and agree on a common vision based on their shared interests.

Deepening existing strategic relations with European and Transatlantic political, economic and security structures and continuing the accession negotiations with the European Union (the “EU”) remain the main pillars of Turkish foreign policy. At the same time, drawing strength from its increased economic and political capabilities, Turkey has been more actively involved in a wider geography and in a wider set of global issues. In this context, Turkey has been developing and strengthening its relations bilaterally as well as with regional organizations in Africa, Asia-Pacific, and Latin America and the Caribbean. Turkey has also been taking on greater responsibility in global humanitarian and development initiatives. To this end, on May 23-24, 2016, Turkey hosted the first-ever UN World Humanitarian Summit in Istanbul.

Furthermore, Turkey has been playing a more prominent role in peace building and conflict prevention efforts, serving as a mediator or facilitator in various conflicts across the world, and initiating multilateral initiatives such as the United Nations Alliance of Civilizations in 2005 and Mediation for Peace in 2010, which promotes tolerance and strengthens the role of mediation in the United Nations (the “UN”) and other international forums.

Strong commitment to human rights, the rule of law and democracy are among the guiding principles for Turkey in pursuing foreign policy objectives. With this understanding, Turkey gives its full support to protection, promotion and effective implementation of fundamental human rights in its surrounding region and beyond, as well as making significant contributions to the international standard-setting activities with respect to human rights. Beginning in January 2016, Turkey became a major contributor to the budget of the Council of Europe and increased its annual contribution to 33 million Euros. Additionally, the seats allocated to the delegation of Turkey at the Parliamentary Assembly of the Council of Europe and the Congress of Local and Regional Authorities increased to 18 from 12.

Turkey is party to the core human rights conventions of the UN and cooperates with the international and regional human rights mechanisms. Turkey is also party to the European Convention on Human Rights and to a large number of protocols and other Council of Europe Conventions, including Protocol 6 and 13, abolishing the death penalty in all circumstances.

Over the last decade, a series of comprehensive reforms have been successfully implemented in line with Turkey’s international commitments and aspirations to further improve the standards of human rights, the rule of law and democracy. In December 2012, the Ombudsman’s Institution began operation. The Human Rights and Equality Institution of Turkey was established in June 2012 and was designated the “National Preventive Mechanism” in January 2014, in order to perform tasks under the Optional Protocol to the Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment.

Turkey is committed to pursuing an active foreign policy which aims to strike a balance between national interests and universal values.

International Organizations

Turkey is the founding member of the UN, the Council of Europe, the European Bank for Reconstruction and Development and the Organization for Security and Cooperation in Europe (“OSCE”). Turkey is also a member of NATO, the OECD, the World Trade Organization, the Organization of the Islamic Cooperation (“OIC”), Islamic Development Bank, the Black Sea Economic Cooperation Organization, the Economic Cooperation Organization, the Developing 8 and the Conference on Interaction and Confidence Building Measures in Asia. Turkey also has either an “observer” or a “partner” status at various regional organizations. Turkey also participates in the Euromed/Barcelona Process. Turkey is a member of the World Bank, the IMF, the European Resettlement Fund, the Asian Development Bank, the Multilateral Investment Guarantee Agency, and the Bank for International Settlements and is a participant in the International Convention on the Harmonized Commodity Description and Coding System. Turkey ranks among the biggest contributors to the UN budget. Turkey has been a member of the Geneva Group since 2014. In line with our increasing contributions to UN activities, important steps have already been taken to realize our vision of making Istanbul a regional UN center. In this regard, UNICEF will follow the examples of the United Nations Development Program, United Nations Population Fund and UN Women by opening its regional office in Istanbul, helping to make Istanbul a regional UN center.

Turkey is a founding and active member of the Organization of the Islamic Cooperation”). Turkey hosted the 13th Islamic Summit of the OIC on April 14-15, 2016, in İstanbul. Turkey has assumed the Summit Chairmanship of the OIC for two years.

Turkey is a member of The Group of Twenty (“G-20”). At the G-20 Leaders’ Summit in Cannes in 2011, it was announced that Turkey would assume the presidency of the G-20 in 2015. Turkey became a member of the G-20 troika (past, current and future hosts) on December 1, 2013, and its presidency of the G-20 commenced on December 1, 2014. Upon taking over the G-20 Presidency, Turkey announced its priorities as ‘Inclusiveness’, ‘Implementation’, and ‘Investment’, namely the three ‘I’s. During its G-20 Presidency, Turkey organized events in line with the Africa’s “Agenda 2063”. A High Level Conference on Access to Energy in Sub-Saharan Africa was organized on October 1, 2015. The 10th G-20 Leaders Summit was hosted by the President of the Turkey in Antalya on November 15-16, 2015. Turkey handed over the G-20 Presidency to China on December 1, 2015 and continues to be part of the troika membership.

 

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Turkey was one of the founding members of the International Maritime Organization (“IMO”) and has been a member of its Executive Council since 1999. Turkey has intensified its efforts to improve the standards of its merchant fleet and to harmonize its legislation with the EU acquis in areas like maritime safety, fisheries and shipping. Turkey is also party to major IMO Conventions and Protocols. Turkey became an Associate Member of the European Organization for Nuclear Research (“CERN”), on May 6, 2015, following Turkey’s ratification of the Associate Member Agreement signed in 2014, granting Associate Member status to the country. Turkey’s Associate Membership will strengthen the long-term partnership between CERN and the Turkish scientific community.

Non-Proliferation and Disarmament

Turkey’s security policies prohibit the production and use of all kinds of weapons of mass destruction (“WMD”). Party to all international non-proliferation instruments and export control regimes, Turkey supports the universal use of such measures, as well as effective implementation in good faith. With a view to fulfilling the provisions of these instruments and arrangements, Turkey has an enhanced system of export controls in line with the standards of the European Union.

Turkey pursues a comprehensive and integrated policy in its region. Due to its proximity to areas of internal and regional strife, Turkey also closely monitors developments in its region and takes part in collective efforts aimed at containing and reversing alarming trends. In this respect, Turkey supports all efforts towards the establishment of an effectively verifiable zone free of WMD and their means of delivery in the Middle East, as an important confidence building measure that would contribute to the peace, security and stability in the region.

Terrorism

In recent years, the Republic has experienced a number of terror-related incidents. On January 6, 2015, a police station in Istanbul was bombed. In June 2015, four people died and over 400 were injured after two explosions hit the city of Diyarbakir during a pro-Kurdish Peoples’ Democratic Party election rally. On April 27, 2016, a suicide bomber detonated an explosive in the northwestern Turkish city of Bursa. Police operations in respect of this bombing are ongoing.

The bombings and attacks by Islamic State of Iraq and the Levant (“DAESH”), a terrorist organization, in major cities in Turkey has taken the lives of 206 Turkish citizens and left hundreds of citizens wounded. As a member of the Global Coalition Against DAESH, Turkey contributes to the Coalition’s efforts in Syria and Iraq through the use of its own national assets and capabilities. Turkey and the United States have been conducting joint military operations with the Coalition against DAESH elements in northern Syria since July 28, 2015. As of July 2016, Turkey has eliminated more than 1,200 DAESH operatives in Syria.

On October 10, 2015, two bombs exploded in Ankara during a peace rally killing nearly 100 individuals and wounding over 200 others. On October 28, 2015, the Ankara Chief Public Prosecutor’s office said a DAESH cell from Gaziantep, a province in southern Turkey that borders Syria, carried out the bombing. On January 12, 2016, a bombing in Istanbul killed at least 11 individuals including the bomber, a suspected DAESH activist based in Syria. More than a dozen other individuals were wounded in the attack. Following the suicide bombing, Turkish artillery attacked DAESH positions in Syria and Iraq, killing around 200 fighters within 48 hours. On March 19, 2016, a suicide bomb attack in İstiklal Street, İstanbul’s main shopping street, killed 4 people and injured 39 others. Two Israelis with dual U.S. nationality and an Iranian were killed in the blast.

In late July 2015, the Kurdistan Workers’ Party (the “PKK”), a terrorist organization, abandoned the cease-fire process initiated by the Government, and resumed violent activities. Since July 2015, hundreds of civilians as well as Turkish soldiers and policemen have been killed by PKK, and Turkish security forces have carried out operations against the terrorist group in Turkey and northern Iraq. Since July 2015, counter-terrorist operations have escalated to include airstrikes against PKK targets. On February 17, 2016, PKK-affiliated terrorists exploded a car bomb in the Turkish capital near military vehicles carrying personnel, killing 29 people and injuring at least 60 other individuals. On March 13, 2016, another car bomb attack in Ankara’s central Kızılay neighborhood hit a major public transportation hub, killing 37 people and injuring dozens of others. The Interior Ministry has identified the 24-year-old female bomber who had joined the PKK terrorist group in 2013 and received training with the People’s Protection Units in Syria. On April 4, 2016, Turkish Armed Forces carried out airstrikes on PKK terrorist bases in northern Iraq.

On December 14, 2015, Special Forces from the Turkish National Police and the Turkish Armed Forces commenced a joint counter-terror operation against PKK members located and active in a number of southeastern Turkish towns. On February 11, 2016, the counter-terror operation in Cizre town ended. According to figures released by the Turkish Armed Forces, 619 PKK members were killed in Cizre during the nearly two month long operation. On March 9, 2016, anti-terror operations launched against the PKK in the southeastern Sur district of Diyarbakır province ended. According to a statement released by the Turkish General Staff, 264 terrorists were killed and 345 explosive devices were defused in Sur since the operation began. On March 14, 2016, counter-terrorism operations were launched in the Nusaybin district of Turkey’s southeastern province of Mardin. According to a statement from Mardin Governorate, 137 PKK terrorists were neutralized, 100 barricades were removed, 11 ditches filled up and 263 handmade explosives destroyed since the launch of operations. On September 4, 2016, the Turkish Government announced that it will invest U.S.$3.4 billion in rebuilding the settlements destroyed by the PKK in terror in the southeast of the country.

 

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Turkey contributed to the Council of Europe Additional Protocol to the Convention on the Prevention of Terrorism which addresses the phenomenon of foreign terrorist fighters. Turkey signed the Additional Protocol on October 22, 2015 and the ratification process is expected to be completed soon.

Turkey’s response to these terror threats has been based on the notion of self-defense as outlined in Article 51 of the UN Charter. Turkey will continue to exercise its right to protect the country’s national security. Certain Security Council resolutions (no. 1373, no.2170, no.2178) attribute responsibility to countries in the fight against terrorism, specifically in countering DAESH.

It is against this backdrop that Turkey initiated Operation Euphrates Shield (“OES”) on August 24, 2016. OES is a counter-DAESH effort and is supported by the Global Coalition. Turkey is determined to clear its borders of terrorist groups. Turkey has given its full support to all international efforts to fight DAESH since day one. DAESH rocket and suicide attacks claimed the lives of hundreds of Turkey’s citizens. Clearing Turkey’s borders of DAESH will ensure Turkey’s border security completely. As of September 4, 2016, the 98 km stretch of Turkey’s borders from Azaz to Jarablus has been sealed off. DAESH still needs to be totally eliminated in inland Syria. Turkey is maintaining pressure in cooperation with the Global Coalition.

INTERNATIONAL RELATIONS

The European Union

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 Ankara 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 the EU. In December 1989, in its “Opinion on Turkey’s Request for Accession to the Community” the European Commission determined that the EEC could not accept a new member or engage in new accession negotiations before 1993, at the earliest. Moreover, the opinion stated that Turkey would have to fulfill certain requirements in terms of the country’s economic, social and political developments prior to any accession negotiations.

With the completion of the Customs Union, in accordance with the Ankara Agreement, the association between Turkey and the EU entered its final stage and at the European Council (the “Turkey-EU Summit”) held in Helsinki in December 1999, Turkey was granted candidate status. The recognition of Turkey as a candidate country for accession to the EU ushered in a new era in Turkey-EU relations. The Accession Partnership Document for Turkey was approved by the Council of the European Union (the “EU Council”) on March 8, 2001. In response, the Turkish Government adopted its National Program for the Adoption of the Acquis (“NPAA”) on March 19, 2001. Both the Accession Partnership Document and the NPAA are revised on a regular basis to take note of the progress made and to include new goals and priorities.

Accession Negotiations

Turkey’s EU accession process is being conducted in 35 chapters. During the negotiation process, chapters are opened depending upon the candidate country’s fulfilment of opening benchmarks, if any, which are determined by the EU Council. Chapters are provisionally closed depending upon the candidate country’s fulfilment of closing benchmarks, which are also determined by the EU Council. A negative opinion expressed by one or more member states can block the opening or closing of a chapter.

In October 2015, following a meeting between President Erdoğan, Donald Tusk, President of the European Council, Martin Schulz, President of the European Parliament, and Jean-Claude Juncker, President of the European Commission, Turkey and the EU agreed to re-energize Turkey’s accession process at the Turkey-EU Summit of November 29, 2015. Chapter 17 (Economic and Monetary Policy) was opened to negotiations on December 14, 2015. Turkey and the EU also agreed to complete the preparatory work for the opening of Chapter 15 (Energy), Chapter 23 (Judiciary and Fundamental Rights), Chapter 24 (Justice, Freedom and Security), Chapter 26 (Education and Culture) and Chapter 31 (Foreign, Security and Defense Policy), in the first quarter of 2016 and to start the preparations regarding the remaining Chapters. As of September 2016, the preparatory work has been completed and Turkey has sent its contribution to the Commission. Turkey expects the Commission and the EU Council to take the necessary steps to open these chapters.

In the Turkey-EU Summit of March 18, 2016, the parties also decided to open Chapter 33 (Financial and Budgetary Provisions) and on June 30, 2016, Chapter 33 was opened to negotiations at the 12th meeting of the Intergovernmental Accession Conference in Brussels.

In Turkey’s EU accession negotiations, sixteen chapters have been opened to negotiations including most recently Chapter 17 (Economic and Monetary Policy—on December 14, 2015) and Chapter 33 (Financial and Budgetary Provisions-on June 30, 2016). One chapter has been provisionally closed — Chapter 25 (Science and Research).

Although the screening process of 33 chapters was completed back in 2006, the screening reports of 8 of those chapters are still pending for approval at the EU Council. Since the screening reports have not yet been approved, the official opening benchmarks of these chapters has yet to be communicated to Turkey.

 

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Fourteen chapters have been blocked by the EU Council and Southern Cyprus. The EU Council (General Affairs and External Relations) Decision of December 11, 2006, suspended negotiations on eight chapters relevant to Turkey’s restrictions with respect to the Republic of Cyprus and restricted the closing of the other six chapters until Turkey fulfils its commitments under the Additional Protocol to the EU-Turkey Association Agreement, which extended the EU-Turkey Customs Union to the ten member states, including Cyprus, that joined the EU in May 2004. Therefore, the fulfillment of Turkey’s commitments under the Additional Protocol to the Ankara Agreement is the opening benchmark for eight chapters and the closing benchmark for all chapters. Although no chapter can be closed due to the aforementioned EU Council decision, two (Chapter 20—Enterprise and Industry and Chapter 21—Trans-European Networks) are ready to be closed other than meeting the commitments under the Additional Protocol. Moreover, the European Commission has confirmed the fulfillment of certain closing benchmarks of five chapters since 2011. The sole closing benchmark of Chapter 20 (Enterprise and Industry Policy) was confirmed fulfilled in April 2011. The sole closing benchmark of Chapter 21 (Trans-European Networks was confirmed fulfilled by the Commission) in March 2011. One closing benchmark out of 5 in Chapter 6 (Company Law) was confirmed fulfilled in June 2012. Three closing benchmarks out of 6 in Chapter 32 (Financial Control) were confirmed fulfilled by the Commission in June 2012. And one closing benchmark out of 5 in Chapter 28 (Consumer and Health Protection) was confirmed fulfilled in October 2012. Turkey is ready to revive the process and proceed in the negotiations, which, however, may be difficult as long as the political blockages are in place. Currently, Turkey’s priority is to open chapters within the framework of Turkey-EU statement of November 29, 2015, particularly, Chapter 23 (Judiciary and Fundamental Rights) and Chapter 24 (Justice-Freedom and Security).

Efforts to Accelerate Accession Negotiations

(1) Turkey’s New EU Strategy

Turkey’s New EU Strategy (“EU Strategy)”, was publicly announced on September 18, 2014. The EU Strategy rests on three pillars: (1) determination in the political reform process, (2) continuity in socio-economic transformation, and (3) effectiveness in communication.

The first pillar of the strategy involves the political reform process. The Reform Action Group (“RAG”) monitors political reforms, and takes an active role contributing to the preparation, adoption and implementation phases of reform. Three meetings of the RAG have been held so far—on November 8, 2014, February 20, 2015, and December 11, 2015.

The second pillar of the EU Strategy is socio-economic transformation in Turkey, which is a continual process, essential to fostering and consolidating democracy. Accordingly, a two-phase National Action Plan for EU Accession has been established, which focuses, among other things, on proper enforcement of relevant legislation to further raise the living standards of Turkish citizens. Initially, the National Action Plan was being implemented in two phases, the first phase covers the period between November 2014 and June 2015 and the second phase covers the period between June 2015 and June 2019. In the first phase of the National Action Plan, seven laws were ratified, 72 secondary legislations became effective, and 20 administrative measures were established. However, some legislation and administrative were left untouched due to time constraints. Therefore, Ministry for EU Affairs opted to update the National Action Plan, incorporating and rescheduling the elements of the first phase that had been pending with the elements of the second phase which are yet to be addressed. As a result, the updated National Action Plan for EU Accession was publicly announced on February 26, 2016, covering the 2016-2019 period.

The National Action Plan for EU Accession, covering the 2016-2019 period, establishes the steps that Turkey will take to align with the EU acquis in 33 chapters in terms of legislative and administrative measures.

To ensure that new legislation is drafted in line with the EU Acquis, the Prime Ministry issued a Circular on September 25, 2014, which delineates the role of the Ministry for EU Affairs in the accession process and requires that any draft legislation prepared by a public institution with the purpose of EU Acquis alignment be sent to the Ministry of EU Affairs for its opinion.

The third pillar of the EU Strategy, Turkey’s EU Communication Strategy, was announced on October 16, 2014. The EU Communication Strategy has two dimensions. The first dimension covers communication within the country, which aims to contribute to the domestic perception of the EU accession process as a modernization project, improving living standards of Turkish people. The second dimension of the strategy addresses the European public opinion of Turkey and its accession negotiations with the EU.

In this context, the Ministry for EU Affairs hosted Civil Society Dialogue meetings in seven different cities, including İstanbul (on November 26, 2014), İzmir (on February 19, 2015), Konya (on March 18, 2015) Adana (on March 24, 2015), Bursa (on April 22, 2015),Antalya (on April 28, 2015) and Samsun (on December 24, 2015). Hundreds of Civil Society Organizations (“CSOs”) representing businesses, universities, different interest groups and local administrations were invited. Over 2,000 participants in each of those cities attended the meetings. During the meetings, CSOs expressed their views about Turkey’s EU accession process and shared their opinions and recommendations on how to establish a better dialogue between the populace and the public sector and encourage participation in every aspect of the process. The meetings created a forum and an opportunity not only for the CSOs’ voices to be heard, but also for the Ministry to explain to the CSOs the goals of the EU Strategy, provide information regarding the EU funds available for CSOs’ development, and promote administrative-civil society dialogue and civil society dialogue between Turkey and EU.

 

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To incorporate all segments of Turkish society into the EU accession process, the Ministry for EU Affairs opened its second Office in Antalya on December 21, 2014 and its third Office in İzmir on February 19, 2015, in addition to its office in İstanbul. The main purpose of these new offices is to achieve harmonization and effective implementation of the EU Acquis at a local level. The offices work in close cooperation with NGOs, municipalities, and public institutions in all EU related activities at the local level and to ensure efficient use of EU financial assistance to Turkey.

(2) Sub-Committees

Eight sub-committees to the Association Committee were established by Decision No: 3/2000 of the European Community-Turkey Association Council on April 11, 2000. The subcommittees were established before the accession negotiations and remained a mechanism to harmonize the EU Acquis. They, however, lacked the capabilities needed to effectively respond to the challenges of the negotiation process after 2005.

Therefore, Turkey and the European Commission agreed on a new chapter-based methodology for sub-committee meetings. Sub-committee meetings employing this new methodology were held in 2015 after a nearly three-year break. The chapter-based structure of sub-committees facilitated the technical negotiation process by managing the opening and closing benchmarks regardless of political blockages, increasing the motivation of public institutions. With this new methodology, Turkey expects to be informed via official letters from the Commission on the progress made with respect to the relevant benchmarks following the sub-committee meetings.

(3) Dialogue Platforms

Recently, new dialogue platforms were established between Turkey and the EU. Turkey welcomes intensifying the dialogue for deepening Turkey-EU relations; however, the dialogue mechanisms between Turkey and the EU are not a substitute for the accession process. These mechanisms complement and support the accession process.

Both sides agreed to have regular Summits twice a year, and to have comprehensive regular political dialogue meetings at Ministerial/High Representative/Commissioner level in addition to the regular Association Council meetings. Turkey and the EU agreed to launch a High Level Economic Dialogue (“HLED”) Mechanism in the first quarter of 2016, and the first meeting was held on April 25-26, 2016. The HLED aims to further enhance the economic relations, which have been significantly improved as a result of the Customs Union between the EU and Turkey, through developing a mutual understanding of economic policies and structural reform agendas. The first day included an EU-Turkey Business Dialogue in Istanbul where officials from the Commission and Turkish Government and representatives of major Turkish and European businesses came together and focused on how to create a better business environment and deepen bilateral trade and investment links. The second day of the HLED was held in Ankara where ministerial-level discussions were held regarding the outlook for the EU and Turkish economies and the need for an ambitious reform agenda.

To enhance Turkey-EU cooperation for securing and diversifying energy supplies and to ensure competitive energy markets, the High Level Energy Dialogue was launched on March 16, 2015. Turkey is a natural energy hub between the energy resources of the Middle Eastern and Caspian Regions and the EU energy markets. Turkey’s development as an energy hub would be beneficial to both Turkey and the EU.

Political Reforms

Since 1999, a comprehensive transformation and reform process in line with the goal of EU accession has been underway. Turkey’s objective is full compliance with the EU Copenhagen political criteria and political reforms in the areas of human rights, democracy and the rule of law, which are prerequisites to EU accession.

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 to enable the learning 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 certain 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.

New democratic institutions were established, which created notable improvements in the process of institutionalization of human rights. The Law on the Human Rights Institution, which became effective on June 30, 2012, for example, is a public legal entity which has administrative and financial autonomy and has its own budget. In order to make the Human Rights Institution of Turkey more effective, the Law on Human Rights and Equality Institution of Turkey was adopted, and it entered into force on April 20, 2016. The purpose of this Law is to protect and promote human rights, secure the right to receive equal treatment, prevent discrimination, and

 

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fight against torture and ill-treatment effectively. The Institution operates as national preventive mechanism within the framework of the provisions of Optional Protocol to the UN Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment. The Ombudsman Institution aims to improve the quality and effectiveness of public services, by addressing the complaints of citizens regarding public services in a fair and timely manner, free of charge. The establishment of an Ombudsman system, on June 29, 2012, is a first in Turkey and one of the most important steps taken to improve accountability, fairness and transparency of the public administration. With the adoption of the Law on Settlement of Some Applications Made to the European Court of Human Rights through Compensation, which was published in the Official Gazette on January 19, 2013, a domestic legal remedy has been introduced which provides for compensation for persons who have applied to the European Court of Human Rights on the grounds of (a) excessively long civil, criminal or administrative trials or (b) delayed or deficient implementation or non-implementation of courts’ decisions. The implementation of the individual application system to the Constitutional Court, which is an exceptional domestic legal remedy for the violation of individual rights and freedoms guaranteed by the Constitution and the ECHR through acts, operations or negligence of public authorities, started on September 23, 2012.

The Action Plan for Prevention of Human Rights Violations became effective on March 1, 2014. The Action Plan contains concrete objectives towards finding solutions through a timetable in areas in which European Convention on Human Rights are violated.

The Democratization Package announced on September 30, 2013, proposed comprehensive reforms for further improvement and enjoyment of a wide spectrum of civil and political rights. The package includes, allowing political discourse in languages and dialects other than Turkish, facilitating local organization of political parties, enabling education in languages and dialects other than Turkish in private schools, lifting restrictions on renaming villages and the use of letters Q, X, W, ending the ban on women wearing headscarves in public service, enacting a comprehensive anti-discrimination legislation, establishing the Anti-Discrimination Commission, and ensuring that possible motives based in bigotry are considered an aggravating circumstance in criminal proceedings. The Law Amending Certain Laws for the Enhancement of Fundamental Rights and Freedoms was adopted on March 2, 2014, fulfilling legal and administrative arrangements required by the Democratization Package.

In the first half 2016, Turkey took several crucial steps to become a party to regional and international conventions in the field of fundamental rights and freedoms by ratifying over a dozen conventions and protocols, which range from the processing of personal data to the prevention of financing of terrorism. Some of these steps also constitute some of the requirements of the Visa Liberalization Roadmap towards a visa-free regime for Turkey. The approval of these conventions and protocols strengthens the fundamental rights and freedoms in Turkey. The approval of these conventions and protocols also has had a positive impact on the post-monitoring dialogue between Turkey and the Council of Europe, which began after the Council of Europe lifted the political monitoring process in 2004.

The Law on International Judicial Cooperation in Criminal Matters was adopted by the Turkish National Grand Assembly on April 22, 2016 and entered into force on May 5, 2016. This Law facilitates the implementation of the provisions of international agreements in the field of international judicial cooperation in criminal matters in the domestic law.

After five years of implementation, the Judicial Reform Strategy, which aims to further strengthen the independence, impartiality, efficiency and effectiveness of the judiciary, was renewed on April 17, 2015.

Within the framework of the previous Strategy, Turkey has adopted six Judicial Reform Packages binning in 2011. The amendments to the legislation were introduced to strengthen independence and impartiality and increase the effectiveness of the judiciary as well as to reduce the backlog of cases.

The First and Second Judicial Reform Packages became effective in March 31 and August 16, 2016, respectively and aim to accelerate and carry out judicial services swiftly, efficiently and economically and tackle the backlog of cases.

On July 2, 2012, the Turkish Parliament adopted new measures, known as the Third Judicial Reform Package (The Law Amending Some Laws for Effectiveness of Judicial Services and Suspension of Cases and Sentences Regarding the Offences Committed via Press), intended to improve the effectiveness of the judiciary. The Third Package provides further protection for freedom of expression and freedom of press, as well as fights against corruption. The Package has made major contributions to increasing the effectiveness and speed of judicial services.

The Third and the Fourth Packages (the Fourth Package became effective of April 3, 2013) were designed to improve human rights and governance and to overcome the problem of long trials, as guided by the European Convention on Human Rights and case law of the European Court of Human Rights. The Packages also amended certain provisions in penal legislation including detention orders, administrative judiciary, and legislation regarding freedom of expression and freedom of the press. The amendments to the Turkish Criminal Code and the Anti-Terror Law give more room for interpretation in favor of freedom of the press and freedom of expression. In addition, the Packages removed the statute of limitations applicable to offences of torture.

The Fifth Reform Package, effective March 6, 2014, ensures the right to a fair trial, personal freedom and protection of privacy and personal data, as well as presumption of innocence. The Sixth Reform Package, adopted June 18, 2014, restricted the Regional Administrative Courts within the administrative judiciary. The Regional Administrative Courts acts as a better filter between first instance courts and the Council of State. The package also introduces some amendments for the Regional Courts of Appeal within the Regional Administrative Courts. With these amendments, Regional Administrative Courts and Regional Courts of Appeal may either

 

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uphold or quash the decision of the First Instance Courts. The Council of State is the last instance for reviewing judgments rendered by administrative courts. This in turn reduces the length of trials in judiciary and reduces backlog. The package also strengthens the Council of State’s main role: safeguarding legal uniformity through case law. The amendments also include increased penalties regarding offences against sexual integrity.

The Law amending the Law on Judges and Prosecutors and Certain Laws and Decree Laws became effective on December 12, 2014. The Law primarily aims to strengthen independence, impartiality and the effectiveness of the judiciary in line with the provisions of the European Convention on Human Rights and case law of the European Court of Human Rights.

The Law on Eradicating Terrorism and Strengthening Societal Integration was adopted by the Parliament on July 10, 2014. The objective of the law is to end terrorism and strengthen societal integration in Turkey. Necessary measures were taken regarding the societal integration process of the members of the terrorist organization, who have been disarmed.

The Law on Protection of Family and Prevention of Violence against Women was adopted on March 20, 2012. The By-Laws on the implementation of the Law on the Protection of Family and Prevention of Violence against Women and on the Establishment of Women Shelters were adopted as of January 2013. Turkey became the first country to sign and ratify the Council of Europe Convention on preventing and combating violence against women and domestic violence (Istanbul Convention) without any reservations in 2011 and The Law Approving the Council of Europe Convention on Preventing and Combating Violence against Women and Domestic Violence entered into force on March 14, 2012.

With the Law on Mediation in Legal Disputes, published in the Official Gazette on June 22, 2012, a mediation system was established through which the parties may freely address disputes arising from private law procedures. With this system, disputes can be resolved through a mediator chosen by the parties.

The Prime Minister announced, on January 14, 2015, the creation of a new action plan covering the 2015-2018 period within the scope of Transparency Package in public administration. The Transparency Package includes many significant reforms including amendments in political parties finance and political ethics.

The Law amending the Law on Duties and Competencies of the Police and Certain Laws and Decree Laws (known as Reform Package on Internal Security and Protection of Freedoms) was adopted by the Parliament on March 27, 2015. The Law aims to strike a balance between freedom and security and establish control mechanisms on many issues including the use of force by law enforcement authorities.

Significant steps have been taken to enhance the dialogue with different faith groups. Ministers and Government officials have been continuously holding meetings with the representatives of religious communities to address their problems. The Prime Minister met with the religious leaders and representatives of different faith groups twice in the first half of 2015.

Following the request of the Greek community for a Greek Primary School in Gökçeada, permission was granted on March 28, 2013, to open a Greek minority school in Gökçeada. In September 2014, the Ministry of National Education approved the opening of the Private Mor Ephrem Syriac Kindergarten by Beyoğlu Virgin Mary Chaldean Church Foundation in Yeşilköy, İstanbul. The Gedikpaşa Armenian Protestant Church and School Foundation applied to register certain land as its private property, which was transferred on October 27, 2015.

With respect to property rights, an important step was taken to resolve a long-standing issue regarding the immovable properties of minority foundations by the amendment of Law on Foundations in August 2011 and its Implementing By-Law, dated October 1, 2011. This legislation has paved the way for the return of the immovable properties owned by minority foundations. 116 community foundations have applied to the Directorate General of Foundations and the Foundations Assembly has decided for the return of 333 immovable properties, and has decided to pay compensation for 21 immovable properties. . Within the scope of the Law, all the applications for the return of properties were assessed and the process was completed in 2014. Additionally, as a part of the Democratization Package, the disputed property of Mor Gabriel Monastery was returned to the Monastery Foundation in 2013. Twelve parcels, which were the subject of dispute, were registered on behalf of the Monastery Foundation on February 25, 2014. Some churches and monasteries, including Sumela Monastery, Armenian Church of Akdamar on Lake Van and Surp Giragos (an Armenian Orthodox Church at Diyarbakir) that had been closed for years to religious ceremonies were re-opened. The Great Synagogue in Edirne was restored by the General Directorate of Foundations, and re-opened for worship on March 26, 2015.

In the wake of the coup attempt by Fetullah Terrorist Organization, which claimed the lives of 241 people, Turkey has achieved some reforms regarding civil-military relations, which was an area previously criticized by the European Union. The Gendarmerie General and Coast Guard Commands now report to the Ministry of Interior. The Service Commands report to the Ministry of National Defense. The composition of the Supreme Military Council has changed and now has more civilian members. During the 3-month State of Emergency instituted immediately following the coup attempt, administrative actions in respect of human rights and rule of law remained open to judicial review.

 

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Visa Liberalization Dialogue

The launch of the Visa Liberalization Dialogue on December 16, 2013, was an important point in Turkey-EU relations. The Readmission Agreement was signed on the same day. Steps towards ensuring timely completion of the Visa Liberalization Dialogue and effective implementation of the Turkey-EU Readmission Agreement are being taken together with all the relevant Turkish institutions and with the collaboration of the European Commission.

The Visa Liberalization Dialogue is based on a Roadmap towards a visa-free regime with Turkey setting out the requirements that Turkey needs to meet in order to enable the European Parliament and the Council to amend Regulation (EC) No 539/2001 which would allow Turkish citizens holding a biometric passport in line with EU standards to travel for short stays in the Schengen area without a visa. The 72 requirements listed in the Roadmap are organized in five thematic groups: (1) document security, (2) migration management, (3) public order and security, (4) fundamental rights, and (5) readmission of irregular migrants. The European Commission reports regularly to the Council and the Parliament on Turkey’s progress in fulfilling the Roadmap requirements.

On October 20, 2014, the Commission adopted its First Report on progress. The First Report assessed the fulfillment of each requirement and issued recommendations for making further progress. After the publication of the First Report, high-level meetings of the Visa Liberalization Dialogue were held between Turkey and the Commission on February 26, 2015, and December 14, 2015. The Commission organized seven technical missions to Turkey between April and July 2015, involving experts from Member States, the Commission, Frontex, European Asylum Support Office, Europol and the EU Delegation to Turkey, to study Turkey’s legislation and administrative practices and evaluate possible progress made in implementing the requirements of the Roadmap. In addition, two meetings of the Joint Readmission Committee took place on July 15, 2015, to assess the implementation of the EU-Turkey Readmission Agreement.

At the Turkey-EU Summit of November 29, 2015, Turkey and the EU agreed to accelerate fulfillment of the Roadmap and the Second Report was adopted by the Commission on March 4, 2016. According to Second Report, Turkey fulfilled 19 out of 72 requirements/benchmarks in the Roadmap. The Third Report on progress was published on May 4, 2016. In the Third Report, the Commission stated that Turkey fulfilled 65 out of 72 benchmarks in the Roadmap. Work is underway to meet the remaining requirements through expert working groups. In the Third Report, the European Commission also presented the proposal to amend Regulation (EC) No 539/2001 to lift the visa requirement for Turkish citizens on the understanding that Turkey will fulfill outstanding benchmarks of the Roadmap.

Harmonization with the EU Acquis

Turkey continues its reform process in every field of the Acquis. In 2015 alone, six primary and 121 secondary legislative enactments were made targeting the harmonization process with the EU Acquis.

The Law No. 6475 on Postal Services was published in the Official Gazette No. 28655 of May 23, 2013, which provides for guaranteed uninterrupted postal service, regardless of geographical areas, for all users throughout Turkey at an affordable price. With this Law, the Information and Communication Technologies Authority was designated as an independent regulator of postal sector. This Law also narrowed the scope of postal monopoly by opening the market to more than one operator, helping to liberalize the sector.

Law No. 6112 on Establishment and Broadcasting Services of Radio and TV, which increases the limit on foreign ownership in radio and TV companies from 25% to 50%, was published in the Official Gazette No. 27863 of March 3, 2011. On March 30, 2013, Law No. 6446 on Electricity Market became effective, abolishing all sectorial restrictions on foreign ownership in the privatization of electricity distribution and general assets.

Turkey has also taken significant steps to liberalize its legislation on real estate acquisition by foreigners by abolishing “the reservation of reciprocity” on May 18, 2012.

On July 4, 2012, it was announced that a Memorandum of Understanding was signed between the Central Bank of the Republic of Turkey and the European Central Bank, laying the groundwork for continued cooperation in the field of central banking, through regular dialogue at technical and policy levels and possible staff exchanges.

The Capital Markets Law (No. 6362) entered into force on December 30, 2012. It provides for the functioning and development of the capital markets in a reliable, transparent, effective, stable, fair and competitive environment. The Law also aims to regulate and supervise the capital markets in order to safeguard the rights of investors.

The Law on Prevention of Financing of Terrorism was adopted on February 16, 2013. With this Law, the crime of financing terrorism has been redefined to be in line with international conventions and arrangements. Freezing of assets has been introduced to Turkey’s legal system as an administrative protective measure, and procedures and principles related to the implementation of this measure have been established.

Payment and Securities Settlement Systems, Payment Services and E-Money Institutions Law No. 6493 entered into force on June 27, 2013. The Law was prepared in line with Turkish commitments to the EU alignment process. It regulates the payment and securities settlement systems, payment services, payment service providers and e-money institutions.

 

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In the banking sector, between September 2015 and March 2016, Turkey completed the Regulatory Consistency Assessment Program of Basel Committee. The Turkish banking sector regulations and legislation were reviewed in terms of compliance with the Basel standards and were determined to be in full compliance with current Basel standards.

On September 26, 2011, the Council of Ministers approved the Decree-Law on Organization and Duties of Public Oversight, Accounting and Auditing Standards Authority. With the establishment of this Authority, the Turkish Accounting Standards Authority was abolished and as stated by the European Commission, the relevant closing benchmark of the Company Law Chapter 6 was met. The Accounting and Auditing Standards Authority has become the sole authority with the power to regulate accounting and auditing standards in Turkey. It has the authority (1) to prepare and publish Turkish Accounting Standards in line with international standards, (2) to ensure uniformity in implementation, reliability and quality of independent auditing, (3) to identify auditing standards, (4) to authorize independent auditors and independent audit companies and supervise their audit activities and (5) to ensure public oversight in the field of independent auditing.

Turkey signed the Convention on Cybercrime of the Council of Europe on November 10, 2010, which was ratified on April 22, 2014. The convention entered into force on January 1, 2015. This Convention will better implement limitations on illegal internet content, since it streamlined current regulations and provides a sound framework for the use of internet.

Law No. 6461 on Liberalization of Turkish Rail Transport Sector entered into force on May 1, 2013. It liberalizes the rail transport market by opening it to competition and separating the functions of infrastructure managers and railway undertakings.

With respect to trade union rights, the Parliament adopted two important pieces of legislation to ensure full trade union rights in line with the EU standards. With the amendment to the Law on Public Servants’ Trade Unions and Collective Agreement on April 11, 2012, the right of collective agreement was established for public servants. The Law on Trade Union and Collective Labor Agreement was adopted on November 7, 2012. As a result of the decision of the Constitutional Court, on June 11, 2015, related to the Law on Trade Union and Collective Labor Agreement, the activity threshold entitling trade unions to engage in collective labor agreements was set at 1%. The Constitutional Court (1) on October 22, 2014, removed the precondition of being employed in an establishment with thirty or more workers and having a minimum seniority of six months for workers to apply to the court for termination of the contract because of trade union affiliation, (2) on October 22, 2014, removed the ban on strike and lockout for banking services and urban public transportation services, and (3) on October 20, 2015, nullified the provision preventing public employees working in the administrative organization of the Turkish Grand National Assembly from being members of a trade union.

The Law on Occupational Health and Safety No. 6331 was adopted on June 30, 2012. This Law constitutes the legal basis of all the transposed EU occupation health and safety directives and includes both workers and public employees in the scope of the health and safety legislation.

On April 20, 2016, the Law on Human Rights and Equality Institution was adopted. This Law sets the general basis for combating discrimination in Turkey, which also aims to transpose the EU Acquis concerning anti-discrimination on grounds of race and ethnic origin in every area of life and anti-discrimination in employment on grounds of religion, belief, disability and age. The Human Rights and Equality Institution will act as an equality body, as required by the EU Acquis.

On June 25, 2015, a new Turkish Industrial Strategy Paper (2015-2018) was published which aims to meet the closing benchmark for Chapter 20 (Enterprise and Industrial Policy).

The Council of Europe Convention on the Prevention of Terrorism which, was ratified on February 23, 2011, entered into force on January 13, 2012.

The Optional Protocol to the Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment (“OPCAT”) has been ratified and entered into force on March 12, 2011. On January 28, 2014, the Human Rights Institution was declared the “national preventive mechanism” under the OPCAT.

The Council of Europe Convention on the Protection of Children against Sexual Exploitation and Sexual Abuse was signed by Turkey and entered into force on April 1, 2012.

The individual application procedure to the Constitutional Court following the exhaustion of domestic remedies became operational as of September 23, 2012.

Another important development is the amendment of the Turkish Criminal Procedure Law and Law on Execution of Penal and Security Measures as of January 2013. No a defendant can opt to make his or her oral defense in his or her preferred language after the indictment is read and the merits on charges are presented.

On April 11, 2013, The Law No. 6458 on Foreigners and International Protection entered into force which is the framework legislation on regular and irregular migrants, foreigners, refugees and asylum seekers in Turkey and establishes General Directorate of Migration Management under the Ministry of Interior.

On November 19, 2015, the By-law on the Procedures and Principles of the Implementation of Turkish Qualifications Framework was adopted. Subsequently the Communiqué related to Turkish Qualifications Framework, which is the annex of the By-law, was published on the Official Gazette No. 29581 of January 2, 2016. Hence, alignment with the EU Recommendation on the establishment of the European Qualifications Framework for lifelong learning (2008/C 111/01) was fulfilled.

 

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On January 11, 2011, the Assembly approved the new Turkish Code of Obligations Law No. 6098. Law No. 6098 was published in the Official Gazette No. 27836 of February 4, 2011. The new Law includes, inter alia, several amendments that provide protection to individuals against unilaterally pre-prepared contracts. Additionally, in the case of any unforeseen, extraordinary events, which with respect to the debtor, which lead to changes to the conditions that existed at the time of the execution of a contract, such debtor is entitled to apply to a court for modification of such contract.

In January 2011, the Assembly approved the New Turkish Code of Commerce (Law No. 6102) and it was published in the Official Gazette No. 27846 on February 14, 2011, and became effective, on July 1, 2012. Under the new Turkish Code of Commerce (“TCC”), among other things, companies will be required to prepare financial statements in accordance with International Financial Reporting Standards and the obligations of companies regarding public disclosures and corporate governance principles have been broadened to be in line with global standards. The TCC also allows the establishment of joint stock companies or limited liability companies with a single shareholder or partner. Legal entities can now become board members, board meetings can be held in electronic media (with the use of online votes in General Assemblies now being allowed), and board resolutions can also be signed with electronic signatures. Types of mergers, conditions of withdrawal from partnerships, financial assistance to employees, spin-offs and conversions have also been acknowledged in the TCC.

Implementation of the Southeastern Anatolia Project (“GAP”) for development continues. GAP includes a wide array of investment products from agriculture to health, education and transportation. The GAP Action Plan Phase I was implemented in 2008-2012. During the first implementation period of the Plan, the share of GAP initiatives in public investments increased from 7% to nearly 14%. More than TL 30 billion (approximately U.S.$16.8 billion) was allocated for investment in GAP Region in the 2008-2012 periods. Within the framework of the GAP Action Plan Phase II (2014-2018), almost TL 26.7 billion (approximately U.S.$12.5 billion) is allocated to the region. Moreover, Konya Plain, Eastern Black Sea and Eastern Anatolia development action plans were adopted and have been implemented by their respective development administrations.

The 2010-2014 Anti-Corruption Strategy (The Strategy on Enhancing Transparency and Strengthening the Fight against Corruption) and its Action Plan was completed successfully. Turkey is committed to fight against corruption based on the principles of the 2010-2014 Anti-Corruption Strategy.

On June 24, 2011, the Financial Action Task Force (the “FATF”), an inter-governmental global standard setting body responsible for developing and promoting policies to combat money laundering and terrorist financing (“AML/CFT”), identified Turkey among the jurisdictions that have strategic AML/CFT deficiencies. Because Turkey has demonstrated significant progress combating AML/CFT issues through both legislation and implementation and, accordingly, has addressed deficiencies identified by the FATF, the FATF released the Public Statement for Turkey on October 2014. In the Public Statement, the FATF noted Turkey’s significant progress in improving its AML/CFT regime and that Turkey has established the legal and regulatory framework to meet its commitments in its action plan regarding the deficiencies that the FATF had identified in February 2010. Turkey is, therefore, no longer subject to the FATF’s monitoring process under its on-going global AML/CFT compliance process.

In addition to Turkey’s efforts in respect of AML/CFT, the regulation on Principles and Procedures Regarding Electronic Notification System of the Financial Crimes Investigation Board became effective on March 30, 2015, through publication in the Official Gazette No.29311. Thus, it is now possible for Financial Crimes Investigation Board (“MASAK”) to communicate with most of the financial institutions in electronic environment in a rapid and reliable manner.

The EU Twinning Project on effectiveness of AML/CFT, in which MASAK is the main beneficiary, officially started on March 1, 2015. The Project aims to strengthen the efficiency and effectiveness of the legal, institutional and technical framework of AML/CFT, and has a completion deadline of 2017.

Progress Reports

Since 1998, the European Commission annually publishes its regular Progress Reports on Turkey, as well as the Enlargement Strategy Paper, which evaluate developments in all candidate and potential candidate countries.

The Progress Report on Turkey and the 2011-2012 Enlargement Strategy were published on October 12, 2011. In the Report, the European Commission concluded that Turkey has made progress in meeting EU membership criteria. The Report indicated that Turkey continued to sufficiently fulfill the political criteria. According to the Report, work on implementing the 2010 Constitutional reform package was launched by the Government, free and fair parliamentary elections took place on June 12, 2011, and opened the way for further Constitutional reform. The establishment of a specific Ministry for EU Affairs was regarded as an encouraging signal for Turkey’s reform efforts to meet the EU accession criteria. The Report also indicated that the rapid economic expansion continued and the private sector remained the main driving force behind the rapid economic expansion. The Report underlined the fact that robust economic development allowed strong employment growth and a sizeable drop in unemployment. It also stated that Turkey continued to improve its ability to take on the obligations of membership, in particular Chapter 6- (Company Law), Chapter 18 (Statistics) and Chapter 21 (Trans-European Networks).

 

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The 2012 Progress Report on Turkey and the 2012-2013 Enlargement Strategy were published on October 10, 2012. The Report welcomed the successful launch of the Positive Agenda in May to support and to complement the accession negotiations through enhanced cooperation in a number of areas of joint interest: political reforms, alignment with the EU law, dialogue on foreign policy, visa liberalization, mobility and migration, trade, energy, counter terrorism and participation in Community programs. In the Report, the Council invites the European Commission to take steps towards visa liberalization as a gradual and long-term perspective, in parallel with the signing of the Readmission Agreement between Turkey and the EU, which was signed in June 2012. It also stressed that Turkey should sign the Readmission Agreement to allow for a proper roadmap to be finalized. The Report welcomes the work on a new Constitution and acknowledges that a democratic and participatory process has been put in place. The Report also notes that representatives of non-Muslim minorities were officially received by Parliament. In the Report, terrorist attacks by the PKK (a terrorist organization in Northern Iraq) were strongly condemned by the EU, yet it is stated that the Kurdish issue remains a key challenge for Turkey’s democracy. Moreover, the Report stressed that several important pieces of legislation were adopted, in particular, laws on the protection of family and prevention of violence against women, probation, collective bargaining for civil servants, the Ombudsman Institution and the national human rights institution.

The 2013 Progress Report on Turkey and the 2013-2014 Enlargement Strategy Document were published by the European Commission on October 16, 2013. The Report comprehensively described the political reforms undertaken in Turkey during the previous year. The Report also emphasized the Turkish Government’s determination regarding the continuation of democratization and political reforms and, in this context, referred to the Democratization Package published on September 30, 2013, as well as to the steps taken concerning the judiciary reform and ongoing work on the new Constitution. The Report stated that the process in Turkey that aims to end armed terrorist attacks and the activities of the PKK constitutes a milestone and continues to generate the support of the EU. The Report also referred to Turkey’s active role in foreign policy.

The 2014 Progress Report on Turkey and the 2014-2015 Enlargement Strategy were published on October 8, 2014. The Report specifically references Turkey’s positive actions implementing legislation within the Democratization Package framework and praises Turkey’s constructive approach outlined in the Solution Process. The Report indicated that the adoption by Turkey of “The Action Plan on Prevention of ECHR Violations” was a critical step in the democratization process. The humanitarian assistance provided by Turkey to 1.5 million Syrians fleeing violence across the border was also praised in the Report. The Report also indicated that the growth of the economy since 2011 affirms the strength and resilience of the economy against the global economic shocks. With regard to alignment with the EU Acquis, the Progress Report confirmed that progress has been made at various levels in 30 of the 33 negotiation chapters. The Progress Report also indicated that Turkey has reached advanced level of alignment in 26 of these chapters.

The 2015 Progress Report on Turkey and EU Enlargement Strategy were published on November 10. 2015. The Report refers to the positive developments in cooperating on foreign and security policy, including counter-terrorism, the Joint EU-Turkey Action Plan for refugees and migration management, the High Level Energy Dialogue, modernization and extension of the Customs Union, and visa liberalization. The humanitarian aid and support provided to millions of refugees from Syria and Iraq was also praised in the Report. The Report confirmed that the high turnouts at the general elections in June and November are a clear sign of the strength of Turkish democracy. The Report criticized the judicial system, rule of law, and freedom of expression, assembly and the media. With regard to the economic criteria, the Report indicates that there is an increasingly high level of commercial and economic integration between Turkey and the EU. It also underlined that Turkey has a functioning market economy, noting Turkey’s high capacity to deal with competitive pressure and market forces despite some macroeconomic imbalances. The Report recommended accelerating structural reforms for long-term growth. With respect to the alignment with the Acquis in the past year, the European Commission has confirmed that Turkey has achieved various levels of progress beyond what was achieved in 2014, in 27 Chapters out of 33.

Economic Criteria

The European Commission has considered Turkey a functioning market economy in all its annual Progress Reports since 1998. The recent Progress Reports have highlighted Turkey’s robust financial sector and resilience of the Turkish economy, with a special emphasis on its sustained growth rate despite a difficult international economic environment.

In March 2015, Turkey submitted its Economic Reform Program (“ERP”) for the 2015-2017 period, which replaced the Pre-Accession Economic Program. The ERP was prepared based on the 2015-2017 Medium Term Program.

The Turkish economy grew by 8.5% in 2011, 2.1% in 2012, and 4.2% in 2013, 2.9% in 2014 and 4.0% in 2015.According to the ERP, for the 2015-2017 period, Turkey’s economy is expected to grow 5% both in 2016 and 2017. The year-end consumer price inflation rate was 10.4% in 2011, 6.2% in 2012, 7.4% in 2013, 8.2% in 2014 and 8.8 in 2015. The inflation target was set as 5.5% for 2016 and 5.0% for 2017. Turkey’s International Labor Organization defined unemployment rates were recorded as 8.4% in 2012, 9.0% in 2013, 9.6% in 2014 and 9.5% in 2015. Unemployment rate is expected to decrease to 9.2% in 2016 and 9.1% in 2017. Current account deficit/GDP ratio figures were 10% in 2011, 6.2% in 2012, 7.9% in 2013, 5.7% in 2014 and 5.4% in 2015. ERP forecasts the current account deficit/GDP ratio as 5.4% and 5.2% in, 2016 and 2017, respectively.

 

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Customs Union

For Turkey, Customs Union was considered a stepping stone. The reason Turkey entered into such an asymmetric structure was that there was an expectation of EU membership within a foreseeable period of time. Because Turkey has yet to achieve EU membership, and the systemic problems within the Customs Union continue to exist, Turkey and the EU have agreed to update the Customs Union.

With the update package, Turkey expects sound and sustainable solutions to the structural problems due to the asymmetries of the Customs Union and an extension of trade relations to new areas which will boost bilateral trade relations. Turkey’s main expectations are removal of existing barriers hindering free movements of goods such as road quotas and visas and inclusion of Turkey in EU’s policymaking mechanisms in areas directly related with the Customs Union, enabling Turkey to benefit simultaneously from the Free Trade Agreement concluded by the EU.

One of the most important aspects of the FTA issue is the Transatlantic Trade and Investment Partnership (“TTIP”) negotiations between the EU and the USA. Turkey expects the update to facilitate the inclusion of Turkey in the TTIP.

The negotiations will start by the beginning of 2017. Currently, both sides are carrying out their internal procedures to get negotiating mandates.

Financial Assistance

Following the expiration of 2007-2013 IPA term’s legal framework (“IPA I”), the European Commission and Turkey established priorities for financial assistance under the new Instrument for Pre-accession Assistance (“IPA II”), set out in the Indicative Strategy Paper for Turkey for the period 2014-2020. This key document was presented to the Commission’s IPA committee in July 2014 and adopted on August 26, 2014. The IPA II Framework Agreement, transferring the implementation principles into internal legislation was signed by both parties on February 11, 2015. The Law No. 6647 regarding approval of the Framework Agreement by the Turkish Grand National Assembly was published in the Official Gazette on April 28, 2015. Council of Ministers’ decision approving the Agreement was published in the Official Gazette No. 29393 on June 21, 2015. In IPA II, reforms relating to the rule of law and fundamental rights, home affairs, and civil society are to receive increased funding compared to IPA I. Other priorities include education, employment and social policies. In the sectors of environment, transport, and energy, the IPA II will focus on promoting development towards a resource efficient, low carbon economy and on increasing inter-connectivity between Turkey and the EU. In the areas of agriculture and rural development, work will focus on food safety, veterinary and phytosanitary policy, agriculture, fisheries and rural development. These priorities will be used as the basis for sector programs promoting structural reforms, allowing more targeted assistance and improving the impact of financial assistance.

In implementing IPA II, the European Commission and Government of Turkey agreed that Civil Society would make up a specific sub-sector, under the overall sector of “Governance and Democracy.” About 190 million Euro will be allocated to this sub-sector. The programming of the IPA II civil society sub-sector has been underway with the participation of all relevant parties.

The objectives under the Civil Society sub-sector are to support the development of civil society through more active democratic participation in policy and decision-making processes; promote a culture of fundamental rights and dialogue; enhance civil society dialogue and inter-cultural exchange between civil societies in Turkey and Europe.

The Financing Agreement of 2014 Annual Action Program for Turkey and its Annexes was signed by National Instrument for Pre-Accession Assistance (IPA) Coordinator on December 3, 2015 and effective on December 21, 2015 after an internal ratification procedure. The Agreement allocates IPA funds to the projects as annual and multiannual programs. The annual programs are Democracy and Governance, Rule of Law and Fundamental Rights, Energy and, Agriculture. The multiannual programs are Competitiveness and Innovation, Education, Employment and Social Policies, Transport and, Environment.

The Sectoral Agreement of the Agriculture and Rural Development allocates IPA funds to the projects addressed under Agriculture and Rural Development area. This Agreement was effective as of November 25, 2015, after an internal ratification process.

EU Process at the Local Level

According to the Ministry of Interior Circular No. 2010/6 of January 26, 2010 EU Harmonization, Consultancy and Steering Committees were established within 81 province governorship offices and within each of the 81 province governorships, one Deputy Governor has been appointed as the Provincial EU Permanent Contact Point. The Provincial EU Permanent Contact Points disseminate EU related information throughout the provinces.

Additionally, Provincial EU Advisory and Steering Committees have been established in all the provinces. Deputy governors appointed as the Provincial EU Permanent Contact Points have been chairing these Provincial EU Advisory and Steering Committee meetings since 2010. By the end of 2015, approximately 900 meetings have been held across Turkey.

Finally, EU Offices have been established in each of the 81 provinces. The local offices of Ministry for EU Affairs in Istanbul, Antalya and İzmir coordinate with these offices and act as a guide through harmonization and implementation of the EU Acquis at the local level.

 

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The United States

Turkey and the United States, as close allies and partners, enjoy a relationship of fundamental importance based on shared values and common goals like democracy, the rule of law, respect for human rights, development and growth of a market economy, as well as the desire to promote peace, stability and prosperity around the globe.

Turkey and the United States together face a host of international challenges of major significance. Turkey-U.S. cooperation makes substantial contributions to efforts aimed at achieving global and regional peace, stability and prosperity. The United States is Turkey’s main military export-import partner. While defense ties form the bedrock of the relationship between two countries, there have also been improvements in bilateral trade and economic relations.

Turkey and the United States cooperate on a wide range of issues and complex international challenges such as the fight against terrorism, the chaos in Syria and Iraq and the migration crisis, energy supply security, nuclear non-proliferation, and global economic developments.

Bilateral high-level visits gained momentum during recent years. Former President Gül visited the United States to attend the NATO Chicago Summit in May 2012. Former Secretary of State Clinton paid a visit to Turkey in June 2012 within the framework of the 2nd Coordination Committee meeting of the Global Counter Terrorism Forum. She also paid a working visit to Turkey on August 11, 2012. The visit of former Prime Minister, now President Erdoğan to Washington, D.C. in May 2013, brought about a fresh impetus to Turkey-U.S. relations. This visit reaffirmed that Turkey and the United States share a common set of foreign policy priorities and that they have the common will to strengthen their cooperation with a view to addressing the challenges of the 21st century.

Other high-level visits and regular contacts between Turkey and the United States during the course of 2013 included the visits of Secretary of State Kerry, Former Prime Minister, Davutoğlu and other Ministers as well as visits of Congressional delegations.

Frequent high-level visits and contacts between Turkey and the United States also took place in 2014. During the NATO Wales Summit and the UN General Assembly in 2014, President Erdoğan met with United States President Obama and United States Vice President Biden, respectively. Former Prime Minister Davutoğlu also met with Secretary of State Kerry during of the NATO Wales Summit, in September 2014. In the last quarter of 2014, Turkey hosted a number of Senior Administrative Officials from the United States. In this period, Vice President Biden, Secretary of State Kerry, Secretary of Commerce Pritzker and Former Secretary of Defense Hagel visited Turkey. Secretary Pritzker’s visit was of particular importance, where business and investment opportunities between the two countries were discussed.

In 2015, high-level visits and contacts between Turkey and the United States intensified. Foreign Minister Çavuşoğlu met with Foreign Minister Kerry in several occasions, including the Meeting of the Global Coalition to Counter ISIL in London in January 2015, Association of Southeast Asian Nations (“ASEAN”) Foreign Ministers’ Meeting in Malaysia in August 2015, UN General Assembly in 2015, G-20 Summit in Antalya in October 2015 and NATO Foreign Ministers’ Meeting in Brussels in December 2015. Minister Çavuşoğlu met with Minister Kerry during his visit to Washington in May 2015. Former Prime Minister Davutoğlu also met with Foreign Minister Kerry at the NATO Foreign Ministers’ Meeting in Antalya in May 2015. President Erdoğan met with President Obama during the G-20 Antalya Summit and World Climate Summit in Paris.

From 2012-204, the United States has issued a waiver to Turkey from certain U.S. extraterritorial sanctions against Iran that otherwise might have applied by reference to Turkish imports of Iranian crude oil, which was later superseded by additional sanctions relief under the Joint Plan of Action with Iran, enabling Turkey, among other countries, to continue purchasing its then-current average amounts of such crude oil from January 20, 2014 forward, subject to the non-involvement of the U.S. financial system and other U.S. elements in those transactions. As of January 16, 2016, which was “Implementation Day” under the Joint Comprehensive Plan of Action which was agreed with Iran in July 2015, the relevant U.S. extraterritorial sanctions against Iran were lifted, leaving in place only the primary sanctions which prohibit the involvement of U.S. elements in Iran-related oil transactions.

The United States is one of the major trade partners of Turkey. The bilateral trade volume between Turkey and the United States was U.S.$17.5 billion in 2015. Turkish exports to the United States reached U.S.$6.3 billion, mainly composed of iron and steel, road transportation vehicles and textile fiber and its products. Total import volume was U.S.$11.1 billion. Iron ore and metal scraps, textile fiber and other transportation vehicles are the major import items of Turkey from the United States.

Approximately 1,600 U.S. companies have invested in or do business in Turkey. In the last decade (2005-2015), U.S. companies have invested U.S.$10.6 billion in Turkey. Currently, the United States ranks second in FDI inflows behind the Netherlands. U.S.-investments surpassed U.S.$1.566 billion in 2015. The U.S. Chamber of Commerce has chosen its second overseas representative mission to be located in Istanbul.

 

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Turkey is also designated by the United States as one of the 6 preferential markets (Colombia, Indonesia, Vietnam, Saudi Arabia, South Africa and Turkey) in the world.

Since 2009, several mechanisms have been established for bringing economic, trade and investment relations to a level proportionate to political and security relations between the two countries, such as the Framework for Strategic Economic and Commercial Cooperation (launched in 2009) (the “FSECC”), the Business Council (launched in 2011), established under the auspices of the FSECC, the Economic Partnership Commission (launched in 2011), and the Trade and Investment Framework Agreement Council.

Russia

While Turkey and Russia differ on a number of international issues, in particular, with respect to Crimea, the Ukraine crisis, and Syria, the two countries keep their channels of dialogue open.

Turkey-Russia relations, which followed a course of cooperation, faced a serious test as a result of military activities related to the Syrian crisis, culminating in the downing of a Russian military aircraft, which violated Turkish airspace despite repeated warnings. Following the incident, Russia took a number of unilateral restrictive measures against Turkey. However, in line with the mutual desire of Turkish and Russian peoples, the two countries decided to make a new start in bilateral relations and a normalization process was launched by the Presidents in June 2016. With this understanding, an intense bilateral political dialogue has been re-established as of second half of 2016. Economy, trade and energy relations are the driving force of Turkish-Russian relations. Due to mainly decrease in Russian economic performance bilateral trade, which was U.S.$30.0 billion at the end of 2014, dropped to U.S.$23.9 billion as of the end of 2015.

Reciprocal investments have exceeded U.S.$10 billion each, as of 2015, excluding the Akkuyu nuclear power plant project being built in Turkey currently valued at approximately U.S.$20 billion.

On December 1, 2014, the President of the Russian Federation announced the cancellation of the South Stream project and instead proposed the construction of a new pipeline system from Russia to Turkey through the Black Sea. During President Putin’s visit to Turkey on December 1, 2014, a non-binding document was signed to this effect between BOTAŞ and Gazprom. Limited progress was achieved between December 2014 and July 2016. Following the high-level talks held between President Erdoğan and President Putin in St. Petersburg on August 9, 2016, both countries displayed a common will to reassess the “Turkish Stream” project.

Work related to Akkuyu Nuclear Power Plant project is ongoing in accordance with the contractual commitments inscribed in the Intergovernmental Agreement signed on May 12, 2010.

Tourism constitutes an important aspect of Turkish-Russian bilateral relations. In 2013 and 2014, 4,270,000 and 4,480,000, respectively, Russian tourists visited Turkey. The number dropped in 2015 to 3,649,000.

Yet another field of economic cooperation is the construction sector. Turkish construction companies have completed various projects in Russia since the fall of the USSR, the total value of which has surpassed U.S.$64.8 billion as of the end of 2015.

The Balkans

Turkey’s policy towards the Balkans is guided by the principles of “regional ownership” and “all-inclusiveness” and is based on four main pillars: security for all, high-level political dialogue, economic interdependence and preservation of the multi-ethnic, multi-cultural and multi-religious social fabric of the region. In addition to having a common history and shared values, the Republic has a joint vision with the Balkan countries based on common goals and integration with European and Euro-Atlantic institutions.

Apart from political support, Turkey also provides assistance to the countries of the region in various areas including economy, culture, education, military and security through its relevant public institutions, municipalities, NGO’s and universities.

 

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Turkey has played a leading role in launching major initiatives such as the South-Eastern European Cooperation Process (“SEECP”), the only major initiative which started within the region, and the Multinational Peace Force Southeast Europe/South-eastern Europe Brigade. Turkey also plays an active role in the Southeastern Europe Defense Ministerial process. Turkey continues to be active within the Southeast European Law Enforcement Center as well.

The Trilateral Summits bring the parties together to engage in joint projects intended to strengthen the dialogue and contribute to the regional peace, stability and cooperation. The second meeting of the “Trilateral Balkan Summit” was held in Karadjordjevo, Serbia on April 26, 2011. The third was held in Ankara on May 14-15, 2013. At the summit, the “Ankara Summit Declaration” was adopted and the Ministers of Economy of Turkey, Bosnia-Herzegovina and Serbia met and established “Trilateral Trade Committee”. The first meeting of the “Trilateral Trade Committee” was held in Ankara with the participation of Ministers of Economy, on August 17-18, 2015. The second meeting of the Trilateral Trade Committee was held in Belgrade on October 19, 2015, followed by a Business Forum, organized in Sarajevo the next day.

During 2015, several high level visits took place, including the visits of Dragan Çoviç, the-then Chairman of the Bosnia Herzegovina Presidential Council, Bakir İzetbegoviç, a Bosnian member of the Council to Turkey, and President Erdoğan to Slovenia, Romania, Bosnia Herzegovina and Albania, respectively. Former Prime Minister Davutoğlu also visited Bulgaria and Serbia in 2015.

Turkey’s economic and trade relations with the countries of this region are strong and the overall trade volume exceeded U.S.$16.5 billion in 2015.

Greece

Following the dialogue and cooperation process initiated between Turkey and Greece in 1999, a more constructive understanding has begun to define the terms of bilateral relations which were problematic in past decades. The conclusion of 35 bilateral agreements/protocols/MoUs in various fields such as trade, tourism, environment, culture, energy, transportation and security-related matters has contributed towards cooperation on issues of common interest. During this process, 29 Confidence Building Measures (“CBM”) were adopted. Since 2009, Turkey and Greece have furthered their efforts in order to improve bilateral relations.

The second High Level Cooperation Council (“HLCC”) meeting was held in İstanbul on March 3-4, 2013. The third meeting of HLCC was held in Athens on December 6, 2014, in conjunction with Prime Minister Ahmet Davutoğlu’s visit to Greece. In total, 48 agreements/MoUs/protocols were signed at the HLCC meetings between Turkey and Greece in various fields with a view to enhancing cooperation in a wide-range of fields such as transport, energy, irregular migration, culture, agriculture and health.

The HLCC model in essence aims to bring together all relevant Ministers from both countries in the form of a joint cabinet meeting in order to raise their issues and develop a joint vision under the guidance of the two Prime Ministers.

The Greek Foreign Minister Kotzias and Prime Minister Tsipras visited Turkey, on May 12, 2015, and November 17 and 18, 2015, respectively. During the visit of the Prime Minister Tsipras, the countries agreed to hold the 4th meeting of HLCC in Turkey in early 2016 and establish a joint working group against irregular migration. The first meeting of the joint working group was held in Ankara on November 27, 2015. As agreed during the visit of Prime Minister Tsipras, the Fourth HLCC Meeting took place on March 8, 2016 in İzmir and 6 documents were signed in the fields of tourism, irregular migration, media and maritime cooperation. At the meeting, both sides agreed to take steps to implement the Izmir-Thessaloniki Ro-Pax ferry line and the Istanbul-Thessaloniki high-speed train projects. In the meantime, established dialogue mechanisms continue to work smoothly. By the end of 2015, 59 rounds of exploratory talks were held.

The countries’ mutual desire to bridge differences through dialogue and promote cooperation has had a positive impact on other dimensions of bilateral relations, such as trade, economy and tourism. The trade volume between the two countries exceeded U.S.$4.0 billion in 2011. The bilateral trade volume reached U.S.$4.9 billion in 2012. In 2013, Turkey became the number one trade partner of Greece and trade volume reached U.S.$5.7 billion, with a surplus of U.S.$2.7 billion in Greece’s favor. Bilateral trade volume was about U.S.$5.6 billion in 2014. In 2015, trade volume was U.S.$3.3 billion in 2015, with Turkey’s exports and imports to Greece amounting to U.S.$1.4 billion and U.S.$1.9 billion, respectively.

The amount of Greek foreign direct investment in Turkey, with the banking sector taking the lead, was U.S.$6.7 billion by the end of 2014 and reached U.S.$6.8 billion by the end of 2015 while the total of Turkish companies’ investments in Greece was about U.S.$500 million.

In 2013, Turkey was the destination of choice for more than 800,000 Greek tourists. In 2014, the number of Turkish tourists who visited Greece exceeded 1 million while the number of Greek tourists visiting Turkey reached 830,000. In 2015, 1,153,046 tourists from Turkey visited Greece and 755,414 tourists from Greece visited Turkey. The simplified visa procedure for Turkish tourists to visit the seven Greek islands close to Turkish shores (in effect since 2012), has been instrumental in the increase of the number of Turkish tourists to Greece.

 

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Turkey and Greece are also intensifying their cooperation in the transportation sector. Currently, Turkish airline operators are conducting 52 flights a week between Turkey and Greece.

As agreed by the Turkish and Greek Foreign Ministers during their meeting in New York in September 2013, the reciprocal visits of the Turkish Cypriot Negotiator Mr. Kudret Özersay and Greek Cypriot Negotiator Mr. Andreas Mavroyiannis to Athens and Ankara, respectively, took place on February 27, 2014, following the resumption of negotiations for a comprehensive settlement in Cyprus. These visits demonstrated the support and commitment of Turkey and Greece to finding a satisfactory solution in respect of the settlement of Cyprus issue.

Cyprus

Turkey supports the UN Secretary General’s Good Offices Mission, with a view to finding a just and lasting comprehensive settlement to the Cyprus problem, based on the long established UN parameters such as bizonality, political equality, equal status of the two constituent states and a settlement which will bring about a new partnership state. Turkey has openly declared its full support for a political settlement in the Island.

The island of Cyprus is the home of two politically equal parties: Turkish Cypriots and Greek Cypriots who are two distinct peoples with different religions, cultures and ethnicities. The bitter past of ethnic conflict in Cyprus dictates that lasting peace can only be achieved through a viable equal partnership.

In 1963, Greek Cypriots expelled Turkish Cypriots by force from the partnership state institutions as well as from the Turkish-Cypriots’ homes, in violation of the Treaties of 1960. A UN peacekeeping operation deployed on the Island in 1964 and has been operational since then.

From 1963 to 1974 Turkish Cypriots lived in isolated enclaves, representing 3% of the Island, under frequent, organized and systemic attacks by Greek Cypriots. When this culminated with a coup d’état in 1974, which was aimed at annexing the Island to Greece, Turkey as a guarantor power was left with no other option but to exercise its rights pursuant to the 1960 Treaties.

In the past forty-eight years of the UN negotiation process, Turkish Cypriots have always supported a just, lasting and comprehensive settlement of the issue based on negotiations between the two peoples of the Island, under the auspices of the UN Secretary-General’s Good Offices Mission. However, Greek Cypriots rejected the 1985-86 Draft Framework Agreement, the UN sponsored Set of Ideas of 1992, the package of Confidence Building Measures of 1994.The political resolve demonstrated by the Turkish Cypriot side for a settlement paved the way for a renewed initiative by the former UN Secretary General Mr. Kofi Annan in January 2004 for the resumption of negotiations with a view to reaching a comprehensive settlement of this issue.

The Annan Plan was submitted to simultaneous separate referenda in the North and the South of Cyprus on April 24, 2004. With the resolute support of Turkey, the Turkish Cypriots voted in favor of the Annan Plan with 64.9%, whereas the Greek Cypriots rejected the Plan with a ‘No’ vote of 75.8%.

Turkey, as a guarantor power, has always supported constructive efforts in the UN negotiating process for the establishment of a new partnership state in Cyprus which will bring peace and stability to the Eastern Mediterranean region and beyond.

The negotiations resumed on May 26, 2010. During the process, the two leaders and the Secretary General of the United Nations (“UNSG”) held in tripartite meetings on November 18, 2010 in New York, on January 26, 2011 and July 7, 2011 in Geneva, and on October 30-31, 2011 and January 23-24, 2012 in Greentree, New York. The Turkish Cypriot side maintained its constructive and result-oriented approach during these meetings as well.

The international community had high expectations from the tripartite meeting held on January 23-24, 2012 in Greentree. The Turkish side had hoped that the second Greentree meeting would usher in the high-level meeting with the participation of the two sides and the three guarantors, which would address all remaining issues that could not have been agreed upon in order to seal the settlement through a grand bargain. Regrettably, this was not achieved at the meeting, despite the sincere efforts of the Turkish Cypriot side and a very important opportunity was missed.

Throughout the period following the second Greentree meeting, the Turkish Cypriot side continued its determined and constructive efforts for the success of the UN process with Turkey’s full support.

After the Greek Cypriot elections in February 2013, it took almost a year for the new Greek Cypriot leader to return to the negotiations.

Almost a year after the election of Mr. Anastasiades and months-long effort to finalize a joint statement, the two leaders in Cyprus finally met on February 11, 2014 to resume the comprehensive settlement negotiations. Following the resumption of the negotiations, the cross-visits of the Turkish Cypriot Negotiator Mr. Kudret Özersay and the Greek Cypriot Negotiator Mr. Andreas Mavroyiannis to Athens and Ankara respectively, took place on February 27, 2014.

Since the resumption of the negotiations, the Turkish Cypriot side exerted repeat efforts to secure the existing convergences and to build upon them. Despite the Leaders’ Joint Statement of February 11, 2014 that referred to the “structured” negotiations to be carried out in a “results-oriented” manner, focusing on unresolved core issues. The Greek Cypriot side came with new proposals that disregarded the existing convergences. This pushed the negotiations into a futile, time-consuming exercise, which meant losing the whole acquis of the process and returning back to 2008.

In their meeting on July 24, 2014, the leaders agreed that both sides had completed the submission of proposals on all issues. The leaders met again on September 17, 2014 for a basic agreement to be reached for moving to the next phase of structured negotiations. The expectation was that a lasting settlement would be achieved following the referenda at the earliest opportunity.

 

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Instead of concentrating on the negotiation process at that critical juncture, the Greek Cypriot side started new drilling activity on September 25, 2014 in its so-called license areas, which overlaps with those of the TRNC and Turkey.

Despite Turkey’s and the TRNC’s warnings, the Greek Cypriot side began its initial offshore drilling activities on September 19, 2011. In this context, a continental shelf delimitation agreement was then signed on September 21, 2011 by Prime Minister Erdoğan and TRNC President Eroğlu in the margins of the 66th UN General Assembly in New York. On the other hand, the Greek Cypriots did not accept President Eroğlu’s constructive proposals put forth on September 24, 2011 and on September 29, 2012 for a fair sharing of these natural resources. In the absence of Greek Cypriot cooperation, the Government of the TRNC designated its own license areas around the Island and issued licenses for exploration and exploitation of oil and gas reserves to the Turkish Petroleum Corporation.

Following the continuing unilateral activities of the Greek Cypriot side, the TRNC also started conducting seismic research activity in its own license area, which does not overlap with the Greek Cypriots’ drilling activity area. In response, the Greek Cypriot side walked away from the UN negotiations table on October 7, 2014.

Following the Greek Cypriot side’s drilling activities coming to an end at the end of March 2015, the Turkish Cypriot side decided to withdraw the BHP ship conducting seismic research from the region. Following the election of Mustafa Akıncı as the President of the TRNC in April 2015, the comprehensive settlement negotiations resumed on May 15, 2015.

After negotiations had intensified at the level of Leaders in November 2015, the Leaders continued their meetings with the aim of reaching a settlement in 2016. As of August 2016, there has been progress achieved on the negotiations, but not enough to conclude a comprehensive settlement of the issue. Turkey and the Turkish Cypriot side are genuinely committed to the settlement aim and believe that if there is political will, a settlement in Cyprus could be possible in 2016.

Water resources are also another area for potential cooperation. Turkey and the TRNC completed the Northern Cyprus Water Supply Project on October 17, 2015, which is to provide 75 million cubic meters of water from Turkey to the TRNC. This amount can be increased ten-fold in the future that would be equal to the double of the water requirement of the entire Island.

Turkey additionally believes that the UN Security Council should heed the call made by the UNSG in his Report of May 28, 2004, towards putting an end to the isolation of the Turkish Cypriots. The UNSG noted in his report that there is no Security Council resolution which imposes restrictions on the Turkish Cypriots and also called on members of the Security Council to encourage all Member States to eliminate unnecessary restrictions and barriers that isolate the Turkish Cypriots and impede their development. The European Council also decided on April 26, 2004, to end the isolation of the Turkish Cypriots with no conditions; this decision, however, has yet to be implemented. This situation is discouraging, particularly with respect to the ongoing UN negotiations. In line with the UNSG’s call, Turkey hopes that the international community will call for the isolation to end, thus also contributing to the settlement aim.

Iraq

Turkey strongly supports Iraq’s stability, political unity and territorial integrity and has made great efforts to help Iraq become a democratic, stable, peaceful and prosperous country. Turkey promoted national reconciliation and contributed to the successful conclusion of the government formation processes after the general elections in March 2010 and April 2014 by reaching out to all segments of Iraqi society and preserving its impartial stance towards all Iraqi political groups.

The Turkey-Iraq High Level Strategic Cooperation Council (the “HLSCC”), established in 2008, provides the legal framework to increase bilateral cooperation between the two countries in a more structured fashion. The purpose of the HLSCC is to achieve full economic integration between the two countries through joint projects in areas such as trade, energy, agriculture, security, health and water.

The first meeting of then HLSCC was held in October 2009 in Baghdad. The second meeting was held in December 2014 in Ankara.

Turkey has expanded its consular presence in Iraq. The Mosul Consulate General was opened in 2007 but it had to be closed after DAESH occupied the city in June 2014. Turkey also opened the Consulate General in Basra in 2009. Activities of Basra Consulate General were suspended temporarily due to security reasons following DAESH’s partial occupation of Iraqi territory in June 2014. The Erbil Consulate General was opened in 2010. The Sulaymaniyah Consular Agency commenced its activities as of April 2016.

Despite the ongoing security problems in Iraq since the second half of 2014, Iraq was the third largest export destination for Turkish products in 2015. Iraq currently ranks fourth among Turkey’s trade partners.

Turkish companies also play a crucial role in Iraq’s reconstruction and development. As of the end of 2015, a total of 1,600 Turkish companies operate in Iraq and their aggregate investments reached U.S.$23.6 billion.

Turkey’s main export items to Iraq are food products and beverages, basic metals, furniture, metal products, agriculture, electrical machinery, wearing apparel, rubber and plastic, and machinery and equipment products. There was a substantial increase in nearly all export items to Iraq between 2010-2014 period.

Turkey managed to diversify both its export markets and export products by implementing effective strategies in foreign trade. Export diversification to the MENA region allowed Turkish exports to grow despite weak demand in the EU, Turkey’s major trade partner, after the global financial crisis. Moreover, since 2010, exports to Iraq increased mainly due to the recovery in the economic activity and political stability in the region. Turkish organizations and businesspersons increased operations in this region to take advantage of its geographic proximity to Turkey.

 

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The major industries of Turkish companies operating in Iraq are finance, construction, logistics, and wholesale & retail trade.

In recent years, Turkey has also significantly improved its relations with the Kurdish Regional Government (“KRG”) in Iraq. Turkish businessmen, contractors and workers have made crucial contributions to the prosperity and welfare in northern Iraq. In addition to the opening of Consulate General in Erbil, frequent high-level visits have been carried out between Turkey and the KRG. Another important factor in Turkish-Iraqi relations is the presence of the PKK, a terrorist organization in northern Iraq. Turkey believes that the PKK constitutes a threat to Turkey and its people, the security and stability of Iraq, and the region at large. Turkey seeks more resolute support and enhanced cooperation from the Iraqi authorities in ending the presence of this terrorist organization in Iraq.

Throughout 2013 and most of 2014, due to a dysfunctional government and lack of inclusive policies, public support of the Iraqi government has plunged and sectarian and ethnic based tensions have soared. DAESH quickly occupied large parts of Iraq by taking advantage of the social and political crisis inflamed by sectarian conflicts. Turkey believes that, in addition to the military efforts supported by the Global Coalition to Counter DAESH, established by the members of the international community in 2014 to strengthen cooperation in this struggle, regaining the alienated segments of Iraqi society through inclusive policies and establishment of a functioning federalism based on fair power and revenue sharing, as stated in the Iraqi constitution, is the sole remedy to defeat DAESH and achieve durable stability in Iraq. Furthermore, the underlying economic and structural drivers of instability should be addressed by a comprehensive overhaul of the administration.

DAESH is a national security threat for Turkey. Turkey is committed to fighting DAESH in cooperation with Iraq and the Global Coalition to Counter DAESH. To this end, since June 2014, Turkey has been providing military and humanitarian assistance to Iraq. At the request of the Iraqi Government, we have trained more than 3,000 local Iraqis and 2,500 Peshmerga to fight against DAESH to protect and liberate their own cities. Turkey set up three Internally Displaced Persons (“IDPs” camps in KRG that host almost 40,000 IDPs and opened its doors to more than 200,000 Iraqis, 10,000 of which are living in IDP camps, including 20,000 Yezidis and Christians. Turkey has also donated 770 truckloads of humanitarian assistance to Iraq.

On December 6, 2015, Turkey deployed forces to a camp in a region of northern Iraq as a routine rotation to train Iraqis to retake Mosul from DAESH. The Iraqi leadership resisted this deployment and threatened to turn to the U.N. Security Council if Turkish troops sent to northern Iraq were not withdrawn within 48 hours. Turkey decided to halt the transfer of troops. On December 18, 2015, Turkey decided to move troops out of Iraq to de-escalate tensions. Bilateral talks between the neighboring states are proceeding favorably.

Iran

Turkish-Iranian bilateral relations are evolving based on the principles of non-interference in domestic affairs, mutual respect and good neighborliness. Efforts are made to further enhance the political dialogue both on bilateral and regional issues, through reciprocal visits and mechanisms such as a High Level Cooperation Council (the “HLCC”), and joint commissions in different sectors. Since the formation of the HLCC in 2014, Turkish-Iranian relations have been carried out in a structural framework. So far, two HLCC meetings were co-chaired by Turkish and Iranian Presidents. Developments in Iran are of direct consequence to Turkey. Turkey has continually sought to engage Iran in helping stabilize the region. Therefore, Turkey’s relationship with Iran is an asset not only for Turkey but also for the international community.

Given the already volatile and unstable situation in this region, Turkey believes that only negotiated and cooperative solutions can provide lasting arrangements for issues that are of regional and global concern. Therefore, Turkey considers diplomacy and negotiation the only option in the resolution of the Iranian nuclear program and supported the negotiation process between P5+1 (China, France, the Russian Federation, the United Kingdom, the United States and Germany) and Iran which culminated in the adoption of the Joint Comprehensive Plan of Action on October 18, 2015.

Iran is an important trading partner of Turkey. In 2012, the volume of trade between Turkey and Iran reached a record level of U.S.$21.8 billion, which had decreased to U.S.$9.8 billion in 2015. Since then, the trade volume decreased significantly. In January-November 2015 period, total imports from Iran decreased by 38% compared to the previous year, mainly due to lower energy costs, while exports to Iran declined only by 3.5%. In the last 6 years, the major products exported to Iran are natural or cultured pearls, precious metals and jewelry products, machinery and mechanical appliances, plastics and articles, wood and articles of wood, electrical machinery and equipment and parts, and tobacco products. Major products imported from Iran are mineral fuels and mineral oils, plastics and articles thereof, copper and articles thereof, organic chemicals, and fertilizers. In 2012, when the total trade reached its record level, the main product exported was gold and the main product imported was energy. Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious metal and articles thereof, imitation jewelry, coin accounted for 65.9% of total exports in 2012. Mineral fuels, mineral oils and products of their distillation, bituminous substances, and mineral waxes accounted for 89.4% of total imports in 2012.

 

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The tourism sector constitutes the main part of Turkey’s service trade, as well as trade in goods. The number of Iranian tourists visiting Turkey has increased rapidly in the last decade and reached its peak level of 1.9 million in 2010. From January-November 2015, the number of tourists from Iran was approximately 1.6 million, which accounted for a 4.6% share of the total number of tourists visiting Turkey during that same time period.

Given that Turkish and Iranian economies complement each other, bilateral relations between Turkey and Iran, particularly in trade and energy, is expected to accelerate rapidly since the sanctions related to Iran’s nuclear program were lifted in early 2016. The Preferential Trade Agreement between Turkey and Iran, which came into effect in 2015, is an instrumental in increasing bilateral trade.

Syria

Turkey has invested substantial resources, politically, economically and otherwise, in its relations with Syria in the last ten years. Prior to the conflict that began in March 2011, the thriving relations between Turkey and Syria had contributed positively to bilateral trade, investment and tourism until the conflict erupted.

In March 2011, the Syrian people staged peaceful demonstrations, demanding democracy, freedom, human rights and the rule of law. However, the regime responded to these demonstrations with lethal force. In the weeks and months that followed the initial protests, the regime continued its policy to suppress peaceful protests by using heavy weapons, tanks, fighter aircraft and ballistic missiles. On November 30, 2011, the Minister of Foreign Affairs Ahmet announced measures, in close consultation with the Arab League, to curtail the capacity of the Syrian administration to commit acts of violence against its citizens. The measures adopted include (i) suspending the High Level Strategic Cooperation Council mechanism until a democratic administration comes to power, (ii) imposing travel ban and asset-freeze measures against some members of the Syrian leadership who have been reportedly involved in incidents where excessive violence and illegal methods were used against civilians, (iii) freezing the financial assets of the Syrian Government in Turkey, (iv) ceasing transactions with the Syrian Central Bank. On May 30, 2012, after the violence committed by the Syrian security forces in the town of Houla, and pursuant to Article 9 of the Vienna Convention on Diplomatic Relations, Turkey, as the host country, requested that the Syrian Chargé d’Affaires in Ankara and all other diplomatic personnel of the Embassy to leave the country, (v) terminating oil exports from Syria, and (vi) freezing credit relations with the Syrian government.

On December 4, 2012, NATO approved the augmentation of Turkey’s air defense capabilities. United States, German and Dutch batteries were deployed in Turkey beginning in early 2013. In August 2015, the United States and Germany decided to remove Patriot missile batteries from southern Turkey on technical and stational grounds. As of January 2015, one Spanish Patriot battery and, since July 2016, an Italian SAMP/T battery have been deployed in Turkey.

On March 23, 2014, a Turkish fighter jet shot down a Syrian jet and on May 16, 2015 a Turkish fighter jet shot down a Syrian aerial vehicle for violating Turkish air space in accordance with its rules of engagement and determination to protect its borders.

The regime’s aggression, as well as the growing presence of extremist and terror elements supported by the regime (particularly in the northern parts of Syria) constitute a deep and increasing concern for Turkey’s national security. This threat became more acute and manifold with the emergence of DAESH in Syria in the beginning of 2014. DAESH terrorism quickly became a threat to regional security as well has had a direct impact on Turkey’s national security.

The situation in Syria progressively deteriorated in from 2013-2015. By the end of 2015, the number of Syrians who sought refuge in neighboring countries surpassed 4.8 million. The death toll reached 245,000. The number of those in need of assistance inside Syria rose to 13.5 million. Over the course of 2015, the regime continued its indiscriminate attacks against innocent civilians and further escalated its campaign of violence through the continued use of heavy bombardment (ballistic missiles, barrel bombs) as well as chemical weapons.

The Republic is continuing its humanitarian efforts to provide shelter to refugees fleeing the conflict in Syria employing an open-door policy without discrimination. As of December 2015, the Republic had spent more than U.S.$8 billion for Syrian refugees in Turkey. As of April 11, 2016, 269,736 Syrian refugees occupied accommodation centers throughout Turkey. The Turkish Government has spent more than U.S.$6 billion for Syrians in Turkey, whereas the total contributions we received bilaterally and multilaterally from the international community so far have been limited to U.S.$417 million.

 

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On October 6, 2015, a draft action plan was published reflecting an agreement between the EU and the Republic to cooperate on support of refugees and migration management to address the unprecedented refugee crisis created by the situation in Syria and Iraq (the “Action Plan”). The Action Plan identifies collaborative actions to be implemented as a matter of urgency by the EU and the Republic with the objective to assist the Republic in managing the massive influx of refugees and preventing uncontrolled migratory flows from Turkey to the EU. The Action Plan contemplates immediate implementation to be jointly steered and monitored by the European Commission and the High Representative / Vice President and the Republic through the establishment of the EU-Turkey high-level dialogue on migration. On November 29, 2015, the leaders of the European Union met in Brussels with their Turkish counterparts. In this meeting, the European Union declared that it is committed to provide an initial €3 billion of resources to Turkey for Syrian refugees. On March 18, 2016, the EU agreed on a wide range of proposals with Turkey to manage the migration crisis, including the return of all irregular migrants, accelerating the visa-liberalization process for Turkish citizens and sharing the work of hosting Syrian refugees. According to the agreement, the EU will allocate €6 billion (U.S.$6.6 billion) for reducing illegal migration and making passage to Europe safe. On April 4, 2016 the agreement went into effect and the first group of Syrian refugees arrived in Germany from Istanbul while the first group of migrants, including Syrian refugees, returned to Turkey from Greece.

As a response to the shattering infrastructure and lack of services within Syria, Turkey mobilized its own resources to address and alleviate the suffering of the Syrian people through on-the-ground humanitarian assistance in conformity with international legitimacy and humanitarian principles. The total value of the aid channeled to Syria through zero point operations was in the range of U.S.$535 million as of March 2016. Since July 2014, Turkey has also been cooperating closely with the UN to enable UN cross-border humanitarian operations into northern Syria within the framework of UN Security Council Resolution 2165.

Turkey, aware of this threat, has designated DAESH/ISIL as a terrorist organization since 2005, under its previous names and revised it by its new name the Islamic State of Iraq and the Levant (“ISIL”) on October 10, 2013, has begun to counter the threat posed by foreign terrorist fighters since 2011 and called for source countries to take necessary legal and administrative measures to prevent departure and travel of foreign terrorist fighters from their countries.

Turkey continues to be at the forefront of DAESH/ISIL threat and has seen the most ruthless face of terrorism of DAESH. The bomb attacks of this terrorist organization in major cities of Turkey took 206 lives of Turkey’s citizens and left hundreds of people wounded.

Following the terrorist attack that took place in Suruç, Turkey, on July 20, 2015 and DAESH’s targeting Turkey’s military border post on July 23, 2015, Turkey took necessary military actions against the terrorist organization in Syria. On July 24, 2015, Turkish Air Force hit certain DAESH targets in Syria, based on Turkey’s right of self-defense in accordance with Article 51 of the UN Charter. On December 3, 2015, the Prime Minister of Turkey announced that Turkey is setting up “physical barriers” in the 98 km (61 mile) stretch of land controlled on the Syrian side by DAESH.

On February 13, 2016, Syria’s Democratic United Party (“PYD/YPG”), a terrorist group affiliated with the PKK, located around Azaz in northern Syria, shelled the Akçabağlar base of the Turkish military, located near the Kilis province. Turkish Armed Forces shelled PYD/YPG targets in retaliation under Turkey’s military rules of engagement. On February 16, 2016, at the request of Russia, the UN Security Council discussed Turkey’s shelling of PYD/YPG targets in Syria and expressed their concerns.

On December 18, 2015, the United Nations Security Council unanimously agreed Resolution 2254 endorsing an international roadmap for a Syrian peace process. Turkey has announced that it supports a solution in which Bashar Assad would be transitioned out in the envisaged political transition process through absolute transfer of power to a transitional government body.

Turkey continues to cooperate with its regional and international partners in order to bring an immediate end to the violence in Syria and to initiate a political transition process in line with the legitimate demands of the Syrian people. Turkey remains fully committed to a political solution in Syria and will continue to support all efforts for a genuine political transition based on the principles of the Geneva Communique.

Israel & Palestine

In light of fundamental changes taking place in the Middle East and North Africa in the recent period, finding a just, lasting and comprehensive settlement to the Israeli-Palestinian conflict has become all the more important and urgent. Turkey supports all efforts for the resumption of the direct negotiations for the resolution of the Israeli-Palestinian conflict, through a two-state solution based on pre-1967 borders that would lead to the establishment of an independent, sovereign and viable Palestinian State with East Jerusalem as its capital, to live in peace and security with the State of Israel.

On June 3, 2016, Turkey’s Deputy Prime Minister participated in the Paris Ministerial Meeting where participants met to revive the Middle East peace process.

Turkey has maintained its bilateral program of assistance and its contribution to the international efforts aimed at improving the economic and humanitarian situation in Palestine. It carries out projects relating to health, education, technical assistance, protection of cultural heritage, and water supply in the Palestinian territory through the Turkish Cooperation and Coordination Agency (“TIKA”), Prime Ministry Disaster and Emergency Management Authority, and Turkish Red Crescent. Moreover, Turkey pledged U.S.$200 million for the period of 2014-2017 at the Donors Conference in Cairo, which took place on October 12, 2014 for the reconstruction of, and the humanitarian aid to Gaza. Turkey’s development assistance to Palestine during 2006-2015 period reached U.S.$375 million. In 2014 and 2015, TIKA, Prime Ministry Disaster and Emergency Management Authority and the Turkish Red Crescent provided assistance to Palestine worth approximately U.S.$100 million. In 2016 and 2017, Turkey will contribute U.S.$100 million for the reconstruction of Gaza and the sustainable development of the Palestinian economy.

 

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Turkish-Israeli economic relations continued to develop in recent years. The trade volume reached U.S.$4.4 billion in 2011 and U.S.$4.0 billion in 2012. While bilateral trade volume was U.S.$4.6 billion in 2013, it increased to U.S.$5.5 billion in 2014. Bilateral trade volume fell to U.S.$4.2 billion in 2015 due to the decreasing oil prices.

Turkish Airlines is the second airliner in Tel Aviv Ben Gurion Airport, just after El Al. Turkish airliners make a total of 100 reciprocal scheduled flights every week between İstanbul and Tel Aviv.

Israeli tourists visiting Turkey reached 79,140 in 2011, 83,740 in 2012, 164,917 in 2013, 188,608 in 2014, and 224,000 in 2015.

Tunisia

A country which ignited the first spark of democratic transformation in the region, Tunisia has successfully completed its political transition process.

Increasing terrorist activity has posed a threat to Tunisia (with three significant attacks occurring in 2015), which has broader implications for its democratic consolidation efforts and economic well-being. To that end, Turkey provides technical and financial support to Tunisia to ensure lasting stability, democracy and welfare in the country. High Level Strategic Cooperation Council mechanism, established in 2013 between Turkey and Tunisia, has given a fresh impetus to the bilateral relations of the two nations. The first meeting of the Council was held on June 6, 2013 in Tunis. The two countries are working on joint projects that will enable Turkey to share its experience and expertise in the fields of economic development, defense, security, poverty reduction and technical training.

In order to facilitate the transition process, Turkey has extended financial assistance to Tunisia. Turkey provided a financial package worth U.S.$500 million in 2014 (U.S.$100 million grant, U.S.$200 million loan and a U.S.$200 million Eximbank line of credit from Turkish Eximbank) to Tunisia.

Libya

Turkey supported the subsequent Libyan political dialogue process facilitated by the United Nations throughout 2015, aimed at bringing an end to the political division and authority vacuum in Libya. Turkey has engaged with all sides in Libya in order to encourage them to join the dialogue process and come out with a mutually acceptable agreement. Turkey hosted various meetings of Libyan stakeholders throughout 2015. Turkey welcomed the signing of the Libyan Political Agreement on December 17, 2015, which offers a framework for long-lasting peace and stability in Libya. As a show of support, the Minister of Foreign Affairs of Turkey, took part at the signing ceremony held in Skhirat, Morocco. Turkey supports the Government of National Accord in its endeavors to effectively implement the Libyan Political Agreement.

Egypt

Starting from the earliest stages of the Tahrir Revolution back in January 2011, Turkey supported the legitimate demands of the Egyptian people in Egypt. Nevertheless, the coup that took place on July 3, 2013, which led to the ousting of the first democratically elected President, Mohammed Morsi, has adversely affected the bilateral relationship between Turkey and Egypt. In this regard, due to Egypt’s unilateral actions, the level of diplomatic relations were lowered to Chargé d’Affaires and the bilateral agreement on Cooperation on Ro-Ro and Road Transit Transportation. For its part, Turkey continues to pursue a policy of non-hostility towards Egypt.

 

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Yemen

Yemen faces severe political, economic, humanitarian and security problems. These challenges require a resolute and unified stance of the international community, particularly the UN. In the face of forceful seizure of power in Yemen by the Houthis in February 2015, Turkey supports the constitutional legitimacy in Yemen represented by President Abd Rabbu Mansour Hadi. Turkey believes that a lasting settlement in Yemen is possible only through peaceful political dialogue and reconciliation, based on the parameters set by the Gulf Cooperation Council Initiative, the National Dialogue Conference outcomes and the UN Security Council Resolution 2216 in 2015.

To assist economic development in Yemen, Turkey pledged U.S.$100 million in 2012. This amount has been allocated for specific capacity-building projects. As the conditions on the ground allow, these projects will be implemented. Turkey also extends humanitarian assistance to Yemen. Turkey has delivered humanitarian aid both in Yemen and in Djibouti where thousands of Yemeni refugees stayed in 2015.

Gulf Cooperation Council

Turkey has strong political, economic, commercial and cultural ties with the Gulf countries, based on deep-rooted common history, common values and interests. Turkey views its relations with the Gulf countries from a strategic perspective and wishes to further develop its relations with the Gulf Cooperation Council (“GCC”). To this end, there is common will and mutual understanding between Turkey and the GCC. In 2008, the Turkey-GCC High Level Strategic Dialogue Mechanism was established. Within this Mechanism, four meetings have been held thus far at Foreign Ministers level.

Moreover, the bilateral relations between Turkey and the Gulf countries have been steadily developing. High-level bilateral visits are frequently held between Turkey and the Gulf countries and several agreements have been signed, which continue to contribute to the expansion of relations in all fields between Turkey and the GCC countries. The first meeting of the Turkey-Kuwait Joint Committee for Cooperation was held on October 24, 2013, among Foreign Ministers. Turkey and Qatar established the Supreme Strategic Committee in December 2014 and held its first meeting on December 2, 2015 in Doha. Moreover, Turkey and Saudi Arabia agreed to form a similar high-level cooperation mechanism during the visit of Turkish President Erdoğan in December 2015.

As a manifestation of its support to the security and stability of the Gulf region, Turkey signed an agreement with Qatar for deployment of Turkish Armed Forces in Qatar in December 2014.

South Caucasus

The South Caucasus occupies one of the unique places in Turkey’s quest for peace, security and prosperity in its neighborhood and beyond. Turkey’s approach to the South Caucasus is shaped by its desire to establish a climate conducive to comprehensive peace and cooperation among all states of the region. The region is home to three of the four protracted conflicts of the OSCE area, namely that of Abkhazia, South Ossetia and Nagorno-Karabakh (“NK”). The conflicts are a destabilizing factor and threat to the security of this crucial region. These conflicts have also prevented the region from realizing its full cooperation potential, which in turn, adversely affects regional wealth and prosperity. In this regard, Turkey is engaged in significant diplomatic efforts for strengthening peace and stability in the South Caucasus region. The Nagorno-Karabakh (“NK”) conflict constitutes a major impediment to the establishment of peace, stability and prosperity and it also prevents the emergence of a cooperative atmosphere in the South Caucasus. The recent ceasefire violations by Armenia against Azerbaijan along the line of contact in the Nagorno-Karabakh region which caused military and civilian casualties confirm once again that the status-quo in the conflict is neither acceptable nor sustainable. Since 1994, there have been numerous unsuccessful attempts to broker peace by the Minsk Group. However, due to the failure of mediation efforts, the region faces increasing risk of renewed hostilities and escalating militarization. Turkey is a member of the OSCE Minsk Group and continues to support the efforts towards the peaceful settlement of the NK conflict within Azerbaijan’s territorial integrity and sovereignty. Turkey is also working on confidence building measures including ones in the transport sector with a view to creating peace, stability and prosperity atmosphere in the region.

The process that Turkey has initiated with Armenia for the normalization of its relations should also be regarded as the reflection of this interest. The signing of the protocols on October 10, 2009 in Zurich was a major achievement in the direction of building a comprehensive and sustainable peace in the South Caucasus. Turkey keeps its adherence to the protocols and remains committed to the normalization process. However, Armenia does not display a similar approach as shown by its latest move of recalling the Protocols from the Armenian Parliament in 2015.

Turkey’s relations with Azerbaijan and Georgia are multifaceted and strategic. The three countries are engaged in substantial regional cooperation projects such as the Baku–Tbilisi–Ceyhan oil pipeline (operational since 2006), Baku–Tbilisi–Erzurum gas pipeline (operational since 2007), Baku–Tbilisi–Kars railway project and the Trans Anatolian Pipeline project. Additionally, Turkey has begun to organize trilateral meetings of the Ministers of Foreign Affairs of Turkey-Azerbaijan-Iran, Turkey-Azerbaijan-Georgia and Turkey-Azerbaijan-Turkmenistan. The latter two meetings are also held at the presidential level.

Turkey’s economic relations with the South Caucasus have been steadily improving. Turkey’s total trade with the countries of the region has amounted to U.S.$4.8 billion in 2015.

 

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Central Asia

Central Asia constitutes a strategic aspect of Turkey’s multi-dimensional foreign policy. Turkey shares common historical, linguistic and cultural ties with the Central Asian Republics (“CARs”). Turkey believes that a secure and democratic Central Asia will be in the interest of the region as well as the whole world.

Turkey has High Level Strategic Cooperation Council mechanisms with Kyrgyzstan and Kazakhstan, as well as strategic cooperation with Turkmenistan in areas ranging from energy to trade. Turkey’s trade volume with the countries of the region reached U.S.$6.5 billion at the end of 2015. In addition, Turkish construction companies have completed approximately U.S.$73 billion worth of projects in the region. Turkish direct investments in the region amounted to U.S.$4.5 billion as of the end of 2015. More than 2,000 Turkish companies are operating in the region. Turkey has also provided the region with a substantial amount of development assistance, worth approximately U.S.$1.9 billion in the last 10 years.

Turkey spearheaded the process of The Summits of Turkic Speaking Countries, which has been held since 1992, with a view to increasing solidarity and cooperation among the CARs. This process gained an institutional structure through the Establishment of the Cooperation Council of Turkic Speaking States in 2010. The Council has been conducting various projects, ranging from education to transportation including establishing the International Turkic Academy and Turkish Culture and Heritage Fund in Astana and Baku, respectively.

Given the critical geopolitical location and proximity to Afghanistan, countries in the region may face security challenges. Turkey is closely working with these countries to assist them in their effort to strengthen their security environment.

Afghanistan

Turkey cultivates bilateral ties with Afghanistan in every field and actively contributes to international efforts to establish lasting stability and security and ensure sustainable development in the country.

The Resolute Support Mission (“RSM”) was launched by NATO on January 1, 2015. Turkey is a “framework nation”—a term used by NATO to define a nation accepting the primary responsibility for completing the tasks assigned to a multi-national headquarters groups and/or units. Other framework nations in Afghanistan are the United States, Germany and Italy. Turkey assumed responsibility for managing Hamid Karzai International Airport in Kabul on January 1, 2015. Turkey will continue its lead role until the end of 2017. Former Turkish Ambassador to Afghanistan currently serves as the Senior Civilian Representative of NATO in Afghanistan. Furthermore the Turkish Embassy in Kabul is the NATO Contact Point Embassy for the 2015-2016 period.

The aggregate amount of Official Development Aid (“ODA”) of Turkey to Afghanistan between 2011 and 2015 is U.S.$962 million. ODA towards Afghanistan mainly focuses on education, health, water and water sanitation and transportation.

The largest part of Turkey’s development assistance is dedicated to education in Afghanistan. Turkey has built more than 100 schools in Afghanistan and is working to establish “Mevlana Celaleddin-i Rumi Turkish-Afghan Women University”. A sum of U.S.$60 million is being allocated to this university from our international pledge to Afghanistan for the 2015-2017 period. Health is the second largest field of Turkey’s development assistance to Afghanistan. As of the end of 2015, more than 250 projects were completed in this field with 17 hospitals or clinics built or repaired. Thus far, approximately 4 million Afghans have been served by hospitals, clinics and mobile health clinics built/repaired or operated by Turkey.

At the Tokyo Conference in 2012, Turkey pledged U.S.$150 million to development efforts in Afghanistan for the 2015-2017 period. This pledge was reiterated during the London Conference in 2014.

Turkey also confirmed its pledge of U.S.$60 million for the sustainment of the Afghan National Defense and Security Forces (“ANDSF”) for the 2015-2017 period in NATO’s Chicago Summit in 2012.

As a part of its capacity building assistance in the field of security in Afghanistan, Turkey organizes comprehensive training programs for the Afghan National Army (“ANA”) and Afghan National Police. Since 2011, 1,956 Afghan police cadets were trained in 4 terms of a six-month program. Likewise, a total of 494 Afghan female police cadets were trained since 2011.

The Trilateral Summit Process, launched at Turkey’s initiative in 2007, has evolved into a concrete platform for multidimensional cooperation among Turkey, Pakistan and Afghanistan. The process has three dimensions: political dialogue, security cooperation and development partnership. It allows for the development of multidimensional cooperation in areas such as economy, development, security, education and training, while enabling enhanced contacts across a wide spectrum, including among parliamentarians, businessmen and members of the media. The Eighth Summit meeting was held in Ankara in February 2014.

 

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Turkey also continues to encourage regional cooperation through the Heart of Asia-Istanbul Process. This Process, which was initiated by Turkey and Afghanistan at the Istanbul Conference for Afghanistan on November 2, 2011, serves as a regional cooperation platform with Afghanistan at its center, engaging regional countries in political dialogue and practical cooperation through the implementation of confidence building measures (“CBMs”). Turkey takes part in the implementation of all CBMs and leads the Counter Terrorism CBM together with Afghanistan and the United Arab Emirates. Turkey organized a “Defense Against Suicide Bombing” course under the Counter-Terrorism CBM and the Regional Technical Group meeting in 2015 with a view to plan future activities. The fifth Ministerial Conference of the Process was held in Islamabad, on December 9, 2015.

Asia-Pacific

In line with its multi-dimensional foreign policy and in view of the growing economic and political significance of the Asia-Pacific, Turkey has adopted policies geared towards a more constructive relationship with the region. The main elements of the policy include, fostering economic and trade relations, enhancing political dialogue, establishing necessary legal frameworks and strengthening cultural ties.

Bilateral relations with the G-20 members of the region, namely Australia, China, Indonesia, Japan and the Republic of Korea remain strong both economically and politically. Since 2014, Turkey has successfully established strategic relations with six countries in China, Japan, Indonesia, Korea, Malaysia and Singapore.

Turkey’s economic relations with the Asia-Pacific region followed global trends towards increased trade and investment with the countries in the region. The total trade between Turkey and East Asian countries (China, Japan, Korea) reached U.S.$38.4 billion in 2015. Trade with ten ASEAN members was U.S.$7.8 billion Dollars in 2015.

Major items exported to Asia-Pacific are salt and sulphur, ores, slag and ash, nuclear reactors, boilers, machinery and mechanical appliances, inorganic chemicals, vehicles other than railway or tramway rolling-stock, mineral fuels and oils, and iron and steel. Major items imported from Asia-Pacific are electrical machinery and equipment, nuclear reactors and boilers, plastics and articles, mineral fuels and oils, vehicles other than railway or tramway rolling-stock, iron and steel, organic chemicals, and optical machines.

Turkey aims to liberalize its trade with the region. Turkey-South Korea FTA has been in force since May 2013. Turkey-Malaysia Free Trade Agreement (a “FTA”) came into force in August 2015 and is the first FTA with an ASEAN member. Turkey-Singapore FTA was signed in November 2015.

Turkey’s Dialogue Partnership with the Shanghai Cooperation Organization in June 2012 is another example of its opening to the Asia-Pacific region, as are the signing of the ASEAN Treaty of Amity and Cooperation in 2010, a turning point, and its active participation in the Pacific Islands Forum as Post-Forum Dialogue Partner.

Turkey regards ASEAN as the key organization in Southeast Asia and continues to develop new partnerships will all its members. Today, the Turkish Embassy in Jakarta is accredited to ASEAN. Turkey will continue its engagement with the new ASEAN Economic Community in sectors. Its application to ASEAN Secretariat in Jakarta in December 2015 to form a Sectoral Dialogue Partnership, once approved, will lead to stronger dialogue and sectoral cooperation.

Turkey’s involvement in development in the Asia-Pacific region is relatively new. Turkish Cooperation and Coordination Agency has increased the number of its development projects and strengthened its presence by opening offices in Yangon, on February 1, 2013, and Manila, on April 8, 2015.

Turkish Airlines flies to all major capitals in the Asia-Pacific region. As of the end of 2015, from its hub in Istanbul, the national flag carrier operates 196 flights to the region. The number of tourist arrivals to Turkey from the Asia-Pacific countries reached 1.2 million people in 2015.

Middle Corridor/Silk Road/Belt and Road

Turkey signed the Memorandum of Understanding on Aligning the Silk Road and the 21st Century Maritime Silk Road and the Middle Corridor Initiative between the Government of the Republic of Turkey and the Government of the People’s Republic of China (the “Middle Corridor Initiative”) on November 14, 2015, in Antalya, during the G-20 Summit.

The Middle Corridor links Turkey, the Caucasus and the Central Asian Republics via crossing the Caspian Sea. The Marmaray tube crossing under the Bosporus Bridge has already been built and links Europe and Asia. The opening ceremony of the third bridge (Yavuz Sultan Selim) was held on August 26, 2016. Another big tube link under the Bosporus is being constructed. The third bridge, 3 Level Bosporus Tunnel and the new international airport of Istanbul are also under construction and will be part of an intermodal transport linkage between Europe and Asia. Once the Baku-Tbilisi-Kars railway project becomes operational, at the end of 2016, an uninterrupted railway line will connect Beijing to London through the Caspian Sea and the Bosporus.

 

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Turkey believes that the Middle Corridor Initiative and the “Belt and Road” will contribute to regional development, welfare, cultural exchange and enhance people-to-people contacts between Turkey and China. It will also provide new employment opportunities and energy security. Thus, Turkey supports integration projects in the fields of transportation, logistics, investment, energy and trade that would contribute to the realization of the “Modern Silk Road”.

Africa

In recent years, Turkey’s relations with the region have been transformed into a mutually reinforced political-economic partnership.

The partnership was further strengthened by the Second Turkey-Africa Partnership Summit held in Malabo, Equatorial Guinea, in November 2014. During the Summit, a framework for Turkey-Africa Partnership for 2014-2019 was outlined.

Turkey pursues a multilayered policy in Africa, aiming to establish close political relations by intensifying bilateral high level visits and defending the rights of various African nations at the bilateral and multilateral level, assisting certain African countries to overcome economic difficulties through trade, investment and humanitarian assistance; when duly requested, playing a role through diplomacy in the settlement of conflicts and disputes, supporting progress in the areas of democracy and good governance, supporting international and regional organizations in their efforts towards peace and stability, and participating in seven out of nine peacekeeping missions in the continent.

The number of Turkish embassies in Africa was only 12 in 2002, but as of the end of 2015, there are 39. Similarly, African countries have opened several embassies in Turkey in the past decade. Currently, 32 African countries have embassies in Ankara.

Turkey’s trade volume with Sub-Saharan Africa reached U.S.$6.0 billion in 2015. Overall trade volume with the entire African continent reached U.S.$17.5 billion in 2015. Major items exported to Africa are iron and steel, nuclear reactors, boilers, machinery and mechanical appliances, mineral fuels and oils, and electrical machinery and equipment. Major items imported from Africa are mineral fuels and oils, jewelry and precious metals, cocoa, plastics and articles, copper and articles, and iron and steel.

In line with the developing relations, the value of Turkish direct investments to Sub-Saharan African countries is also steadily increasing. Many being exemplary of their kind in a number of African countries, Turkish investors employ local labor force, use home-produced resources and export final products to third countries. Total Turkish investment in Africa is estimated to be around U.S.$6.2 billion. Turkey, under various cooperation schemes, has been trying to share its experience in the fields of agriculture, health, education, energy, tourism and environment, as well as supporting small and medium size enterprises.

TIKA, with its 15 coordination offices across the continent, is the key governmental agency carrying out humanitarian and development assistance in most of the African countries. Turkey has substantially increased its official development assistance to the African countries. While having provided U.S.$269.8 million in 2011, Turkish official development assistance to Africa reached U.S.$383.3 in 2014. Turkey has also become a prominent country in humanitarian activities across the continent ranging from Somalia to Niger and Sudan.

Turkish Airlines has become a major international airline connecting the continent to the world with a total of 48 flights from Istanbul to various cities across the continent.

Turkey has been providing several scholarships to African students. For the 2015-2016 academic year alone, 1239 scholarships have been allocated to students from the continent. As of the end of 2015, there are 5437 students in higher education and 116 visiting professors/research assistants from African countries.

Latin America

Turkey firmly believes in the importance of frequent high-level visits and entering into agreements in order to complement the legal framework of its relations with Latin America. Two official Presidential visits from Ecuador and Chile took place in in Turkey 2012 and, in 2013, the President of Mexico visited Turkey. During the visit, relations between Turkey and Mexico were elevated to the level of strategic partnership and Mexico became Turkey’s second strategic partner in the region following Brazil. President Recep Tayyip Erdoğan visited Colombia, Cuba and Mexico from February 9-13, 2015. The visit was the first presidential tour to Latin America from Turkey in the last 20 years.

 

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Turkey’s economic and commercial relations with the region increased in recent years. The average trade volume for the 2011-2015 period was U.S.$7.8 billion. Major items exported to Latin America are iron and steel, vehicles other than railway or tramway rolling-stock, nuclear reactors and boilers, ships, boats and floating structures, and mineral fuels and oils. Major items imported from Africa are mineral fuels and oils, oil seeds and oleaginous fruits, miscellaneous grains, seeds and fruit, industrial or medicinal plants, straw and fodder, ores, slag and ash, vehicles other than railway or tramway rolling-stock, copper and articles, nuclear reactors and boilers, and iron and steel.

Turkey opened embassies in Quito, Ecuador in 2012, Santo Domingo, Dominican Republic in 2013, and in San Jose, Costa Rica and Panama in 2014 and Guatemala City in 2015, in addition to the existing eight Embassies in 2011, and a Consulate General in Sao Paulo. Latin American countries (“LAC”) increased their representation in Turkey. The number of LAC resident Embassies in Ankara reached 11 at the end of 2015, up from 9 at the end of 2011. Moreover, TIKA opened its Coordination Office in Mexico City. Through such enhanced representation, Turkey is better equipped to further its relations and cooperation in the region.

Chile became the first country in the region with which Turkey has concluded a Free Trade Agreement. Turkey is currently negotiating similar agreements with Mexico, Colombia, Peru and Ecuador. While building closer ties with the countries of the region and diversifying relations on a bilateral basis, Turkey has also sought to strengthen its cooperation with regional organizations. Turkey enjoys permanent observer status in the Organization of American States, the Association of Caribbean States, the Pacific Alliance and Central American Integration System. Furthermore, Turkey established a Cooperation and Consultation Mechanism with the Caribbean Community, a Political Dialogue and Cooperation Mechanism with Mercosur countries and a Consultation Mechanism with the Community of Latin American and Caribbean States Quartet. The Turkish National Assembly has applied for observer status to the Latin American Parliament, which is an umbrella regional parliamentary organization.

 

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ECONOMY

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 to a greater reliance on market forces and trade liberalization was necessary. 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.

Turkey’s real GDP annual growth rate averaged 4.4% during the period from 2011 to 2015. 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 long-term gross external debt levels rose in absolute terms from U.S.$214.6 billion in 2010 to approximately U.S.$304.9 billion in 2015. See “Debt-External Debt and Debt Management” for details.

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 trade by the Republic with states consisting of the Commonwealth of Independent States (CIS) (Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan). 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”.

In 2015, growth was mainly driven by the increase in domestic demand. External demand’s contribution to growth in 2015 was negative. The unemployment rate in 2015 increased due to the rise in labor force participation. Inflation in 2015 increased due mainly to increases in food prices and unfavorable exchange rates. The current account deficit in 2015 improved due mainly to the decline in oil and commodity prices. The current account is mainly financed through long-term sources and direct capital investments. Domestic debt security yields increased primarily because of the overall increase in global rates and tight liquidity conditions in 2015.

ECONOMIC STIMULUS EFFORTS

On June 4, 2009, the Government announced a new stimulus package that included investment incentives, certain measures to enhance employment and a new credit guarantee fund for small and medium-sized enterprises. On June 18, 2009, Law No. 5909, which enables the Turkish Treasury to transfer up to TL 1 billion of resources to the “Credit Guarantee Fund,” was approved by Assembly and was published in the Official Gazette on June 24, 2009 (No. 27268). The purpose of this law is to ensure that the Credit Guarantee Fund is adequately capitalized. The investment incentives program was renewed in 2012 with Decree No 2012/3305 and is still being implemented.

The Action Plan of the Business and Investment Climate Improvement Program became effective on February 16, 2015. The Program intends to increase investments by improving existing mechanisms and is built on four pillars: (1) Improving Bureaucratic Procedures; Improving Judiciary Processes, (2) Facilitating the Provision of Investment Location, (3) Improving the Governance of Business and (4) Investment Climate at Regional Level. The Program targets (i) increasing the share of private sector investment in GDP to 19.3% by the end of 2018 which was 15.9% in 2015, (ii) reaching U.S.$92.8 billion cumulative international direct investment for the 2014-2018 plan period (excluding real estate), and (iii) ranking among the top 40 countries in the Ease of Doing Business Index created by the World Bank Group.

GROSS DOMESTIC PRODUCT

Table 1

 

     Gross Domestic Product  
     2011      2012      2013      2014      2015  

At constant 1998 prices

              

GDP (millions of TL)

     115,175         117,625         122,556         126,258         131,289   

GDP (at current prices)

     1,297,713         1,416,798         1,567,289         1,748,168         1,953,561   

Turkish Lira/US dollar (annual average)

     1.670         1.793         1.902         2.187         2,719   

GDP (at current prices, millions of dollars)

     774,188         786,283         823,044         799,370         719,967   

Population (mid-year, in thousands)

     74,224         75,176         76,055         76,903         77,738   

Per capita GDP (at current prices, in dollars)

     10,428         10,459         10,822         10,395         9,261   

Source: TURKSTAT

In 2011, in spite of the worsening economic conditions for many countries in Europe, notably in the first half of the year, the economy grew at a strong pace, mainly driven by credit expansion and favorable external funding conditions. In the first half of 2011, value added of the agricultural sector, industrial sector and services sector increased by 7.5%, 11.9% and 10.5% respectively, and GDP growth rate was 10.8%. However, such an increase in the domestic economy raised concerns for a potentially large current account

 

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deficit. Therefore, the Central Bank of the Republic of Turkey and Banking Regulation and Supervision Agency took cautionary measures against robust credit growth in order to cool down the economic activity and to shrink the current account deficit. In the second half of 2011, effects of those measures slowed down the pace of growth and the GDP growth rate was 7.0%. At the end of 2011 the sectors’ growth rates were recorded as 6.1%, 9.7% and 9.0% respectively and the annual GDP growth rate was 8.8% which indicate strong economic activity in spite of measures taken. In 2011, agriculture, industrial sector and services sector accounted for 9.0%, 22.5% and 68.5% of GDP respectively.

In 2012, the slowdown in the pace of growth of economic activity continued each quarter. Namely, measures taken in 2011 yielded a gradual decline in domestic demand. Therefore, exports were enhanced through the near and Middle East to circumvent the distress in European markets and the effects of weak domestic demand and to prevent a sharp decline in GDP growth rate. On the other hand, a new investment incentive program was introduced to stimulate production. However, those efforts did not suffice to support aggregate domestic demand, and it shrank by 1.8%, while net exports grew by 4.0% in 2012. On the production side of the economy, agriculture, industrial sector and services sectors grew by 3.1%, 1.8% and 2.4%, respectively. Thus, the annual GDP growth rate was 2.1%. In 2012, agriculture, industrial sector and services sectors accounted for 8.8%, 21.7% and 69.4% of the GDP, respectively.

In 2013, domestic demand recovered somewhat thanks to increases in both private consumption and public investment expenditures which were recorded as 5.3% and 24.1% respectively. Therefore, growth in net exports declined 2.6% due to the recovery in domestic demand. On the other hand, private investment expenditures did not rise sharply and occurred as 0.5%. On the production side, agriculture, industrial sector and services sectors grew by 3.5%, 3.4% and 5.7%, respectively. High value added rises in services sector mainly stemmed from construction and financial intermediation services sectors. In sum, the GDP growth rate was 4.2% in 2013. Agriculture, industrial sector and services sectors accounted for 8.3%, 21.6% and 70.1% respectively.

In 2014, growth rate of domestic demand declined to 1.0%, mainly caused by sluggish increase in private consumption expenditures which was recorded as 1.4% and the 8.2% decrease in public investment expenditures. On the other hand, private investment expenditures could not rise remarkably and recorded only 0.3% growth. Sluggish domestic demand and depreciation in domestic currency bolstered the growth of net exports somewhat and was recorded as 2.0%. On the production side, agricultural sector shrank by 2.1% due to unfavorable weather conditions. Therefore, crop production shrank by 4.8%. The industrial sector carried on its moderate pace and grew by 3.8%. Capital goods production and energy production were the main leading manufacturing sectors which recorded 5.4% and 4.3% growth rates respectively. On the other hand, mining sector’s production growth rate occurred as 7.4% and 5.6% for value added growth rate, which had bolstered the total industrial value added in 2014. The services sector grew by 4.1%, which was mainly fueled by financial intermediation services, professional, scientific and technical activities, education and entertainment activities, which recorded 7.0% and 10.8% growth rates, respectively. Consequently, GDP grew by 3.0% in 2014. Agriculture, industrial sector and services sectors accounted for 8.0%, 22.0% and 70.0% of GDP, respectively.

In 2015, domestic demand recovered rapidly and became the main driver of a 4.0% GDP growth rate, while net exports shrank somewhat. Private consumption and investment expenditures grew by 4.5% and 2.7%, respectively. Similarly, public expenditures contributed buoyant domestic demand. Public consumption and investment expenditures recorded 6.7% and 7.6% growth rates. Thus, total domestic demand grew by 4.2% and net exports decreased by 0.3%. On the production side, favorable weather conditions and base effect elevated agricultural production sharply and agricultural value added recorded 7.6% growth. Industrial value added growth carried on its moderate pace and recorded 3.7% growth rate. The services sectors value added grew by 4.5% in 2015, mainly driven by financial services and professional, scientific and technical activities. Agriculture, industrial sector and services sectors accounted for 8.6%, 21.5% and 69.9% of GDP, respectively.

Table 2

Gross Domestic Product

 

                                           

Years

   GDP at
Current
prices

(in millions
of TL)
     Percentage
change
from prior
year (%)
     GDP at
Current
prices
(in millions
of US$)
     Percentage
change
from prior
year (%)
     GDP at
Constant
prices
(in millions
of TL)
     Percentage
change
from prior
year (%)
 

2011

     1,297,713         18.1         774,188         5.8         115,175         8.8   

2012

     1,416,798         9.2         786,283         1.6         117,625         2.1   

2013

     1,567,289         10.6         823,044         4.7         122,556         4.2   

2014

     1,748,168         11.5         799,370         -2.9         126,258         3.0   

2015

     1,953,561         11.7         719,967         -9.9         131,289         4.0   

Source: TURKSTAT

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

 

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Table 3

 

Composition of GDP by Sectors (1)

   2011      2012      2013      2014      2015  
                                            

Agriculture

     9.0         8.8         8.3         8.0         8.6   

Industry

     22.5         21.7         21.6         22.0         21.5   

Mining

     1.7         1.7         1.6         1.6         1.4   

Manufacturing

     18.2         17.4         17.3         17.8         17.6   

Electricity, Gas, Steam

     1.9         2.0         2.0         1.8         1.6   

Water Supply

     0.7         0.7         0.7         0.8         0.8   

Services

     68.5         69.4         70.1         70.0         69.9   

Construction

     5.0         4.9         5.0         5.1         5.0   

Wholesale and Retail Trade

     13.4         13.3         13.6         13.4         13.2   

Transportation

     13.1         13.5         13.5         13.4         13.2   

GDP Total

     100.0         100.0         100.0         100.0         100.0   

 

(1) Financial intermediation services were indirectly measured and tax-subsidies were distributed to sectors with respect to their sectoral weights. Therefore, the sum of agriculture, industry and services sectors’ shares equals 100%.

Source: TURKSTAT

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

Table 4

 

     2011      2012      2013      2014      2015  
                                            

Agriculture

     6.1         3.1         3.5         -2.1         7.6   

Industry

     9.7         1.8         3.4         3.8         3.7   

Mining

     3.9         0.8         -3.4         5.6         -2.3   

Manufacturing

     10.0         1.7         3.7         3.7         3.8   

Electricity, Gas, Steam

     9.0         3.4         1.3         4.1         2.4   

Water Supply

     6.5         2.7         4.7         10.8         10.4   

Services

     9.0         2.4         5.7         4.1         4.5   

Construction

     11.5         0.6         7.4         2.2         1.7   

Wholesale and Retail Trade

     11.2         0.0         5.1         1.9         2.1   

Transportation

     10.4         2.0         3.9         3.1         2.9   

GDP

     8.8         2.1         4.2         3.0         4.0   

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.

2010 and 2011 witnessed recovery from the global financial crisis, with the industrial sector’s value added increase amounting 13.9% and 10.0% respectively. Production of total industry and manufacturing industry increased by 12.8% and 14.5%, respectively, in 2010 and by 10.1% and 10.5%, respectively, in 2011. The manufacturing sector capacity utilization rate was 75.4%.

In 2012, the slowdown in the economic activity was reflected in industrial sector. Total industrial production and manufacturing production increased by 2.5% and 2.3%, respectively, while value added of industrial sector was 1.8%. The manufacturing sector capacity utilization rate was 74.2%.

In 2013, thanks to recovery in the domestic economy, industrial production and manufacturing industry production rose by 3.0% and 4.0%, respectively, and the capacity utilization rate was 74.6%. Value added in industry increased by 4.1% in 2013.

In 2014 and 2015, industrial sector carried on its moderate pace. Industrial production rose by 3.6% and 3.2%. Manufacturing industry production rose by 3.2% and 3.6%. Capacity utilization rates were 74.4% and 74.7% in 2014 and 2015. Value added in industry increased by 3.5% in 2014 and 3.3% in 2015.

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

 

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Table 5

 

     (In TL Millions)      (% change)  
     2011      2012      2013      2014      11/10      12/11      13/12      14/13  
                                                                       

Hard Coal

     840         876         818         769         5         4         -7         -6   

Lignite

     6,330         6,816         6,246         5,927         27         8         -8         -5   

Natural Gas

     327         373         348         351         9         14         7         0,9   

Iron Ores

     882         1,201         1,267         1,530         41         36         6         21   

Lead, Zink, Tin Ores

     284         407         566         608         242         43         39         7   

Other Non-Iron Metal Ores

     1,112         1,501         1,152         2,159         11         35         -23         87   

Marble and Building Stones

     1,402         2,100         2,681         2,430         30         50         28         -9   

Limestone and Gypsum

     497         538         606         702         24         8         13         16   

Granules and Pebble Stones

     1,558         2,061         3,391         2,683         53         32         65         -21   

Other Minerals

     922         822         1,236         1,308         44         -11         50         6   

Beef (Fresh or Cooled)

     1,720         2,755         2,652         3,425         2         60         -4         29   

Poultry (Fresh or Cooled)

     5,675         6,719         6,840         8,397         16         18         2         23   

Cigarette

     2,944         3,179         3,567         4,405         8         8         12         24   

Cotton Yarn

     7,852         7,706         8,292         9,052         35         -2         8         9   

Cotton Weaving Fabric

     5,287         5,896         6,723         7,411         33         12         14         10   

Rough Aluminum

     836         797         766         1,081         47         -5         -4         41   

Tractor (37 kw < engine power < 59 kw)

     817         610         897         1,114         72         -25         47         24   

Automobile (1500 cm3 cylinder volume 3000 cm3

     12,435         11,299         12,084         15,661         26         -9         7         30   

Tankers

     61         98         n/a         430         -70         61         n/a         n/a   

Source: TURKSTAT

Note: 2015 data is not available.

ENERGY

Geographically, Turkey is in close proximity to 72% of the world’s energy resources. Thus, it forms a natural energy bridge between the source exporting countries and energy consumer markets and it stands as a key country in ensuring energy security through diversification of supply sources and routes. Therefore, considerations that have gained increased significance in the world today.

Turkey imported 72% of its total energy consumption in 2011 which increased 73% in 2012 and 2013 and 75% in 2014.

 

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The total amount of imported oil increased abruptly in 2015, crude oil imports were up 32% over the last three years to 25.1 million metric tons of oil. In 2015, Turkey imported 48.4 bcm of natural gas. Turkey imported 22.5 million metric tons of oil equivalent of coal in 2014.

Turkey’s sources of imported oil have diversified recently. While the share of oil from Iran has been decreasing from 51% in 2011 to 22% in 2015, the proportion of Iraqi oil in total oil imports has risen from 16% to 45%. Dependence on oil from Russia has not changed in the years between 2011 and 2015 and it has corresponded to approximately 12% of total oil import.

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

Table 6

 

Oil Imports (million tons)    2011      2012      2013      2014      2015  

Iraq

     3         3.7         6.3         5.7         11.4   

Iran

     9.2         7.6         5.5         5.5         5.6   

Libya

        1         0.6         0.1         —     

Saudi Arabia

     1.9         2.8         2.8         2.1         2.4   

Russia

     2.1         2.1         1.5         0.6         3.1   

Syria

     0.2                  —     

Azerbaijan

        0.2         0.1            —     

Georgia

           0.4         1.8         —     

Kazakhstan

     1.1         1.4         1.6         1.6         0.7   

Italy

     0.1         0.3         0.2            0.3   

Italy

     0.1         0.3         0.2         

Nigeria

                 0.5   

Colombia

                 0.9   

Others

        0.4            0.7         0.2   

Total Crude Oil Imports

     18         19.5         19         18.1         25.1   

Petroleum Products Imports

     9.1         10         13         14.8         14.6   

Source: Energy Market Regulatory Authority

Energy development and power generation were priority areas for public investment. In particular, in the second half of 1970s Turkey embarked on a power and irrigation project (known as “GAP”) in Southeastern Anatolia, and Turkey is continuing to develop hydroelectric sources. The GAP 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). As of December 31, 2015, the installed capacity of GAP hydropower plants in operation was 5,534 MW. In addition, as of December 31, 2015, approximately 26.4 % of the total irrigation was completed, 8.9 % was under construction and 64.7 % was at the planning and final design level. The total cost of GAP is expected to be U.S.$25.0 billion (excluding expropriation and overhead costs)

Natural Gas

Natural gas has been used extensively for power generation in Turkey since the late 1980s. Turkey is increasingly utilizing natural gas, both from its own reserves and from abroad, having established long-term purchase contracts with the Russian Federation, Algeria, Nigeria, Iran and Azerbaijan and also buys spot liquefied natural gas (“LNG”) from the market during the winter season in order to maintain a supply-demand balance. Turkey has very limited domestic gas reserves and national gas production represents approximately 1% of the total domestic demand. Consequently, nearly 99% of natural gas demand is satisfied by import .The Petroleum Pipeline Corporation of Turkey (“BOTAŞ”) is Turkey’s main natural gas importer. At present, BOTAŞ has 9 long-term sale and purchase contracts with 6 different supply sources. In 2015, primary natural gas supply amounted 48 billion cubic meters (bcm) and 41.3 bcm of it was imported by BOTAŞ. By the end of 2015, the breakdown of consumption was 39.6% electricity production, 29.1% industry and 22.9% households, government and trade offices 6.0%. Distribution is carried out by local distribution companies. As of the end of 2015, 66 distribution zones were supplied with natural gas. Recent analysis suggests that natural gas demand will increase parallel to the growth expected in primary energy demand. Forecasts currently indicate that the demand for natural gas will reach 61 bcm in 2020.

In 2015, Turkey imported 26.8 bcm of natural gas from the Russian Federation, 7.8 bcm of natural gas from Iran and 6.2 bcm of natural gas from Azerbaijan. Turkey also imported 3.9 bcm and 1.2 bcm of natural gas from Algeria and Nigeria, respectively in LNG form. On the other hand, in 2015 Turkey also imported spot LNG from Qatar, Nigeria, Norway, Spain, Trinidad Tobago, France, Nigeria and Belgium.

 

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The agreement for gas purchase and transmission from Azerbaijan, within the scope of Trans Anatolian Gas Pipeline (“TANAP”) Project, was signed on October 25, 2011. According to the agreement, Turkey will purchase annually 6 bcm Shah Deniz Phase 2 beginning 2018.

Turkey’s domestic natural gas transmission system is approximately 12,963 km in length. As of the end of 2015, the number of firms with a distribution license was 69. The Natural Gas Market Law was enacted on May 2, 2001 to foster competition in the natural gas sector. Pursuant to this 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.

Since the enactment of Natural Gas Market Law in 2001 , which aimed to liberalize Turkish natural gas market, crucial steps have been taken to transition to a competitive natural gas market in Turkey. In 2012, Energy Market Regulatory Authority (“EMRA”) Board rendered a decision that paved the way for private sector companies to import natural gas from Iraq. The Board Decision allowed the private sector applications for natural gas import license. As a result, one company obtained an import license in September 2013. BOTAŞ did not extend the Natural Gas Sale and Purchase Contract dated February 14, 1986 with Russian Federation. Then, in July of 2012, EMRA Board rendered a decision relating to natural gas import from Russia via Malkoçlar Entry Point for 6 bcm/year. According to this decision, the private sector companies were allowed to submit applications to obtain import licenses, until August 2012. Four applicants ultimately obtained natural gas import licenses. These private companies, began importing natural gas on January 1, 2013. By 2015, the market share of BOTAŞ has decreased to 80% of the total consumption.

In December 2012, EMRA Board decided that all customers should be eligible to choose their supplier. This decision was reinforced with a new EMRA Board decision taken in December 2014 decreasing the eligibility threshold for the household customers to 75,000 m3. In October 2013, EMRA prepared and published the model agreements for natural gas transportation and delivery services in distribution regions. This development will provide transparency to supplier switching process and functioning of the market.

Amendment of Natural Gas Market Law was sent to the Grand National Assembly in August 2014. It is aimed to enhance liberalization and competition of natural gas market and expected to contribute to the process of liberalization of Natural Gas Market within the Draft Natural Gas Market Law.

Restructuring the Electricity Sector

Significant steps have been made towards a fundamental restructuring of the electricity sector. The Electricity Market Law (No. 4628) came into effect in March 2001, with the objective of developing a transparent and competitive electricity market. In March of 2013, the new market law governing the electricity market entered into force. The Electricity Market Law (No. 6446) includes new rules and regulations regarding the electricity market to increase transparency and efficiency in the investment environment. These laws provide a framework for establishing institutions and provide the following structural regulations:

 

    Creates and maintains the EMRA, as an independent agency, governed by the Energy Market Regulatory Board, which is responsible for regulatory functions such as licensing, supervising, tariff setting and market monitoring.

 

    Requires participants in defined market segments (generation, transmission, distribution and wholesale (trading and retail)) to be licensed by the 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; with compulsory pool type wholesale markets excluded.

 

    Provides competition, since March of 2003, for consumers directly connected to the transmission system or with annual consumption of more than 9 Gigawatt Hour (GWh). This eligibility threshold was re-determined in January 2011 as 30,000 kWh, in January 2012 as 25,000 kWh, in January 2013 as 5,000 kWh, in January 2014 as 4,500 kWh in January 2015 as 4,000 kWh and in January 2016 as 3,600 kWh (85.04% theoretical market openness).

 

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

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.

As of the end of 2015, There are 17 plants in operation based on the BOT Model with total capacity of 2,309 MW, whereas approximately 6,101.8 MW of capacity was built through the BOO Model. As of the end of the 2015, 60 plants comprising a total of 946.2 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.

 

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Auto-production is regulated by Law No. 3096 by Decree No. 85/9799 which allows the Ministry of Energy and Natural Resources (“MENR”) to grant permission to industrial plants, residential complexes with more than 5,000 dwellings, five star hotels, industrial zones, universities and municipal institutions to generate their own electricity. With the amendments in Law Nr. 6446, auto-production license was abolished and accordingly all of these licenses will be changed into generation licenses. As of the end of 2015, 954 Independent Power Producers generated 146.7 TWh, which constituted approximately 56% of Turkey’s total electricity generation.

Turkey consumed 265.7 TWh of electricity in 2015. Installed capacity has surpassed 73.1 GW in 2015 and the increase of electrical energy demand has been realized as 3.3% in 2015. Electricity demand is projected to increase annually between 5% and 6% until 2020. With the Bylaw on Competition for the Applications of the Wind and Solar Power Plant Projects (Official Gazette: December 6, 2013, No. 28843), principles and procedures related to applications for projects to be connected to the grid are determined. Within the context of this Bylaw, eligibility criteria are determined by the declared RES (Wind Power Electricity Generation Plant) contribution margin to be paid per MW of electricity.

According to the Amendment to Law on Utilization of Renewable Energy Resources for the Purpose of Generating Electrical Energy (No. 6094) (Official Gazette: January 8, 2011, No. 27809), a new support structure was introduced with varying prices for different renewable based electricity generation, namely: 7.3 US cents per kWh for hydro and wind, 10.5 US cents per kWh for geothermal and 13.3 US cents per kWh for solar and biomass (including waste gases). In addition, MENR issued the By-law on the Domestic Production of the Equipment Used in Facilities Producing Electrical Power with Renewable Energy Resources published in the Official Gazette dated June 19, 2011 (No. 27969) to provide certain support of between 0.4 to 3.5 US cents per kWh to power plants for the utilization of domestically manufactured technical equipment. Additionally, MENR also issued the By-law on Electricity Generating Facilities Based on Solar Power which identifies the standards, testing and audit methods for equipment used in solar power plants in the Official Gazette dated June 19, 2011 (No. 27969). Moreover, the EMRA issued the By-law on Production of Electricity in Electricity Market without License in the Official Gazette dated July 21, 2011 (No. 28001) which identifies methods and principles to be applied for cogeneration facilities that produce electricity for its own needs and renewable energy based facilities with installed capacity below 500 kW and micro cogeneration facilities which are all exempted from licensing requirements .The new Electricity Market Law (No. 6446) aims to increase the amount of generation plants based on renewable resources, increasing the limit of the unlicensed installed capacity to 1 MW. This law also defines methods and principles for unloading excess electricity into the system. Similarly, EMRA issued the By-law on Certification and Promotion of Renewable Energy Sources which identifies methods and principles for the certification of renewable energy facilities and the establishment and operation of such facilities (Official Gazette dated October 1, 2013 (No. 28782).

Also by the amendment in Regulation on Documentation and Support of Renewable Energy published in Official Gazette on April 29, 2016, renewable participants in support mechanism have responsibility for electricity sales and imbalances. They can sell to the day-ahead market, intraday market and sell by bilateral contracts. The support amount is determined by total of feed-in-tariff plus the difference of sales and the produced amount multiplied by 98% of Day Ahead Market price.

By the end of 2015, the share of renewable energy sources in total electricity generation was 31.5% and total wind capacity reached 4,503.2 MW

Privatization of the bulk of the publicly held installed capacity in the power generation sector was initiated in 2011. Transmission ownership and market operation functions will remain under government control through the Turkish Electricity Transmission Co. (“TEİAŞ”), as a result of the nature of the transmission activity.

The electricity sector in Turkey was dominated by three state-owned companies, covering generation, trading and transmission activities: Turkish Electricity Transmission Corp. (TEİAŞ), Electricity Generation Corp. (EÜAŞ) and Turkish Electricity Trading and Contracting Corp. (TETAŞ). As of end of 2015, the share of publicly held installed capacity stayed below privately held installed capacity due to continuous and increasing private investments in the sector. Moreover, about 72% of electricity generation capacity was held by the private sector in 2015. 28 hydro power plants were privatized with a total capacity of 99,693 MW in 2011, 17 hydro power plants with a total installed capacity of 63,27 MW and 3 thermal power plants (Kangal, Seyitömer, Hamitabat) with a total installed capacity of 2213 MW were privatized in 2013. 5 hydro power plants with a total installed capacity of 5,54 MW and 4 thermal power plants (Kemerköy, Yeniköy, Yatağan, Çatalağzı) with a total installed capacity of 1980 MW were privatized in 2014, 3 thermal power plants (Orhaneli, Tunçbilek, Soma B) with a total installed capacity of 1565 MW were privatized in 2015. The remaining plants are expected to be privatized in the next few years.

While EÜAŞ, a state-owned company, held approximately half of all installed capacity in 2011, its share in total installed capacity reduced 27.8 % by the end of 2015. The total installed capacity of EÜAŞ by the end of 2015 is 20,322 MW. Independent power producers owned more than 59% of total capacity in 2015. BOO, BOT and TOOR power plants (with long term purchase agreements with TETAŞ) had 13% of capacity.

In order to introduce nuclear power into the generation portfolio, projects are being carried out at bilateral level. An intergovernmental agreement (IGA) between the Russian Federation and Turkey concerning cooperation in the area of construction and operation of the nuclear power plant on the Akkuyu Site in Turkey was ratified and came into force on December 27, 2010 (OJ Number 27721). The Akkuyu site has been allocated to the project company established under the terms of the agreement. The IGA establishes build own operate (BOO) model where the project company is responsible for construction and operation of the Akkuyu NPP. On June 25, 2015, EMRA granted Akkuyu NPP a preliminary generation license which is effective for 36 months. It is expected that a construction license application will be submitted in December 2016 following the approval of the Site Parameters Report by Turkish Atomic Energy Authority.

 

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An IGA between Turkey and Japan for construction and operation of the second nuclear power plant and development of the nuclear industry in Turkey was ratified and came into force on May 23, 2015 (OJ Number 29364) This IGA establishes a public private partnership between Japanese Consortium (MHI, Itochu and GDF Suez) and EÜAŞ. Sinop site has been designated as the potential candidate for the second nuclear power plant. Site evaluation studies in Sinop continue.

Turkey acknowledges the need to reduce energy dependency and to improve energy efficiency. The Energy Efficiency Strategy Paper (published in the Official Gazette on February 25, 2012, No. 28215) was published in order to increase the effectiveness of energy efficiency studies which had occurred to date and to set concrete objectives for such studies, with an aim to reduce primary energy intensity at least 20% by 2023.

Similarly, according to the 2010-2014 Strategic Plan of the MENR, efficiency is considered a supply source and it is evaluated as a crucial component of security of supply. . Energy efficiency was also one of the main topics covered in the 2014-2019 Strategic Plan of MENR, where related targets and actions were identified to increase energy efficiency.

Electricity Interconnections

Turkey has the following existing interconnections with neighboring countries, and import/export figures are as follows:

 

    Bulgaria: There are two 400 kV separate interconnection lines between Hamitabat (Turkey) and Maritsa East (Bulgaria), and each of them currently operate in synchronous parallel mode with the ENTSO-E Continental Europe Synchronous Area (“CESA”). 2,525,418,000 kWh of energy was imported from Bulgaria to Turkey and nearly 163,052,000 kWh of energy was exported from Turkey to Bulgaria through the Hamitabat-Marista East interconnection line in connection with synchronous parallel operation between the Turkish power system and ENTSO-E CESA since 2015.

 

    Azerbaijan (Nahcievan): There is a 154 kV interconnection line between Babek (Nahcivan/Azerbaijan) and Iğdir (Turkey) which is currently operating for import to Turkey in unit direction mode. 3,280 kWh of energy was imported from Nahcevan to Turkey and 2,110 kWh of energy was exported from Turkey to Nahcievan at 15-25 MW peak power through the Igdir-Babek interconnection line in 2015.

 

    Iran: There are two interconnection lines; one of which is a 400 kV Khoy (Iran) and Başkale (Turkey) interconnection line and the other is a 154 kV Doğubeyazit (Turkey) and Bazargan (Iran) interconnection line, Doğubeyazıt-Bazargan interconnection line is not operated due to the expiry of term of the importer company’s license. In 2015, 1,867,695,307 kWh of energy was imported from Iran to Turkey through the Khoy-Baskale interconnection line.

 

    Georgia: Two interconnection lines exist between Turkey and Georgia. The first is a 220 kV Hopa-Batum interconnection line which is operated only in emergency situations. In 2015, 1,389,609 kWh of energy was imported from Georgia and 1,386,662 kWh of energy was exported to Georgia in 2015. The second interconnection line is a 400 kV interconnection line between Borçka (Turkey) and Akhaltsikhe (Georgia) with a DC back-to-back station in Akhaltsikhe was completed in 2013 and operated since 2014. In 2015, via Borçka-Akhaltsikhe interconnection line, 416,064,813 kWh of energy was imported to Turkey and 746,427 kWh of energy was exported from Turkey.

A Construction Agreement for a new 154 kV transmission line, between Batumi (Georgia) and Muratli (Turkey), with a DC back-to-back station on the Georgian side was signed in 2011 and construction of the Turkish part commenced in 2015. Georgian part of the154 kV Batumi-Muratli Interconnection Line is expected to be complete in 2020.

 

    Syria: The 400 kV interconnection line between Birecik (Turkey) and Aleppo (Syria), has been out of service since October 1, 2012 due to technical problems on the Syria side. However, steps have been taken to increase the amount of energy exchanged between Syria and Turkey by installing a 600 MW High-Voltage Direct Current back-to-back station in Şanliurfa (Birecik substation). A successful interconnection depends on end of the war in Syria and the establishment of new relationship with the appropriate institutions.

 

    Iraq: There is a 400 kV interconnection line between PS3 (Turkey) and Zakho (Iraq) which was being used for export to Iraq in isolated mode, but the use of this line was terminated as of January 25, 2011. However, an Interconnection Operation Agreement was signed between TEİAŞ and the Regional Directorate of Iraq and the Ministry of Electricity on June 10, 2013. As of June 12, 2013, the interconnection line has resumed operation. Installation of a second 400 kV interconnection line between Cizre (Turkey)–Mosul (Iraq), is well underway and the portion of the line within Turkish borders is 130 kilometers in length. Cizre -Border section has been completed but the Mosul—Border section is not and Iraqi authorities have stated that they cannot predict when this section will completed. 317,757,760 kWh of energy was exported from Turkey to Iraq through PS3—Karkey (Turkey)—Zakho (Iraq) Interconnection Line in 2015.

 

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    Greece: There is a 400 kV interconnection line between Babaeski (Turkey) and Philippi Nea Santa (Greece) which is currently operating in synchronous parallel mode with ENTSO-E CESA). 8,366,740 kWh /year of energy was imported from Greece to Turkey and nearly 2,818,614,910 kWh of energy was exported from Turkey to Greece through the Babaeski- Nea Santa interconnection line in connection with trial synchronous operation between the Turkish power system and ENTSO-E CESA in 2015. A Bilateral Agreement was signed in November 2012 between TEİAŞ and IPTO, the independent power system operator of Greece, with respect to the commissioning of a communication channel for providing the real time data exchange realized between the National Load Dispatch Centers located in Ankara and Athens.

EMRA issued the By-law on Electricity Market Import and Export, published in the Official Gazette dated May 17, 2014 (No. 29003), in order to identify rules and exceptions governing the export and import of electricity through interconnections between the national grid and transmission grids of neighboring countries and to determine methods and principles of capacity allocation in international interconnections.

Trial synchronous parallel operation of the Turkish Power System with the ENTSO-E Continental Europe Synchronous Area (“CESA”) began on September 18, 2010. The trial parallel operation would be finalized in 3 sections. The “limited commercial exchange” period, which is the third and last phase, was delayed until the autumn of 2013. On September 4, 2013, ENTSO-E Regional Group Continental Europe (“ENTSO-E RG CE”) Plenary approved the report emphasizing the success of the technical studies carried out by TEİAŞ for ENTSO-E connection. After the positive results of trial parallel operation, ENTSO-E decided in favor of the permanent synchronous operation of Turkish power system with the Continental Europe system ın April 2014. Following the fulfilment of the standards/obligations set down in the ENTSO-E Operation Handbook by TEIAS, the Long Term Agreement was signed in April 2015, which is a requirement of the ENTSO-E Articles of Association for permanent operation and will make the standards and obligations binding for TEIAS. TEIAS, therefore, became an integral part of European network. On its General Assembly on December 10, 2015, ENTSO-E approved TEIAS’s application to be an observer and an Observer-ship Agreement was signed between TEIAS and ENTSO-E on January 14, 2016.

Crude oil and natural gas pipelines and pipeline projects

As a consequence of the three-year negotiations carried out between Turkey and Azerbaijan, an agreement for gas sale and purchase, transit passage of gas across Turkey, and development of a standalone pipeline was signed on October 25, 2011. According to the agreement, Turkey will purchase annually 6 bcm Shah Deniz Phase 2 gas. The Shah Deniz natural gas production of Azerbaijan will be transported to Europe by this pipeline.

Subsequently on December 24, 2011, Turkey and Azerbaijan signed a Memorandum of Understanding concerning the development of a standalone pipeline. The Trans Anatolian Natural Gas Pipeline (“TANAP”) Project will have initially 16 bcm/a capacity and will be scalable up to 32 bcm/a to accommodate future natural gas volumes originating and transiting from Azerbaijan. The Intergovernmental Agreement and the Host Government Agreement of The TANAP Project were signed on June 26, 2012 and became effective on April 8, 2013. The groundbreaking ceremony of TANAP was held in March 2015 and construction started in April 2015.

First gas flow is planned in 2018 to Turkey and in 2020 to Europe. The TANAP Project is critical to meeting the natural gas demand of both Turkey and Europe. Upon operation, this project would be the first to take gas from the Caspian Sea and transmit it to Europe from Caucasus 6 bcm of the 16 bcm of gas to be taken from the Stage 2 of the Shah Deniz Offshore Gas Field is planned to be used in Turkey and the remaining 10 bcm is planned to be transmitted to Europe through the TANAP Project. On May 30, 2014, a signing ceremony of a package of agreements concerning Shah Deniz gas field and TANAP Project was held in Istanbul. The package contains several agreements related to the increase of Türkiye Petrolleri A.O’s share in Shah Deniz Consortium from 9% to 19% by acquiring all shares of TOTAL, increase of BOTAŞ’s share in TANAP Project Company from 20% to 30% by acquiring 10% of SOCAR’s share, transportation of 6 bcm of gas to be purchased by BOTAŞ from Shah Deniz Phase II via TANAP System. With these agreements, Turkey reaffirmed its commitment to Shah Deniz field and pipeline projects in order to further enhance its supply security and open up the Southern Gas Corridor.

The TANAP Project is designed as the backbone of the Southern Gas Corridor and will contribute to the diversification of natural gas sources for Turkey. TANAP Project will facilitate the realization of the other projects such as South Caucasus Pipeline Expansion and Trans Adriatic Pipeline (“TAP”) within the Southern Gas Corridor.

Once the Southern Gas Corridor is opened by Azerbaijani gas, other gases such as the Turkmen gas originated from Caspian Basin or Iraqi and Iranian gas can also flow through this corridor as well. Regarding the delivery of Turkmen gas to Europe through Turkey, on May 1, 2015, the Ashgabat Declaration, was signed between Turkmenistan, Azerbaijan, Turkey and European Union, and a High-Level Working Group was established to negotiate the roadmap of the Trans Caspian Pipeline.

In June of 2013, the consortium developing Azerbaijan’s Shah Deniz gas field chose TAP over Nabucco West project. The TAP project, first envisioned more than a decade ago, reflects a European Union push for alternatives to Russian gas imports and is expected to start flowing in 2020. The annual gas transportation capacity of the project is planned to be 10 bcm. However, the design of the pipeline will allow for transportation of more than 20 bcm/year of additional gas sources. The TAP project will collect Azeri gas via Turkey and will start on the border of Turkey and Greece, where it will connect with the TANAP project. TAP will continue

 

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onshore, crossing the entire territory of Northern Greece, then pass through Albania to the Adriatic coast. The offshore section of the pipeline will traverse the Adriatic Sea and will connect Italy’s gas transportation network in Southern Italy. TAP will be approximately 878 kilometers in length (Greece 550 km; Albania 215 km; Adriatic Sea 105 km; Italy 8 km). TAP is fronted by Swiss company AXPO BP of England, SOCAR of Azerbaijan, Fluxys of Belgium, Enagas of Spain and Snam of Italy. On March 28, 2014, a Memorandum of Understanding relating to the Turkey-Bulgaria Interconnector Project was signed. This memorandum establishes a Joint Working Group in order to prepare a prefeasibility report and action plan for the Project.

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

Table 7

 

      Coal (2)     Oil     Hydro     Gas     Electricity     Other     Total  
  (mtoe)(1)     (%)     (mtoe)     (%)     (mtoe)     (%)     (mtoe)     (%)     (mtoe)     (%)     (mtoe)     (%)     (mtoe)     (%)  

Production

    2011        17.86        15.6        2.55        2.2        4.50        4.0        0.65        0.6            6.66        5.8        32.22        28.15   
    2012        17.01        14.2        2.40        2.0        4.98        4.1        0.53        0.4            7.04        5.9        31.96        26.61   
    2013        15.45        12.8        2.48        2.1        5.11        4.3        0.44        0.4            8.46        7.0        31.94        26.55   
    2014        16.36        13.2        2.47        0.08        3.5        2.8        0.41        0.3            8.31        6.7        31.05        25.05   

Import

    2011        17.58        15.4        36.09        31.5          —          36.21        31.6        0.39        0.4            90.29        78.87   
    2012        22.43        18.7        37.86        31.5            37.91        31.6        0.50        0.4            98.70        82.18   
    2013        20.13        16.7        37.88        31.5            37.35        31.1        0.64        0.5            96.00        79.81   
    2014        22.54        18.2        38.52        31.1            40.64        32.8        0.67        0.5            102.38        82.6   

Export(3)

    2011          —          8.24        4.6          —          0.6        0.5        0.31        0.3            -9.15        -7.99   
    2012            9.56        7.9            0.5        0.4        0.25        0.2            -10.32        -8.59   
    2013        0.01          8.35        6.9            0.56        0.5        0.11        0.1            -9.03        -7.50   
    2014        0.04          8.80        7.1            0.52        0.4        0.23        0.2            -9.60        -7.7   

Net stock

    2011        —          —          —          —          —          —          —          —          —          —          —          —          1.10        0.97   
    2012                                -0.81        -0.67   
    2013                                -0.64        -0.53   
    2014                                0.11        0.09   

Statistical Error

    2011        —          —          —                    —          —            —         
    2012                                0.56        0.46   
    2013                                2.01        1.67   
    2014                                -0.04        -0.03   

Total supply

    2011        35.84        31.3        30.49        26.6        4.5        4.0        36.90        32.2            6.75        5.9        114.48        100.0   
    2012        39.29        32.7        31.20        26.0        4.97        4.1        37.37        31.1        —          —          7.26        6.1        120.09        100.0   
    2013        34.66        28.8        33.90        28.2        5.11        4.3        37.63        31.3            8.99        7.5        120.29        100.0   
    2014        39.05        31.51        32.43        26.16        3.5        2.82        40.22        32.45            8.31        7.1        123.94        100.0   

 

(1) Million Metric tons of oil equivalent. Calorific unit of energy is taken as 860 kcal/10 kWh
(2) Includes coke and petrocoke
(3) Includes marine bunkers.

Source: MENR

AGRICULTURE

While agriculture has historically been a very important sector in Turkey, the contribution of this sector to the country’s GDP and total employment has diminished in the past few years. Nevertheless, this sector is crucial to the Republic since the agricultural sector employs a significant portion of Turkey’s work force, generates most of the income and employment in rural areas, supplies products to many other sectors, and contributes significantly to total exports of the country.

Turkey became a member of the G20 troika (past, current and future hosts) on December 1, 2013, and its presidency of the G20 commenced on December 1, 2014. Turkey, as President of the G20, hosted the meeting of the G20 Ministers of Agriculture on May 6-8, 2015, in İstanbul. This was the first time G20 Agriculture Ministers had convened since 2011. The G20 Agriculture Ministers expressed their strong support of global efforts to ensure food security and agreed on the importance of establishing economically, socially and environmentally sustainable food systems. The G20 Labor and Employment Ministers Meeting was held on September 3-4, 2015, in Ankara. By adopting the G20 Labor and Employment Ministerial Declaration, the G20 Labor Ministers agreed upon a target to reduce the share of young people who are at most risk of being permanently left behind in the labor market by 15% by 2025. The first G20 Energy Ministers Meeting in the history of the G20 was held in İstanbul on October 2, 2015, focusing on issues relating to development and access in particular. The G20 Leaders’ Summit was held on November 15-16, 2015, in Antalya. After the conclusion of its term as the G20 President, Turkey passed the presidency over to China on December 1, 2015.

In recent years, support schemes that contribute to productivity have been given special importance. Premium payments especially for oil seeds, area-based supports, animal husbandry supports and rural development supports are among the major schemes in the support program. In 2015, those major support schemes have accounted for 27.1%, 28.0%, 28.2% and 10.3% of total support budget, respectively. The distribution of premium payments, area-based supports, animal husbandry supports and rural development supports for the year 2016 are estimated to have constituted 29.6%, 28.3%, 27.0% and 9.0% of the total support budget, respectively.

 

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As irrigation investments accelerated with the introduction of the GAP Action Plan (2008-2012), the concentration on regional development action plans increased. A new version of the GAP Action Plan has been finalized for the period of 2014-2018. In addition, to the revised GAP Action Plan (2014-2018), the KOP Action Plan (2014-2018), the DAP Action Plan (2014-2018), and the DOKAP Action Plan (2014-2018) applicable to other priority regions have also been prepared and implementation thereof has begun. The purpose of these plans is to strengthen the social and economic development of Turkey. The agriculture sector plays a crucial role in these Action Plans to create jobs and incomes, improve the standard of living in rural areas and diminish the regional disparities. The principal objectives of the agriculture sector in these Action Plans are to increase productivity, generate more income and employment in rural areas, and provide sufficient and balanced nutrition to the population.

In 2015, agricultural value added increased by 7.6%, compared to a 2.1% decrease in 2014 (in 1998 prices).

Although agricultural production in Turkey is generally less efficient than elsewhere in Europe, Turkey is largely self-sufficient with respect to crops. Turkey is a net exporter country in terms of agricultural raw and processed products trade in the world market. Moreover, there have been significant improvements in the quality and productivity of its crops in recent years. These crops, such as barley, wheat, maize and rice, have become more readily marketable.

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

 

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Table 8

Agricultural Output

 

     Annual      Percentage Change  
     2011      2012      2013      2014      2015      2011/2012      2012/13      2013/14      2014/15  
     (in thousands of tons)      (percentage)  

Cereal

                    

Wheat

     21,800         20,100         22,050         19,000         22,500         -7.8         9.7         -13.8         18.4   

Barley

     7,600         7,100         7,900         6,300         8,000         -6.6         11.3         -20.3         27.0   

Maize

     4,200         4,600         5,900         5,950         6,300         -9.5         -28.3         -0.8         5.9   

Pulses

                    

Lentils (red)

     385         410         395         325         328         6.5         3.7         17.7         0.9   

Chick Peas

     487         518         506         450         460         6.3         2.3         11.1         2.2   

Dry Beans

     201         200         195         215         232         -0.3         2.5         -10.3         7.9   

Industrial Crops

                    

Sugar Beet

     16,126         15,000         16,483         16,743         17,893         -7.5         -9.9         -1.6         6.9   

Cotton (raw)

     2,580         2,320         2,250         2,350         2,350         -10.1         3.0         -4.4         0.0   

Tobacco

     45         80         90         70         75         61.3         -12.5         22.2         7.1   

Oil Seeds

                    

Sunflower

     1,335         1,370         1,523         1,638         1,688         2.6         -11.2         -7.5         3.1   

Soybeans

     102         122         180         150         160         19.4         -47.4         16.7         6.7   

Rapeseed

     91         110         102         110         120         20.6         7.3         -7.8         9.1   

Groundnut

     90         123         141         124         144         35.8         -15.1         12.5         16.5   

Tuber Crops

                    

Potatoes

     4,613         4,795         3,948         4,166         4,831         3.9         17.7         -5.5         16.0   

Dry Onions

     2,141         1,668         1,905         1,790         1,936         -18.9         -14.2         6.0         8.2   

Fruit Bearing Vegetables

                    

Watermelons and Melons

     5,512         5,711         5,587         5,593         5,676         3.6         2.2         -0.1         1.5   

Tomatoes

     11,003         11,350         11,820         11,850         12,500         3.1         -4.1         -0.3         5.5   

Fruits and Nuts

                    

Grapes

     4,296         4,185         4,011         4,175         4,146         -2.6         4.2         -4.1         -0.7   

Figs

     261         275         299         300         329         5.6         -8.7         -0.5         9.6   

Citrus Fruits

     3,614         3,475         3,681         3,784         3,806         -3.8         -5.9         -2.8         0.6   

Hazelnuts

     430         660         549         412         585         53.5         16.8         25.0         42.0   

Apples

     2,680         2,889         3,128         2,480         2,535         7.8         -8.3         20.7         2.2   

Olives

     1,750         1,820         1,676         1,768         1,980         4.0         7.9         -5.5         12.0   

Tea

     1,231         1,250         1,180         1,260         1,260         1.5         5.6         -6.8         0.0   

Value Added in Agriculture (at 1998 prices, billion TL)

     10,604         10,935         11,315         11,083         11,926         3.1         3.5         -2.1         7.6   

Source: TURKSTAT

                    

 

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SERVICES

The services sector, which accounted for 69.4% of GDP (excluding tax-subsidies and Financial Intermediation Services Indirectly Measured) in 2012 (compared to 68.5% of GDP in 2011) and 58.4% of total civilian employment in 2014, 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 2012, value added in the services sector increased by 2.4%, compared to a 9.0% increase in 2011. The increase in the services sector was attributable to the overall recovery of the Turkish economy and its impact on trade and construction sectors. In 2013 and 2014 value added increases continued in the services sector and the growth rate reached 5.7% and 3.9%, respectively. As of end of 2014, services sector accounts for 70.0% of GDP.

Trade

Wholesale and retail trade is a dynamic sector in Turkish economy. A modernization trend toward more organized market structure has been observed during recent years. By 2015, the share of sector in total employment was 14.0%. By the end of the year 2014, the share of wholesale and retail trade in total number of enterprises and turnover in industry and services (excluding financial services) were 34.0% and 38.0%, respectively. In 2015, wholesale and retail share in GDP accounted for 11.6%.

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.

In 2011, the number of foreign visitors increased by 9.9% to 31.5 million and tourism revenues increased by 12.8% to U.S.$28.1 billion. In 2013, the total number of foreign visitors visiting Turkey increased by 9.8% to 34.9 million and tourism revenues increased by 10.1% to U.S.$32.3 billion. In 2014, the total number of foreign visitors travelling to Turkey increased by 5.5% to 36.8 million and tourism revenues increased by 6.2% to U.S.$34.3 billion. In 2015, the total number of foreign visitor visiting Turkey decreased by 1.6% to 36.3 million and tourism revenues decreased by 8.3% to U.S.$31.5 billion. In 2015, according to the World Tourism Organization (“UNWTO”), Turkey ranked 6th in tourist arrivals in the world, and 12th in tourism revenues. Additionally, in 2015, Turkey’s international tourism expenditures were U.S.$5.4 billion while its tourism revenues were U.S.$31.5 billion, ranking Turkey 5th among countries by surplus on the travel balance.

In 2013, Turkey’s methodology for measuring tourism statistics, revenues and expenditures was revised to be more in line with the methodologies recommended by Eurostat and UNWTO.

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

Table 9

 

     Total Foreign
Visitor Arrivals
     Total Receipts      % Increase in Total Receipts  

Year

   (in thousands)      (in millions of US dollars)      (percentage)  

2011

     31,456         28,116         12.8   

2012

     31,783         29,351         4.4   

2013

     34,910         32,309         10.1   

2014

     36,838         34,306         6.2   

2015

     36,245         31,465         -8.3   

Sources: CBT, Ministry of Culture and Tourism

Transport and Communications

Since its liberalization in 2004, the telecommunications sector has experienced rapid growth. As of 2013, 2014 and 2015, the value of the telecommunications market reached approximately U.S.$17.3 billion, U.S.$16.2 billion and U.S.$14.6 billion, respectively. Even though growth rates of the market, in Turkish Liras terms, are 5.0%, 8.2% and 11.5% in 2013, 2014 and 2015, respectively, the contraction in U.S. dollar terms is the result of depreciation of the currency. A total of 930 authorizations were granted to 582 telecommunications operators as of May 27, 2016.

 

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The usage of fixed and mobile broadband services is steadily increasing in Turkey while fixed telephone usage has been declining since 2006. Mobile telephone (GSM + 3G) penetration is 93.6% and fixed line telephone use declined to 14.4% as of December 2015. The use of broadband services in Turkey increased drastically in the last few years. As of December 2015, total broadband penetration is 61.7% and mobile broadband use reached 49.6%.

4G mobile broadband services were introduced in April 2016 and 3 telecommunication operators provide these services. As of May 30, 2016 the number of active 4G users reached 12.1 million.

In 2010 and 2011, the total output in transportation increased by 11.0% and 10.4% in real terms and accounted for 12.4% and 13.1% of GDP at current prices, respectively, while information/communication sector grew by 4.7% and 9.2% in real terms and accounted for 2.5% and 2.2% of GDP at current prices. In 2012, value added in transportation grew by 2.0% and accounted for 13.5% of GDP at current prices, while information/communication sector grew by 8.5% in real terms and accounted for 2.3% of GDP. In 2013, the growth rate in transportation sector was 3.9% and share in GDP was 13.5%, while information/communication sector’s growth rate and share was 2.8% and 2.2%, respectively. In 2014, the growth rate in transportation sector was 3.1% and share in GDP was 13.4%, while information/communication sector’s growth rate and share was 3.3% and 2.1%, respectively. In 2015, the growth rate and share in GDP were 2.9% and 13.2%, respectively, for the transportation sector and 3.3% and 2.0%, respectively, for the information/communication sector.

Construction

The importance of the construction sector is underscored by the role of housing, particularly by the activities of the Mass Housing 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 services sector is competitive in foreign markets.

The construction sector grew by 11.5% in 2011, 0.6% in 2012, 7.4% in 2013, 2.2% in 2014 and 1.7% in 2015. The construction and contracting sector maintains a competitive position in certain foreign markets, especially in North Africa, Middle East and CIS. Its market share has increased from around U.S.$1 billion in 2000 U.S.$22.4billion in 2015. The total contracting amounts in 2011, 2012, 2013, 2014 and 2015 were U.S.$23.0 billion, U.S.$29.8 billion, U.S.$30 billion, U.S.$ 26.5billion and U.S.$22.4 billion, respectively.

EMPLOYMENT AND WAGES

The total civilian labor force in Turkey was 29,678 thousand people in 2015. Turkey has a large pool of unskilled and semi-skilled workers. Turnover in the labor force has been high in certain industries, particularly in those that are labor-intensive. During the period from 2008 to the end of 2015, the total labor force increased at an average annual rate of approximately 3.77%.

Total civilian employment was 26,621 thousand in 2015, of whom approximately 20.6% were employed in agriculture, 20% in industry and 59.4% in services. Moreover, in 2015, the labor force participation rate was at 51.3%, compared to 50.5% in 2014.

There were approximately 3,440,000 public sector workers at the end of 2014. The rate of unemployment was 10.3% in 2015, compared to 9.9% in 2014.

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

Table 10

 

     Employment (in thousands)  
     2011      2012      2013      2014      2015  

Civilian labor force

     25,594         26,141         27,046         28,786         29,678   

Civilian Employment

     23,266         23,937         24,601         25,933         26,621   

Agriculture

     5,412         5,301         5,204         5,470         5,483   

Industry

     4,842         4,903         5,101         5,316         5,331   

Services

     13,012         13,733         14,296         15,147         15,806   

Unemployed

     2,328         2,204         2,445         2,853         3,057   

Unemployment rate (%)

     9.1         8.4         9.0         9.9         10,3   

Source: TURKSTAT

The following table sets forth information on the employment rate with respect to age and gender in Turkey for the dates indicated:

 

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Table 11

 

     Employment Rate%           Youth* Employment Rate%  

Year

   Male      Female      Total      Year    Male      Female      Total  

2010

     62.7         24.0         43.0       2010      40.2         20.3         30.0   

2011

     65.1         25.6         45.0       2011      43.4         21.2         32.1   

2012

     65         26.3         45.4       2012      42.5         20.7         31.5   

2013

     65.2         27.1         45.9       2013      43.1         21.5         32.2   

2014

     69.5         29.5         49.5       2014      45         22.0         33.5   

September 2015

     71.1         31.0         51.1       September 2015      48.8         24.3         36.6   

 

Source: TURKSTAT

   (*) Young people in the 15-24 age group

The collective bargaining system in Turkey covers workers in the public and private sectors. The public sector includes employees who are defined under Union and Collective Bargaining Law No. 6356 and work for state – owned enterprises.

In 2011, labor costs in the public sector increased by 6.4% (-4.2% in real terms), compared to 2010. Labor costs in the private sector increased by 4.4% (-6% in real terms) in 2011, compared to 2010. Labor costs (including salaries and benefits) for civil servants increased by 12% (0.8% in real terms) in 2011 compared to 2010.

In 2012, labor costs in the public sector increased by 7.2% (1% in real terms), compared to 2011. Labor costs in the private sector increased by 12.1% (5.7% in real terms) in 2012, compared to 2011. Labor costs (including salaries and benefits) for civil servants increased by 13.1% (6.6% in real terms) in 2012, compared to 2011.

In 2013, labor costs in the public sector increased by 9.2% (4.5% in real terms), compared to 2012. Labor costs in the private sector increased by 7.3% (2.7% in real terms) in 2013, compared to 2012. Labor costs (including salaries and benefits) for civil servants increased by 7.3% (2.7% in real terms) in 2013.

In 2014, labor costs in the public sector increased by 8.8% (-1.3% in real terms), compared to 2013. In 2015, labor costs in the public sector increased by 12.3% (6.6% in real terms), compared to 2014. Labor costs in the private sector increased by 10.3% (0.1% in real terms) in 2014, compared to 2013. Labor costs (including salaries and benefits) for civil servants increased by 11.2% (0.9% in real terms) in 2014 and 7.6% (2.2% in real terms) in 2015.

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 12

 

     Changes in Labor Costs  
     Public Sector      Private Sector(2)      Civil Servants  

Year

   Nominal      Real (1)      Nominal      Real (1)      Nominal      Real (1)  
     (percentage change)  

2011

     6.4         -4.2         4.4         -6.0         12.0         0.8   

2012

     7.2         1.0         12.1         5.7         13.1         6.6   

2013

     9.2         4.5         7.3         2.7         7.3         2.7   

2014

     8.8         -1.3         10.3         0.1         11.2         0,9   

2015

     12.3         6.6         —          —          7.6         2.2   

 

(1) Deflated by the wholesale price index. 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.

Sources: Ministry of Development, Turkish Confederation of Employer Associations, TURKSTAT, Ministry of Finance

The salaries of civil servants increased by 4.0% in 2011. The salaries of civil servants increased by 4.0% in first six-month period in 2012 and increased by 3.0% in second half of year. The salaries of civil servants increased by 13.7% in 2012, 7.3% in 2013, and 10.0% in 2014. In 2014, all civil servant salaries increased by a fixed amount (TL 175) and additional increases were made to certain professional groups. In 2015, the salaries of civil servants increased by 3.8%.

The minimum wage for both private and public sector workers increased by 4.7% in the first six months of 2011. The minimum wage for both private and public sector workers increased by 5.91% in the first six months of 2012 and by another 6.09% in the second half of 2012. The minimum wage for both private and public sector workers increased by 4.1% in the first half of 2013 and by an additional 4.4% in the second half of 2013. In 2014, the minimum wage for both private and public sector workers increased by 5.0% in the first half of 2014 and by an additional 6.0% in the second half of 2014. In 2015, the minimum wage for both private and public sector workers increased by 6.0% in the first half of 2015 and by an additional 6.0% in the second half of the year. For 2016, the minimum wage for both private and public sector workers increased by 33.5% and was raised to 1,300 TL for the year.

As of December 30, 2015, there were around 5.3 million workers on minimum wage payroll in Turkey.

 

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Law No. 6356, which regulates collective labor agreements, was enacted in 2012. This legislation came into force instead of the Law No. 2821 and 2822. With this new law many arrangements have been implemented to enhance the opportunities of trade union organization to move industrial relations and labor life to modern standards and ILO criteria.

As of July 31, 2016, 1,756,934 employees were members of a trade union (in public), compared to 1,195,102 employees at the beginning of 2011. Moreover, the ratio of civil servants who are union members was 71.64% as of July 31, 2016, compared to 71.32% as of July 31, 2015.

New flexible working arrangements were legalized by Law Code 6715, amending Labor Code 4857, in May 2016. Now, private employment agencies (“PEAs”), permitted by the Turkish Employment Agency, can enter into temporary worker contracts with an employer and assign the PEA’s employee to the new employer. Remote teleworking was added on Labor Code 4857. Now, workers will be able to telecommute.

Also in 2016, new regulations were passed allowing civil servants who recently gave birth to work half of their regular work hours for the first two months for the first birth, first four months for the second birth, and first 6 months for the third birth. Additionally, civil servants who recently gave birth or their spouses can work half of their regular work hours until the child reaches almost six years old. However, the financial and social benefits will be commensurate with the number of hours they would be working.

INFLATION

Falling to a historically low year-end value in 2010, the annual headline inflation further declined in the first quarter of 2011 and decreased to 3.99% by March 2011, the lowest it has been since June 1970. Throughout the year, import prices denominated in Turkish lira increased, mainly as a result of the depreciation of the Turkish lira, which caused core goods inflation to soar in the second half of 2011. Though it did not have an unfavorable outlook, annual inflation of services followed a mild upward trend. Annual food inflation was volatile throughout the year due to the unprocessed food group market and was 12.21% by the end of the year. Energy prices followed an upward trend, which got steeper after the energy price adjustments in the last quarter of 2011. Also, adding to upward price pressures, the tax rate on certain items such as alcoholic beverages and tobacco products increased in the fourth quarter of the year. Additionally, during 2011, the contribution of aggregate demand conditions to disinflation decreased and producer price pressures remained high. The sizable depreciation of the Turkish lira was the main factor causing the year-end target of 5.5% to be exceeded by a wide margin, as annual CPI inflation was 10.45%. Meanwhile, PPI inflation rose to 13.33% and core inflation indicators scaled up.

In 2012, CPI inflation ended the year with a historically low year-end value of 6.2%. The depreciation of the Turkish lira in 2011 for the most part ceased to affect inflation, particularly with respect to durable goods, thus annual inflation in core goods displayed a downward trend across the year. The relatively favorable course of unprocessed food prices was a major factor in reducing inflation. The stable course of the foreign exchange rates, the slowdown in economic activity and the steady course of international commodity prices, excluding agricultural products, throughout the year contributed positively to the inflation outlook. Although services inflation grew slightly during this period, alleviated cost and demand pressures caused the core inflation indicators to trend downwards throughout the year. However, public price increases and tax adjustments, especially in the energy sector, were the leading factors contributing to a worsening inflation. Consumer inflation exceeded the 5% inflation target by 1.16% in 2012, but remained within the uncertainty band. PPI inflation also hit a historically low year-end level of 2.45%, curtailing cost-side pressures on consumer prices throughout the year.

In 2013, consumer inflation increased by 1.2 points year-on-year to 7.4%, overshooting the uncertainty band of the inflation target. Consumer inflation, which soared due to the tax adjustments on tobacco at the beginning of 2013, followed a volatile path in the remaining part of the year amid developments in unprocessed food and energy prices, and ended the mid-year significantly above the value implied by the target. In the second half of the year, the weak course of portfolio flows driven by global uncertainty over the monetary policies in advanced economies led to depreciation of the Turkish lira and caused core inflation indicators to rise with the pass-through effect. Consequently, inflation expectations deteriorated slightly during the last six months of 2013. PPI inflation rose to 6.97% and the course of producer prices suggested that cost pressures on consumer prices increased.

In 2014, annual consumer inflation increased by 0.8 points year-on-year to 8.2%, rising above the uncertainty band around the inflation target. This increase was mostly driven by the depreciation of the Turkish lira as well as the sharp increase in food prices. Throughout the year, inflation followed a volatile course shaped by food price and exchange rate developments. In the first half of 2014, inflation soared due to considerable depreciation of the Turkish lira and surge in food prices and ended the mid-year significantly above the value implied by the target. Despite the slowdown in the second half of the year, thanks to plunging international oil prices and the partial correction in unprocessed food prices, annual inflation ended the year with a high year-end value. Consequently, medium-term inflation expectations followed a downward track in the fourth quarter after trending upward earlier in the year. In line with the outlook for import prices, annual PPI inflation declined to 6.4% in 2014.

 

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In 2015, inflation followed a volatile course and ended the year at 8.81%, well above the upper bound of the uncertainty band. In the first half of the year, annual CPI inflation improved compared to the previous year. As of March, annual CPI inflation decreased to 7.61% mainly due to the core goods group while food and services inflation remained at high levels. Thanks to the correction in the unprocessed food group, annual inflation continued to fall in the second quarter and reached 7.2 \%. Meanwhile, depreciation in the Turkish lira limited this fall and annual inflation of core goods and energy groups increased as a result. In the second half of the year, CPI inflation increased significantly mainly due to the accumulated depreciation in the Turkish lira and the adverse outlook in food inflation. Consequently, medium-term inflation expectations also increased in the second half of the year. On the other hand, decline in commodity prices mainly led by oil price developments helped limit exchange rate pressures on inflation. Accordingly, producer price inflation followed relatively a stable course throughout 2015 and was 5.71% by the end of the year.

Uncertainty Band around Target and Inflation Realizations

Table 13

 

     Dec. 2011      Dec. 2012      Dec. 2013      Dec. 2014      Dec. 2015  

Uncertainty Band (upper limit)

     7.5         7.0         7.0         7.0         7.0   

Uncertainty Band (lower limit)

     3.5         3.0         3.0         3.0         3.0   

Realization

     10.4         6.2         7.4         8.2         8.8   

Source: TURKSTAT, CBRT

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

Inflation

Table 14

 

     Producer Price Index      Consumer Price Index  
Year    (percentage change)          

2011

     13.3         10.4   

2012

     2.5         6.2   

2013

     7.0         7.4   

2014

     6.4         8.2   

2015

     5.7         8.8   

Source: TURKSTAT

EDUCATION

According to the Address Based Population Registration System, the adult literacy rate among individuals aged 6 years and over increased sharply from 80.5% in 1990 to 96.2% in 2015. The rate for men and women was 98.7% and 93.7%, respectively. Over the years, increasing primary school attendance rates have been influential in reducing the illiteracy rate.

According to the Ministry of Development, total student enrollment in the educational year 2015-2016 is 24.2 million, of whom 4.9% were in pre-primary school, 43.5% were in primary school, 23.9% were in secondary school and 27.5% were in university. The number of university students continues to increase year after year.

ENVIRONMENT

The current National Development Plan of Turkey has placed sustainable development at its center with a focus on green growth. To protect and improve the quality of the environment, implement sustainable development principles, and internalize green growth approach, strategies and policies have been adopted and projects and programs on strengthening legislation and institutional structure have been implemented.

In July 2016, Turkey presented its report on steps towards the implementation of the 2030 Agenda for Sustainable Development at the United Nations Economic and Social Council, High Level Political Forum on Sustainable Development in July 2016. The report indicated that the land area covered by forests in Turkey is increasing. While total forestland in 1973 was 26.1%, it increased to 26.6% in 1999 and to 27.7% in 2012. At the same time, Turkey’s Greenhouse Gas emissions have also increased, primarily due to economic and population growth, paired with a corresponding increase in energy demand and industrialization. While the ratio of municipal population who benefit from drinking and using water supplies was 95% in 2001, this increased up to 97% in 2014 due to the extension of investments in that area. 75% of municipal population benefited from sanitation systems in 2001, and this rate has increased to 91% in 2014.

 

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Turkey is a party to most of the 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.

COMPETITION LAW

The Law on the Protection of Competition (Law No. 4054, the “Competition Act”) is the basic legislation which provides the framework for antitrust and merger control rules. The purpose of the Competition Act, which was adopted by the Grand National Assembly of Turkey on December 7, 1994, is (1) to prevent agreements, decisions and practices preventing, distorting or restricting competition in goods and services markets, and (2) to ensure the protection of competition by providing the necessary regulations and performing oversight.

The Competition Act prohibits the following:

 

    Agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their objective or effect, or likely effect, the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services (i.e., agreements involving price fixing, market sharing, etc.);

 

    Abuse by an undertaking or association of undertakings of their dominant position in a particular field; and

 

    Mergers or acquisitions that create or strengthen an undertaking’s dominant position and significantly decrease competition.

The Competition Act has been enforced by the Turkish Competition Authority (the “TCA”) since 1997, when the TCA was formed, and the Competition Board is the decision-making body of the TCA. In addition, the Competition Board has the authority to adopt secondary legislation designed to assist in the implementation of the Competition Act, which is in line with the legislation of the European Union.

The TCA is a stand-alone entity and is granted administrative and financial autonomy. The TCA is a related body of the Ministry of Customs and Trade, but is independent in fulfilling its duties.

The Competition Board has the power to impose an administrative fine of up to 10% of the annual gross revenue of an applicable entity that violates the Competition Act. Moreover, an additional administrative fine of up to 5% of the fine referenced in the previous sentence is imposed on an firm’s/association of firm’s managers or employees who are determined to have had a decisive influence with respect to the violation. Firms or associations of firms or their managers and employees who actively cooperate with the TCA for purposes of disclosing violations of the Competition Act may not be fined or fines may be reduced due to such cooperation. The Competition Act also provides for turnover-based fines for certain procedural violations, such as failure to provide requested information; providing incomplete, false or misleading information; hindering or complicating on-the-spot inspections; executing unauthorized mergers or acquisitions, which are subject to review by the Competition Board, or failure to comply with the decisions of the Competition Board.

Furthermore, the Competition Act empowers the Competition Board to impose structural remedies (i.e., divestiture of certain assets) and behavioral remedies (i.e. elimination of certain conduct such as refusal to deal or amendments to certain provisions in agreements involving resale of goods by dealers) in the event the Competition Act is violated. As a final matter, the TCA is empowered to submit its opinions regarding draft legislation to the relevant administrative and legislative bodies.

The following table presents a summary of the files concluded by the TCA between 2011 and 2015:

Table 15

 

Year

                                                  Competition
Infringement
     Exemptions
and Negative
Clearance
     Mergers and
Acquisitions
(including
privatizations)
     TOTAL  

2011

                    283         54         253         590   

2012

                    303         50         303         656   

2013

                    191         58         213         462   

2014

                    163         59         215         437   

2015

                    89         35         158         282   

TOTAL

                    1,029         256         1,142         2,427   

Source: Competition Authority

 

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In 2011, the following legislation was adopted:

 

    Articles 3, 20, 22, 27, 30 and 37 of the Competition Act were amended, in part to update provisions regarding the composition of the Board and powers of the President of the TCA in delegating work to TCA staff.

 

    Two guidelines on Communiqué No. 2010/4 were issued. One of the guidelines was with respect to remedies that are acceptable to the TCA and the other was with respect to ancillary restraints in mergers and acquisitions. The purpose of this Communiqué is to determine and announce the mergers and acquisitions which require notification to and authorization by the Competition Board.

In 2012, the following legislation was adopted:

 

    Communiqué on the Procedure for the Applications about Competition Infringements (Communiqué No. 2012/2). The Communiqué determines procedures for the intended applications to the TCA regarding the possible infringements of competition law and procedures for evaluating such applications within the Authority.

 

    Communiqué on the Amendments Made to the Communiqué Concerning the Mergers and Acquisitions Calling for the Authorization of the Competition Board (Communiqué No. 2010/4), (Communiqué No. 2012/3). With this communiqué, the merger notification thresholds have been amended. According to the amended (new) communiqué, authorization of the Board shall be required for the transactions which satisfy either one of the following thresholds:

(a) Total turnovers of the transaction parties in Turkey exceed TL 100 million, and turnovers of at least two of the transaction parties in Turkey each exceed TL 30 million, or

(b) The turnover in Turkey for the acquired assets or operations in acquisition transactions, or for at least one of the transaction parties in merger transactions exceeds TL 30 million, and at least one of the other transaction parties has a global turnover exceeding TL 500 million.

Communiqué No. 2012/3 also revoked the previous exceptions in the Communiqué no 2010/4 in relation to the affected market.

In 2013, the following legislation was adopted:

 

    Block Exemption Communiqué on Specialization Agreements (Communiqué No: 2013/3): The purpose of this Communiqué is to establish the conditions for granting block exemption to specialization agreements between firms from the application of the provisions of Article 4 of the Competition Act.

 

    Communiqué on the Procedures and Principles to be Pursued in Pre-Notifications and Authorization Applications to be Filed with the Competition Authority in Order for Acquisitions via Privatization to Become Legally Valid (Communiqué No: 2013/2): The purpose of this Communiqué is to establish and announce the procedures and principles to be pursued in pre-notifications and authorization applications to be filed with the Competition Authority in order for acquisitions realized by the Privatization Administration or by other public institutions and firms to become legally valid, in accordance with Article 7 as well as Article 27, Paragraph 1, Subparagraph f of the Competition Act.

 

    Guidelines on the General Principles of Exemption: The Competition Act dated July 2, 2005 and numbered 5388 abolished the obligation to notify the Board of the agreements, concerted practices and decisions of associations of firms that are under the scope of Article 4 of the Act. Since the obligation to notify was abolished, in principle, firms and associations of firms should make the assessment for exemption on their own without notifying the Board. The purpose of these guidelines is to draw a general framework about the scope of Article 4 and the principles for the application of the conditions listed in Article 5 as well as to set out the criteria used in the assessment of exemption.

 

    Guidelines on the Assessment of Non-Horizontal Mergers and Acquisitions: The purpose of these Guidelines is to lay down the general principles to be taken into consideration in the initial assessments to be conducted by the Competition Board in relation to non-horizontal mergers and acquisitions.

 

    Guidelines on Horizontal Cooperation Agreements: The purpose of these Guidelines is to establish the principles that shall be taken into consideration in the assessment, within the framework of Article 4 and 5 of the Competition Act, of agreements between firms, decisions of associations of firms and concerted practices with the nature of a horizontal cooperation.

 

    Guidelines on Cases Considered a Merger or an Acquisition and the Concept of Control: A merger by two or more firms or the acquisition of direct or indirect control over all or part of one or more firm by one or more firms or by one or more persons who currently control at least one firm, through the purchase of shares or assets, through a contract or through any other means shall be considered a merger or an acquisition within the scope of Article 7 of the Act, provided there is a lasting change in control.

In 2014, the following legislation was adopted:

 

    Guidelines On the Assessment Of Exclusionary Abusive Conduct by Dominant Firms: These Guidelines were published in order to describe the elements the Competition Board (“Board”) must take into consideration when assessing exclusionary abusive conduct by dominant firms under article 6 of the Competition Act, to increase transparency, and thus to minimize the uncertainties that may arise in the interpretation of the article by the firms.

 

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    Competition Assessment Guide: the Guide aims to provide a methodology for government agencies in evaluating competitive impacts of draft or existing legislation. It includes a checklist setting forth questions for detecting unnecessary restraints on competition.

In 2015, no new regulation, communiqué or guideline was published in 2015 by the TCA.

Turkish competition law is parallel to EU 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 and merger control rules. Regarding legislative alignment with the acquis communautaire in the field of competition rules and administrative capacity of the TCA, the 2015 Progress Report prepared by the European Commission reiterates that Turkey has made progress in adapting the acquis, administrative capacity is high and operational independence of the TCA is satisfactory. The Report, which is very similar to the previous years’ reports, indicated the need to make certain alignments with the acquis in some fields.

The TCA actively attends the meetings of Organization for Economic Cooperation and Development, United Nations Conference on Trade and Development, and International Competition Network on a regular basis, presents written papers and oral presentations, and attends other meetings in the international space. The TCA has signed Memorandums of Understanding with the competition agencies of Republic of Korea (2005), Romania (2005), Bulgaria (2007), Portugal (2008), Bosnia and Herzegovina (2010), Mongolia (2010), Russia (2011), Croatia (2011), Austria (2011), Northern Cyprus (2012), Egypt (2012), Kazakhstan (2013), Ukraine (2013) and Kyrgyzstan (2015), each in an aim to promote cooperation in the field of competition law and policy.

INTELLECTUAL PROPERTY

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. Under this law, an author has the exclusive right to perform, authorize or present his works which fall into one of the above-mentioned categories, 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 an author’s right to claim authorship of the work and to object to any distortion, mutilation or other modification of their work that would be prejudicial to their honor or reputation.

The main task of the Turkish Patent Institute (“TPI”) is to perform registration pursuant to provisions of relevant acts of industrial property rights, which currently concerns patents and utility models, trademarks, industrial designs, topographies of layout-designs of integrated circuits and geographical indications. In addition, TPI acts as a mediator in the performance of license transactions, acts as an expert before the courts, guides technological transfers and submits such information for the benefit of the public, cooperates with national/international institutions, and ensures the implementation of agreements in the field of industrial property rights.

TPI has prepared strategy documents in coordination with all the relevant governmental and non-governmental institutions on Industrial Property Rights (“IPRs”). Furthermore, specific strategies on Geographical Indications and Design Protection were also prepared after undertaking consultations with all the relevant stakeholders. The Design Strategy Paper and Action Plan was prepared in 2014 and entered into force upon publication in the Official Gazette dated November 2, 2014. The preparations for the National IP Strategy and Action plan were launched in 2013, followed by the preparations of the National Strategy and Action Plan on Geographical Indications. The two latter papers were completed in 2015 and entered into force upon their publication in the Official Gazette dated July 4, 2015.

A founding member of the World Trade Organization (“WTO”), Turkey adopted its national industrial property legislation in 1995. Turkey’s intellectual property legislation was reviewed successfully by the WTO Member States during the Trade Policy Review Mechanism of the WTO, amongst other obligations arising from the WTO Agreements, on March 15-17, 2016.

In April 2016, Turkey’s application to become an International Search and Examination Authority for the patent applications through Patent Cooperation Treaty was approved by the Committee of World Intellectual Property Organization (“WIPO”), a specialized agency of United Nations. The decision will be adopted by the General Assemblies of WIPO in October 2016.

Turkey’s enforcement capacity has been further strengthened because the number of Specialized IPR Courts has increased to 23 as of the end of 2015

The TPI currently administers bilateral cooperation protocols with the Industrial Property Rights Offices of the following countries: Albania, Azerbaijan, Austria, Brazil, Bulgaria, Czech Republic, People’s Republic of China, Denmark, Morocco, France, South Korea, Georgia, Islamic Republic of Iran, Spain, Sweden, Italy, Kirgizstan, Macedonia, Mongolia, Pakistan, Romania, Russian Federation, Serbia, Syria, Tajikistan and Tunisia.

 

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Statistics Regarding Industrial Property Rights Applications/Registrations/Grants

Table 16

 

     2011      2012      2013      2014      2015  

Number of Patent Applications

     10,241         11,599         12,053         12,375         13,958   

Number of Utility Model Applications

     3,244         3,788         3,541         3,568         3,583   

Number of Trademark Applications

     117,723         111,143         100,608         111,544         110,679   

Number of Industrial Design Applications

     7,989         8,423         8,782         9,028         8,896   

Source: Turkish Patent Institute

Table 17

 

     2011      2012      2013      2014      2015  

Number of Patent Granted

     6,539         7,816         8,925         8,530         10,100   

Number of Utility Model Issued

     1,976         2,299         2,037         2,561         2,767   

Number of Trademarks Registered

     42,059         64,721         83,189         87,545         83,027   

Number of Industrial Designs Registered

     7,388         7,767         8,393         8,265         9,225   

Source: Turkish Patent Institute

SOCIAL SECURITY SYSTEM

The pay as you go social security system in Turkey has been run by the Social Security Institution (“SSI”) since 2006. The SSI is responsible for conducting all operations of the active/passive insured and their dependents regarding retirement and health services. In 2008, the social security system was amended by the Social Security and Universal Health Insurance Law (Law No.5510). The most important parameters of the social security system are provided in the table below.

Table 18

 

    

Before the Reform

  

After the Reform (Law 5510)

Retirement Age (women/men)    58 / 60 (for new entries)    Gradual increase to 65 for both genders starting from 2036

Contribution Period

•    Workers

•    Others

  

7000 days

9000 days

  

7200 days

9000 days

Valorization of Contribution for SSK and BK   

100% real GDP growth +

100% CPI

  

30% real GDP growth +

100% CPI

Replacement Rate      

•    Civil servant

•    Others

  

50% + 1% for each year

3.5% for the first 10 years; 2% for the next 15 years; 1.5% for the remaining years

   2% for each year

Source: UT

In addition to eliminating the differences between the services that the insured receive, one of the most important features of the reform was to repress the rapidly growing deficits of the social security system. Total budgetary transfers to the SSI were 4.0% of GDP in 2015.

Table 19

 

Revenues and Expenditures of Social Security Institution                               

Billion TL

   2011     2012     2013     2014     2015  

Revenues

     124        143        163        184        220   

Expenditures

     141        160        183        204        232   

Rev. - Exp.

     -16        -17        -20        -20        -11   

Budgetary Transfers (BT)

     53        59        71        77        79   

BT as % of GDP

     4.1     4.1     4.5     4.4     4.0

 

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Source: Social Security Institution

The goals of the reform in health services are implementation of Universal Health Insurance which covers the entire population, countrywide implementation of family medicine and easier access to all health care services by the insured.

The compulsory unemployment insurance system was introduced in 1999. The Turkish Employment Agency is responsible for all transactions and services related to unemployment insurance. Contribution rates for unemployment insurance are 2% for the employer, 1% for the employee and 1% for the State based on the employee’s gross salary. As of December 31, 2015, the total asset value of the Unemployment Insurance Fund was TL 93.1 billion.

Personal Pension System

Law No. 4632 (Individual Pension Savings and Investment System) (a) establishes 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, directing individual pension savings to long term investments, (b) improves welfare level during retirement by providing a supplementary pension income, and (c) contributes to economic development by creating long-term resources for the economy and thereby increasing opportunities for employment. The Individual Pension Savings and Investment System commenced on October 27, 2003. As of the end of 2015, there were 18 pension companies, 6,038,432participants and 7,040,375active pension contracts in the system, while the total amount of funds reached TL 42.9 billion (TL 47.9 billion including state match contributions).

According to the Law No. 6327, which came into force in June 2012, the tax deduction incentive was replaced by a state match of 25% for the contributions made by system participants. This match is capped at the annual gross minimum wage for each participant. This new incentive, aiming to increase the effectiveness of the system in attracting pension savings, came into effect on January 1, 2013. Whereas the total number of participants at the end of 2012 was 3,128,130, as a result of the new incentive, the number of new participants who have entered into the system has increased by approximately 3 million between 2013 and 2015.

EXCHANGE RATES AND EXCHANGE POLICIES

The Central Bank of the Republic of Turkey (the “Central Bank” or “CBRT”) continued to implement the floating exchange rate regime in 2011. Amid strong capital inflows to Turkey in the first quarter of 2011, further FX purchase auctions were held with the objective to strengthen the Central Bank’s reserves as much as possible. In the second quarter of 2011, rising concerns over global growth and sovereign debt sustainability in some European countries deteriorated risk appetite and had an adverse impact on capital flows to emerging economies, including Turkey. In view of these developments, the amount to be purchased via daily FX auctions was reduced in May and June, and FX purchase auctions were suspended as of July 25, 2011. Given the heightened uncertainty due to aggravated concerns over global growth and sovereign debt sustainability in some European countries as of late July, with a view to providing the market with FX liquidity, on August 5, 2011, the Central Bank started to hold FX sale auctions, when deemed necessary. In September 2011, the Central Bank announced that the selling amount was set as the maximum daily amount to be sold on the days of FX sales. The amount to be sold could also be lower than the maximum selling amount when deemed necessary. In November, the Central Bank decided to announce the maximum amount of FX that can be sold via auctions on every working day for the subsequent two working days. In December, the Central Bank increased the maximum amount of FX that can be sold within two working days following the daily FX auctions to U.S.$1.70 billion and the amount that can be sold other than exceptions to U.S.$1.35 billion. Starting from January 6, 2012, the Central Bank started to hold intra-day foreign exchange sale auctions when necessary. Given the improving current account balance dynamics following the decisions taken at the Monetary Policy Committee (the “MPC”) meeting on January 24, 2012 as well as the abrupt changes in global conditions, the regular FX sale auctions were suspended as intra-day FX sale auctions proved relatively more efficient and better-suited to meet the objectives of the monetary policy than the regular auctions. Moreover, on October, 18, 2011, December 30, 2011 and January 2 to 4, 2012, direct FX sale interventions were performed in response to unhealthy price formations in exchange rates due to loss of market depth. The last four direct FX sale interventions were conducted in the context of additional monetary tightening which was started on December 29, 2011 as a response to deteriorated inflation outlook and delivered on so-called “exceptional” days in the first half of 2012. Although additional monetary tightening has been implemented mainly via open market operations, it also featured unsterilized (effective) foreign exchange sales and interventions in order to prevent inflation expectations from being adversely affected by exchange rate movements detached from fundamentals.

With a view of providing the market with FX liquidity, FX required reserve ratios were reduced in July, August and October 2011. In addition, interest rates on weekly FX deposits at the FX and Deposit Markets were slightly reduced in August 2011. The maturity of FX deposits that banks can buy from the Central Bank was extended from one week to one month in December 2011. Furthermore, in order to ease FX liquidity in the interbank FX markets, the Central Bank resumed its intervention in the FX Deposit Markets in November 2011.

Moreover, in September 2011, the Central Bank introduced a new facility, Reserve Option Mechanism (“ROM”), which allows banks (and later on other financial institutions) to maintain reserve requirements for Turkish lira liabilities in US Dollar and/or Euro up to a certain threshold. According to this mechanism for each Turkish lira reserve requirement, the banks can bring equivalent FX amount weighted by a factor called Reserve Option Coefficient. In September 2011, this facility allowed banks to maintain FX reserves for Turkish lira reserve requirements up to 10%. This option was first raised to 20% and then 40% in October 2011. In 2012, this option was gradually further raised to 45%, in to 50% in May 2015 and 55% in June 2015. Since this facility is used by the banks almost fully, it increased the FX reserves of the Central Bank.

 

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On October 27, 2011, the Central Bank updated the reserve requirement ratios for Turkish Lira deposits for related maturities and set the range between 5% and 11%. In addition, the reserve requirement ratios for foreign exchange deposits and liabilities were adjusted on October 5, 2011, with a range set between 6% and 11% depending on maturity.

On December 28, 2011, the Central Bank announced that, in addition to the daily one-week repo auctions, the Central Bank will start holding one-month (4 weeks) repo auctions every Friday. The one-month repo auctions are to be held in the traditional auction method and each institution’s total bid amount is to be limited to an announced auction amount. Auctions commenced on December 30, 2011. For the period of December 30, 2011 to January 26, 2012, upper limits were set as TL 2.0 billion for the total funding through one-month auctions and TL 3.0 billion for each week’s auction. On May 29, 2012, the MPC decided to set the amount of daily funding via quantity auctions between TL 1.0 and TL 5.0 billion. On June 21, 2012, the MPC decided to keep the amount of daily funding via quantity auctions between TL 1.0 and 5.0 billion until July 19, 2012. The upper limit for each one-month repo auction to be held between June 22 and July 21, 2012 was set at TL 5.0 billion.

On March 29, 2012, the limit for standard gold reserves that may be held to meet reserve requirements for foreign currency liabilities, excluding precious metal deposit accounts, was decreased from 10% to 0%. On June 21, 2012, it was announced that the upper limit for gold reserves that might be held to maintain Turkish lira reserve requirements was raised from 20% to 25%, and banks were allowed to hold Turkish lira reserve requirements in gold over the total amount calculated by multiplying the first tranche corresponding to 20% of Turkish lira reserve requirements by a reserve option coefficient (“ROC”) of “1” and the second tranche corresponding to 5% of Turkish lira reserve requirements by a ROC of “1.5.”

On August 3, 2012, the Central Bank announced certain technical amendments to the Communiqué on Reserve Requirements no. 2005/1 relating to operational processes with respect to reserve requirements. These amendments stipulate that, as is the case with FX reserve requirements, the Turkish lira equivalent of FX reserves maintained for Turkish lira reserve requirements will be calculated by using the exchange rates announced in the Official Gazette on the calculation date; the US dollar reserves held by the Central Bank to maintain Turkish lira reserve requirements will not be less than 50% of total FX reserves; and the carryover limit will be 5%. On September 11, 2012, the Central Bank announced that in order to maintain required reserves consistent with the composition of foreign currency liabilities, banks must maintain their required reserves against their U.S. dollar-denominated liabilities in U.S. dollars only.

In 2011, the amount of FX purchased via FX purchase auctions totaled U.S.$6.45 billion, while the total amount of FX sold through FX sale auctions and direct interventions amounted to U.S.$13.60 billion. Furthermore, in 2012, an FX amount of U.S.$2.46 billion sold through FX sale auctions and direct interventions. Gross FX reserves of the Central Bank excluding gold stood at U.S.$78.46 billion at the end of 2011 and U.S.$84.00 billion on July 13, 2012.

Table 20

 

Central Bank Direct Interventions and Auctions (in million USD)    Interventions             Auctions  
     Purchase      Sale             Purchase      Sale  

2011

     —          2,390            6,450         11,210   

2012

     —          1,450            —          1,006   

2013

     —          —             —          17,610   

2014

     —          3,151            —           11,200   

2015*

     —           —              —           12,366   

 

* As of December 31, 2015 (includes direct sales to State Energy Enterprises)

Source: CBT

In the second half of 2012, the Central Bank continued to implement the floating exchange rate regime along with the inflation targeting framework (having no nominal or real exchange rate target, and with intervention unlikely unless the level of exchange rate seemed decoupled substantially from macroeconomic fundamentals, hurting inflation and financial stability goals). The Central Bank continued to construct the Reserve Option Mechanism (“ROM”), which allows Turkish banks to hold a certain portion of their TL required reserves in foreign exchange (FX) and gold, during the second half of 2012 and increased the ROCs by 0.2% for all of the tranches except the first tranche (compared to July 2012). The utilization rate of this mechanism reached around 90% as of the end of 2012. The mechanism so far appears to support the resilience of the economy to cross-border capital flows and facilitate the liquidity management of the banking system.

 

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As of December 21, 2012, ROM-based foreign exchange reserves were valued at U.S.$27.2 billion (an increase of U.S.$16.9 billion from the previous year), and the ROM-based gold reserves were valued at U.S.$12.5 billion (an increase of U.S.$10.2 billion from the previous year). To further strengthen the Central Bank’s FX reserves, the Central Bank increased the export rediscount credits limits several times during 2012. In sum, export rediscount credits added U.S.$8.3 billion to the Central Bank’s net international reserves. Overall, total gross international reserves of the Central Bank reached U.S.$119.1 billion as of the end of 2012. Additionally, the Central Bank provided nearly U.S.$2.5 billion to the market through interventions and auctions in 2012.

Due to increasing cross-border capital flows during 2012, the Central Bank gradually increased the foreign exchange required reserve ratios to a range of 6% to11.5% (with 6% for the longest maturity, and 11.5% for the shortest maturity) from 5% to 11%. Moreover, the Central Bank’s foreign exchange lending rate was 4.5% for US Dollars and 5.5% for Euro. In the last meeting of the Monetary Policy Committee (MPC), on December 25, 2012, the MPC increased foreign exchange lending rates for US Dollars and Euro to 10% due to favorable global financial market conditions.

During 2013, the CBRT implemented new revisions to Reserve Option Mechanism for gold and FX facilities. These revisions included an increase in ROCs for gold option on January 22, 2013, an increase in ROCs for gold and FX option on March 26, 2013, addition of new tranches for FX and gold on March 26, 2013, an increase in ROCs for FX option on April 16, 2013, an increase in ROCs for FX option and addition of new tranches for FX on May 16, 2013, an increase in ROCs for FX option on December 26, 2013. The latest tranches and corresponding ROCs as of December 31, 2014 are described below.

Table 21

 

FX Facility Tranches (%)

   ROC  

0-30

     1.0   

30-35

     1.5   

35-40

     1.8   

40-45

     2.6   

45-50

     2.9   

50-55

     3.1   

55-56

     3.9   

56-57

     4.1   

57-58

     4.3   

58-59

     4.5   

59-60

     4.7   

Source: Central Bank

Following the tapering signal by the U.S. Federal Reserve Board in May 2013, most emerging countries’ risk premiums exhibited an upward trend until late 2013. Accompanied with domestic risk factors, the Turkish lira lost value against major currencies (e.g. US Dollar, Euro) beyond what peer emerging countries have experienced. To contain potential risks due to currency depreciation (e.g. a rise in inflation due to pass through), the CBRT has implemented additional monetary tightening and conducted unsterilized foreign exchange selling auctions (amounting to approximately U.S.$17 billion for the whole year). There were also increases in the upper limit of the interest rate corridor in mid-2013. Further, the CBRT conducted forward guidance on the likely path of the CBRT average funding rate in fourth quarter of 2013. The CBRT announced that the rate would be close to the upper limit of the corridor until the end of the year.

In the beginning of 2014, Turkey experienced external and internal developments with strong effects on its exchange rate and risk premium. In order to contain the negative impact of these developments on inflation and macroeconomic stability, the CBRT decided at its interim MPC meeting on January 28, 2014 to deliver a strong and front-loaded monetary tightening and to simplify its operational framework. Accordingly, the marginal funding rate was raised from 7.75% to 12%, the interest rate on borrowing facilities provided for primary dealers on repo transactions within open market operations was raised from 6.75% to 11.5%, and the CBRT borrowing rate was raised from 3.5% to 8%. With regard to the simplification of the operational framework, the CBRT decided to provide liquidity from the one-week repo rate instead of the marginal funding rate, and the one-week repo rate was increased from 4.5% to 10%. This simplified framework has been kept in operation throughout 2014, with several downward revisions to the one-week repo rate and to the interest rate corridor.

During the same time period, the CBRT provided FX liquidity to the market by direct currency intervention and daily FX sale auctions. Considering the developments in FX volatility, the limits on daily FX sales were revised several times which set the minimum amount between U.S.$10 million to U.S.$40 million. Moreover, the CBRT announced that the required portion of the FX requirements of energy-importing state economic enterprises (“SEEs”) would be met directly by the Undersecreteriat of the Treasury and the CBRT as of December 17, 2014. In 2014, an FX amount of U.S.$14.35 billion was sold through FX sale auctions and direct intervention.

 

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As of December 19, 2014, ROM-based foreign exchange reserves were valued at U.S.$33 billion (from U.S.$34.1 billion in 2013), and the ROM-based gold reserves were valued at U.S.$15.1 billion (an increase of U.S.$14.8 billion from the previous year). As of August 1, 2014, the CBRT limit the foreign currencies that can be maintained for Turkish lira required that the reserves be within the scope of the Communiqué on Reserve Requirements No. 2013/15 to the U.S. dollar only. To further strengthen the Central Bank’s FX reserves, the Central Bank increased the export rediscount credits limits several times during 2013 and 2014. In sum, export rediscount credits added U.S.$12.7 billion in 2013 and U.S.$13 billion in 2014 to the Central Bank’s net international reserves. Overall, international reserves of the Central Bank reached U.S.$127.3 billion as of the end of 2014.

In order to maintain balanced growth and capital inflows for the upcoming global monetary policy normalization, the CBRT has changed the foreign exchange deposit rates that apply to banks to borrow from the CBRT within their limits through the Foreign Exchange Deposit Market. As of October 9, 2014, the rates for one-week maturity borrowings from the CBRT as a last resort facility were reduced from 10% to 7.5% for the US Dollar and from 10% to 6.5% for the Euro. Moreover, considering the increase in banks’ balance sheets and in CBRT’s international reserves, it raised the banks’ transaction limits at the Foreign Exchange and Banknotes Markets from U.S.$10.8 billion to U.S.$22.6 billion as of December 10, 2014.

On August 18, 2015, the CBRT released a road map regarding policies to be implemented before and during the normalization of global monetary policies. Thus, adjustments were made in the policies regarding interest rate and Turkish lira liquidity, foreign exchange liquidity and financial stability to be implemented before and during the normalization. Accordingly, measures were taken to enhance the flexibility of the foreign exchange liquidity policy and bolster core liabilities and long-term borrowing to support financial stability before and during the global monetary policy normalization.

In 2015, given the expected normalization in global monetary policies, the CBRT continued to lower the interest rates on FX deposits that banks can borrow from the CBRT within their borrowing limits in the FX Deposit Market. Throughout 2015, the CBRT lowered the 1-week FX deposit interest rate. By August 2015, rates had declined to 2.75% (down from 7.5% earlier in the year) for U.S. dollars and 1.25% (down from 6.5% earlier in the year) for euros. On July 24, 2015, the CBRT announced that going forward, whenever necessary, these rates would be adjusted in either direction at 9:30 a.m. on business days, and will be valid for the same business day. Further, on September 1, 2015, in order to enhance the flexibility of the foreign exchange liquidity management, transaction limits for banks at the CBRT Foreign Exchange and Banknotes Markets were raised by approximately 130% to U.S.$50 billion. The arrangements are anticipated to function as a buffer for the banking sector to boost confidence in financial markets.

Moreover, as of May 5, 2015, U.S. dollar required reserves, reserve options and free reserves held at the CBRT have been remunerated. The applicable interest rate has been set on a daily basis depending on varying conditions in the global and local financial markets, and announced daily at 9.30 a.m. As of December 17, 2015 the remuneration rate was set at 49 basis points. Due to the developments in the euro area, the per annum commission of 0.2% received from euro accounts of banks and financing companies at the CBRT as of 1 February 2015, was reduced to 0% on July 27, 2015.

Effective February 13, 2015, the CBRT introduced changes to reserve option tranches and coefficients to strengthen the automatic stabilizing feature of the Reserve Option Mechanism. Accordingly, to meet the required FX liquidity due to the adjustments in the reserve requirement ratios, the ROC in the first 30% tranche was lowered by 0.2 points. Furthermore, with the upper limit of the facility unchanged, the corresponding ROC to each additional tranche was raised by 0.2 points for tranches above 55%. On March 10, 2015, the CBRT introduced further changes to reserve option coefficients in order to meet the temporary FX liquidity needs of the financial system. Accordingly, the ROC in the first 30% tranche was lowered by 0.2 points. The ROC for tranches above 55%, on the other hand, was raised by 0.6 points. Lastly, on December 26, the calculation of the foreign exchange amount to be held against Turkish lira liabilities under the ROM was rearranged to strengthen its stabilizing feature. Accordingly, the calculation of the foreign exchange amount was based on the average of the exchange rates prevailing before the start of the maintenance period rather than the exchange rates prevailing on the liability date.

As of February 27, 2015, the CBRT has begun to set the FX sale auction amount on a daily basis in order to gain flexibility in FX liquidity policy against market volatility. To this end, as of August 19, 2015, on days when deemed necessary, the CBRT might increase the FX selling auction amount by up to U.S$70 million above the pre-announced minimum amount. Moreover, throughout 2015, the CBRT continued to provide the required portion of the FX requirements of energy-importing SEEs. The CBRT raised the limits of export rediscount credits on January 23, 2015, and widened the scope of firms that can utilize these loans. These changes will enable exporters and the services sector firms, which have FX-denominated earnings, to make higher utilization of the CBRT rediscount credits. The CBRT sold U.S.$22.9 billion through FX selling auctions and direct FX sales to energy-importing SEEs in 2015. During 2015, the FX amount obtained by rediscount credits was U.S.$15.2 billion.

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

 

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Table 22

Exchange Rates

 

Period

Average

Year

   Turkish Lira per
U.S. Dollar
     Turkish Lira per
Euro
     Turkish Lira
per 100
Japanese
Yen
     Turkish Lira per
Currency Basket(1)
 

2011

     1.68         2.33         2.11         2.01   

2012

     1.80         2.32         2.27         2.06   

2013

     1.91         2.53         2.04         2.22   

2014

     2.19         2.91         2.08         2.50   

2015

     2.73         3.03         2.26         2.88   
Period End At            
December 31st            

2011

     1.91         2.47         2.46         2.19   

2012

     1.79         2.36         2.08         2.08   

2013

     2.14         2.94         2.03         2.54   

2014

     2.32         2.83         1.95         2.58   

2015

     2.92         3.19         2.43         3.05   

 

(1) The basket consisting of U.S.$0.5 and EUR0.5.

Source: CBRT

Note: CBRT’s foreign exchange effective selling rates.

INTERNATIONAL LENDING

The World Bank-Turkey Country Partnership Strategy (the “CPS”) for fiscal years 2012 to 2016 (fiscal year end June 30, 2016) is a financial package reaching up to U.S.$6.45 billion in total. This package consists of development policy loans and investment loans. In addition, the CPS provides financing for private sector investments and guarantees against non-commercial risks by the International Finance Corporation (“IFC”) and Multilateral Investment Guarantee Agency (“MIGA”), respectively. IFC and MIGA are members of the World Bank Group.

Between July 1, 2011 and June 30, 2015, under the current CPS, the International Bank of Reconstruction and Development (“IBRD”) provided U.S.$3.9 billion, IFC provided U.S.$4.5 billion, and MIGA provided U.S.$1.1 billion of financing to Turkey.

From July 1, 2011 to December 2015, under the current CPS, Turkey received U.S.$4.3 billion in financing from the IBRD. A summary of the program and investment loans approved during this period are as follows:

Table 23

 

Program Loans    Original Amount      USD Equivalent      Board Approval      Loan Agreement  

Environmental Sustainability and Energy Sector (ESES) DPL3

   455,400,000       $ 600,000,000         Mar 27, 2012         Apr 6, 2012   

Competitiveness and Savings Development Policy Loan (CSDPL)

   624,100,000       $ 800,000,000.         Jun 6, 2013         Jun 7, 2013   

Turkey Sustaining Shared Growth DPL

   367,400,000       $ 500,000,000         Jul 24, 2014         Aug 22, 2014   

Investment Loans

           

Private Sector Renewable Energy and Energy Efficiency Project—Add. Finance

   $

235,000,000

183,600,000

  

  

   $ 500,000,000         Nov 22, 2011         Dec 5, 2011   

SME Energy Efficiency

   $ 201,000,000       $ 201,000,000         Mar 27, 2013         May 6, 2013   

Third Access to Finance for SMEs (SME III)

   $ 300,000,000       $ 300,000,000         Jun 26, 2013         Aug 22, 2013   

Renewable Energy Integration

   217,600,000       $ 300,000,000         May 9, 2014         Jul 10, 2014   

Gas Sector Development—Add. Finance

   $ 400,000,000       $ 400,000,000         Jul 2, 2014         Oct 2, 2014   

Innovative Access to Finance

   $

190,000,000

44,100,000

  

  

   $ 250,000,000         Jul 22, 2014         Aug 22, 2014   

Health System Strengthening and Support Project

   120,000,000       $ 134,300,000         Sep 21, 2015         Sep 30, 2015   

Land Registration and Cadastre Modernization

   81,000,000       $ 90,590,000         Oct 15, 2015         Nov 30, 2015   

Micro Small & Medium Enterprise and Large Enterprise Supply Chain Finance

   $ 200,000,000       $ 200,000,000         Dec 22, 2015         Dec 28, 2015   

 

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On February 11, 2011, the Executive Board of the IMF concluded the Second Post-Program Monitoring Discussions with Turkey. The Executive Board welcomed the strong recovery of the Turkish economy during 2010, with output exceeding its pre-crisis level and unemployment moderating significantly, but noted the sharply widening Current Account deficit. The Executive Board stated that Turkey’s main challenge is determining the right policy mix in the face of vulnerabilities arising from excessive domestic demand and volatile short-term capital flows. The Executive Board recognized that Turkey’s favorable near-term growth prospects and healthy balance sheets would likely continue to attract capital inflows, but also noted that predominantly short-term capital inflows have increased the Republic’s exposure to capital flow reversal and associated re-pricing risks. The Executive Board welcomed Turkey’s increased focus on systemic financial-sector risk and a moderate tightening of macro-prudential measures. A number of Executive Board directors, however, called for further action in these areas. The Executive Board also encouraged progress on structural reforms to enhance competitiveness and resilience to capital inflows.

Between March 16, 2011 and April 5, 2011, an IMF staff mission visited Turkey for the Financial Sector Assessment Program (“FSAP”) update. FSAP assessments include a financial stability assessment, which is the responsibility of the IMF, and a financial development assessment, which is the responsibility of the World Bank. The Financial System Stability Assessment for Turkey, including the main findings of the 2011 FSAP update for Turkey, was endorsed by the IMF during the IMF Executive Board meeting on November 30, 2011 and was published on September 7, 2012. IMF Executive Board’s Decision makes it mandatory for jurisdictions with systemically important financial sectors to undergo financial stability assessments under the FSAP every five years. In 2015, Turkey requested FSAP update to be performed in 2016 and as of August 2016 it is underway.

On September 6, 2011, an IMF staff mission visited Turkey for the purpose of conducting an Article IV consultation for fiscal 2011. The IMF staff mission concluded its review on November 30, 2011, and published its staff report on January 27, 2012. The staff noted that Turkey entered the global economic crisis with stronger private and public sector balance sheets than many other countries in the region, due to institutional reforms and improved policy frameworks adopted earlier in the decade. The staff also noted that a deft macroeconomic and financial policy response during the global economic crisis enhanced policy credibility. However, an inadequate policy response to renewed capital flows caused growth to revert to its previous unbalanced path, and an overvalued real exchange rate and abundant external financing caused demand to become skewed toward imports resulting in the current account deficit widening sharply. The staff report commented on various other economic developments and policies in Turkey, including recommending structural reforms to prevent the emergence of a negative output gap as the current account is corrected.

An IMF staff mission visited Turkey between May 31 and June 6, 2012 to discuss recent economic developments and preparations for the 2012 Article IV consultation discussions. In their conclusion statement, the IMF staff stated that the economy is decelerating toward a soft landing, thus the imbalances built over the last two years are diminishing.

During the G-20 meeting held in Los Cabos on June 18-19, 2012, Turkey declared its commitment to contributing to global financial stability by increasing the resources of the IMF. On June 19, 2012, it was announced that the Central Bank of the Republic of Turkey will contribute up to U.S.$5 billion to the IMF, to be counted as part of its international reserves. The note purchase agreement between the IMF and the Central Bank of the Republic of Turkey became effective on October 17, 2013.

On September 13, 2012, the IMF staff mission visited Turkey in the context of 2012 Article IV consultations. The IMF staff mission concluded its review on September 26, 2012, and published its staff report on December 21, 2012. In its report the staff noted that Turkish authorities set the stage for more sustainable and balanced growth in 2012, accompanied by declines in the Current Account deficit and inflation. The staff also emphasized the importance of the tighter fiscal policy proposed in the Republic of Turkey’s 2013 budget. They also noted that in the current environment of volatile capital flows, the Central Bank’s more flexible policy framework served the Turkish economy well. Additionally, the staff explained that the Turkish banks appear well-positioned for the introduction of Basel III.

After the last payment on May 14, 2013, Turkey’s outstanding debt to the IMF due to the Stand-by Arrangements was settled.

Between September 19, 2013 and October 1, 2013, the IMF mission visited Turkey as part of the annual Article IV consultations. On November 20, 2013, the Executive Board of the IMF concluded the Article IV consultation with Turkey and the staff report was published on December 20, 2013. In its report the staff noted that the economic activity accelerated and domestic demand got stronger. However, these improvements came with a deteriorating external account and inflation remaining above target. The staff underlined that monetary stance should be tightened and the monetary policy framework should be normalized with a clearer focus on inflation. On fiscal policy, while mentioning that the fiscal targets for 2013 are on track to be met, the staff noted that the fiscal stance was expansionary and should be reined in. They also stated that increasing national savings and improving competitiveness were central to addressing vulnerabilities, which would require ambitious medium-term fiscal targets and comprehensive structural reforms. In addition, the report praised the sound performance of the Turkish financial system, while advising against downside risks.

 

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The IMF mission visited Turkey again from April 24 to April 30, 2014 in preparation for the 2014 Article IV regular consultations. No press release was issued following the mission’s visit.

Between September 11 and 24, 2014, the IMF mission visited Turkey to hold discussions for the 2014 Article IV regular consultation. On November 21, 2014, the Executive Board of the IMF concluded the Article IV consultation with Turkey and the staff report was published on December 5, 2014. In its report, the staff noted that Turkey’s economy has grown by 6% on average since 2010, which was a significant achievement. However, low national saving and competitiveness challenges are constraining investment and exports. The staff also noted that monetary policy needs to focus on the inflation target, and macro prudential policies should also be reinforced. The staff commended the fact that the financial system remains well capitalized and capital adequacy ratios are high on average, and mostly based on high quality capital, while noting that a tighter fiscal stance would contribute to reducing the external imbalance and relieving pressure on monetary policy.

An IMF staff mission made two separate visits to Turkey during 2015, the first occurred between April 22-29, 2015, and the second between October 15-22, 2015. The IMF staff visited to discuss, with heads and technical teams of several fiscal, financial and monetary agencies, recent economic developments and preparations for the regular 2015 Article IV consultation discussions.

In 2010, the Islamic Development Bank Group (“IDBG”) approved the Member Country Partnership Strategy (“MCPS”) for the Republic of Turkey, which is the first strategy document ever approved by the IDBG. Within the scope of the Strategy, the IDBG provided U.S.$2.2 billion of financing for projects in Turkey during the period covered by the Strategy, namely 2010-2013. The first MCPS for Turkey was completed and rated “highly successful” by IDBG in July 2016. The second MCPS for Turkey is in progress. As of the end of2015, IDBG has provided U.S.$4.6 billion of financing for projects in Turkey for the 2010-2015 period. The annual approvals of the IDBG for Turkey reached U.S.$2 billion in 2015.

As one of the founding members, Turkey became a recipient country of the European Bank for Reconstruction and Development (“EBRD”) in 2008. As of the end of 2015, EBRD has provided €6.8 billion of financing for projects in Turkey, mostly in the private sector. The annual bank investment (signed operations) of EBRD in Turkey was €1.9 billion in 2015. As EBRD suspended its operations in Russia in 2014, Turkey became the largest individual recipient of the EBRD financing both in 2014 and 2015. The EBRD has demonstrated its confidence in the future of the Turkish economy by making its EBRD office in Istanbul a regional hub, covering the Central Asian operations of the EBRD as well. In addition, the EBRD has offices in Ankara and Gaziantep.

Turkey is one of the founding members of the Black Sea Trade and Development Bank (“BSTDB”). The BSTDB has provided €254.6 million of financing for projects in Turkey between 2011 and 2015, mostly in private sector. According to the 2015-2018 Country Strategy, the BSTDB plans to invest approximately €37 to €55 million per year in Turkey.

The Republic signed a total of €920 million, €1.1 billion, €1.5 billion, €1.1 billion and €1.2 million worth of various financing agreements with the European Investment Bank in 2011, 2012, 2013, 2014 and 2015, respectively.

Turkey is one of the founding members of the Council of Europe Development Bank (“CEB”). The CEB provided €780 million of financing for projects in Turkey from 2011 to 2015.

 

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FOREIGN TRADE AND BALANCE OF PAYMENTS

FOREIGN TRADE

In 2011, exports increased by 18.5% to U.S.$134.9 billion. In 2012, exports increased by 13% to U.S.$152.5 billion and in 2013, exports decreased by 0.4% to U.S.$151.8 billion. In 2014, exports increased by 3.8% to U.S.$157.6 billion. In the meantime, because domestic demand also increased, import demand increased considerably by 31.7% and 29.8% in 2010 and 2011 respectively. In 2015, exports decreased by 8.7% to U.S.$143.8 billion. The same year imports decreased 14.4% and were U.S.$207.2 billion. Since imports decreased more than exports, the trade deficit and hence the current account deficit also decreased.

The trade deficit (including shuttle trade) and the current account deficit were U.S.$89.2 billion and U.S.$74.4 billion respectively in 2011 and the trade deficit and the current account deficit U.S.$65.4 billion and U.S.$48 billion respectively in 2012. The trade deficit and the current account deficit were U.S.$79.9 billion and U.S.$63.6 billion respectively in 2013, U.S.$63.6 billion and U.S.$43.6 billion respectively in 2014 and U.S.$48.2 billion and U.S.$32.2 billion respectively in 2015.

The composition of exports has shifted substantially from agricultural products to industrial products. In 2013, this outlook did not change significantly. In addition to traditional export goods such as textiles and clothing products, 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. In 2013, while textiles and clothing products increased 8.8% to U.S.$27.4 billion, exports of food products and beverages, rubber and plastic products, basic metals, machinery and equipment, electrical machinery and apparatus, motor vehicles and trailers, other transportation and furniture decreased by 6.4% to U.S.$75.0 billion. In 2014, textiles and clothing products increased 6.4% to U.S.$29.2 billion. Additionally, exports of food products and beverages, rubber and plastic products, basic metals, machinery and equipment, electrical machinery and apparatus, motor vehicles and trailers, other transportation and furniture decreased by 4.4% to U.S.$78.1 billion. In 2015, textiles and clothing products decreased by 10.5% to U.S.$26.1 billion and exports of food products and beverages, rubber and plastic products, basic metals, machinery and equipment, electrical machinery and apparatus, motor vehicles and trailers, other transportation and furniture decreased by 6.2% to U.S.$77 billion.

Turkey’s principal trading partners have traditionally been EU member countries. In 2013, EU member countries accounted for 41.5% of total exports and 37.7% of total imports. The largest total export market for Turkish products was Germany, which accounted for 9% of total exports in 2013 compared to 8.6% in 2012. In 2014, EU member countries accounted for 43.5% of total exports and 36.7% of total imports. In addition, the largest total export market for Turkish products was Germany, which accounted for 9.6% of total exports in 2014 compared to 9.0% in 2013. In 2015, EU member countries accounted for 44.5% of total exports and 38.0% of total imports. In addition, the largest total export market for Turkish products was Germany, which accounted for 9.3% of total exports in 2015 compared to 9.6% in 2014.

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

Table 24

Terms of Trade-Foreign Trade, Value, Volume

 

     2011      2012      2013      2014      2015  

Exports f.o.b (1)

     134.9         152.5         151.8         157.6         143.8   

Imports c.i.f (2)

     240.8         236.5         251.7         242.2         207.2   

Consumption goods

     29.7         26.7         30.4         29.0         28.6   

Capital goods

     37.3         33.9         36.8         36.0         34.9   

Intermediate goods

     173.1         174.9         183.8         176.7         143.3   

Total Exports

              

Value

     18.5         13.0         -0.4         3.8         -8,7   

Price

     11.5         -2.7         0.1         -1.4         -9.6   

Volume(3)

     6.4         16.2         -0.5         5.3         1.0   

Total Imports(2)

              

Value

     29.8         -1.8         6.4         -3.8         -14.4   

Price

     14.9         -2.6         -1.6         -2.9         -15.6   

Volume(3)

     13.1         0.9         8.2         -0.9         -1.3   

Terms of Trade

     -3.0         -0.2         1.7         1.5         7.0   

Source: TURKSTAT

 

(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.

 

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

Table 25

Exports (FOB)* by Sectors and Commodity

 

    (in millions of U.S. dollars unless otherwise indicated)     Percentage Change (%)  
    2011     2012     2013     2014     2015     11/10     12/11     13/12     14/13     15/14  

AGRICULTURE AND FORESTRY

    5,166,596        5,188,858        5,653,323        6,029,749        5,756,596        4.7        0.4        9.0        6.7        -4.5   

Agriculture and farming of animals

    5,148,007        5,167,145        5,626,402        6,007,500        5,735,622        4.7        0.4        8.9        6.8        -4.5   

Forestry and logging

    18,590        21,713        26,921        22,249        20,974        20.2        16.8        24.0        -17.4        -5.7   

FISHING

    186,017        190,340        258,177        346,537        368,235        19.2        2.3        35.6        34.2        6.3   

Fishing

    186,017        190,340        258,177        346,537        368,235        19.2        2.3        35.6        34.2        6.3   

MINING AND QUARRYING

    2,805,449        3,160,765        3,879,449        3,406,108        2,798,896        4.4        12.7        22.7        -12.2        -17.8   

Mining of coal, lignite and peat

    5,864        6,660        3,416        8,524        13,618        -10.3        13.6        -48.7        149.5        59.7   

Crude petroleum and natural gas

    126,405        229,919        248,808        226,136        168,260        25.8        81.9        8.2        -9.1        -25.6   

Metal ores

    1,213,947        1,338,680        1,729,264        1,367,763        991,699        -5.2        10.3        29.2        -20.9        -27.5   

Other mining and quarrying

    1,459,233        1,585,505        1,897,960        1,803,684        1,625,319        12.3        8.7        19.7        -5.0        -9.9   

MANUFACTURING

    125,962,537        143,193,911        141,358,199        147,059,418        134,389,890        19.4        13.7        -1.3        4.0        -8.6   

Food products and beverages

    8,880,453        9,514,194        10,664,446        11,157,501        10,222,407        32.5        7.1        12.1        4.6        -8.4   

Tobacco products

    301,161        415,340        465,440        554,938        532,311        1.8        37.9        12.1        19.2        -4.1   

Textiles

    12,920,412        13,259,405        14,740,647        15,413,632        13,591,481        18.2        2.6        11.2        4.6        -11.8   

Wearing apparel

    11,633,424        11,955,404        12,703,715        13,773,510        12,525,940        9.6        2.8        6.3        8.4        -9.1   

Luggage, saddlery and footwear

    773,480        913,714        1,119,089        1,153,124        1,018,116        17.8        18.1        22.5        3.0        -11.7   

Products of wood and cork

    653,294        658,431        724,289        853,567        695,233        14.0        0.8        10.0        17.8        -18.5   

Paper and paper products

    1,407,263        1,646,891        1,933,665        1,984,813        1,778,511        17.8        17.0        17.4        2.6        -10.4   

Printing and publishing

    163,950        157,514        154,496        167,511        142,358        15.9        -3.9        -1.9        8.4        -15.0   

Coke, petroleum products and nuclear fuel

    6,122,477        7,179,744        6,299,799        5,728,616        4,175,800        47.4        17.3        -12.3        -9.1        -27.1   

Chemicals and chemical products

    6,742,722        7,308,244        7,614,807        7,960,572        7,466,601        18.2        8.4        4.2        4.5        -6.2   

Rubber and plastic products

    6,240,692        6,430,097        7,029,917        7,539,802        6,473,843        27.7        3.0        9.3        7.3        -14.1   

Other non-metallic minerals

    4,042,172        4,083,453        4,289,985        4,328,839        3,848,995        1.3        1.0        5.1        0.9        -11.1   

Manufacture of basic metals

    17,062,183        29,109,842        17,516,405        16,636,352        17,709,995        18.3        70.6        -39.8        -5.0        6.5   

Manufacture of fabricated metal prod (exc machinery)

    6,230,149        6,589,003        7,067,823        7,430,285        6,490,562        25.3        5.8        7.3        5.1        -12.6   

Manufacture of machinery and equipment

    11,126,283        11,856,605        12,779,481        13,590,841        12,068,019        22.8        6.6        7.8        6.3        -11.2   

Office, accounting and computing machinery

    140,303        147,973        177,687        189,301        185,113        4.9        5.5        20.1        6.5        -2.2   

Electrical machinery and apparatus

    5,863,094        5,859,416        6,459,928        6,364,357        5,432,544        20.6        -0.1        10.2        -1.5        -14.6   

Communication and apparatus

    2,110,837        2,511,008        2,047,306        2,234,053        1,936,228        8.2        19.0        -18.5        9.1        -13.3   

Medical, precision and optical instruments, watches

    498,727        628,171        789,300        833,516        820,023        21.0        26.0        25.7        5.6        -1.6   

Motor vehicles and trailers

    17,043,514        16,244,049        18,245,643        19,217,751        18,533,196        14.7        -4.7        12.3        5.3        -3.6   

Other transport

    1,992,358        1,780,943        2,340,254        2,398,340        2,178,545        20.1        -10.6        31.4        2.5        -9.2   

Furniture

    4,013,587        4,944,472        6,194,074        7,548,199        6,564,070        22.3        23.2        25.3        21.9        -13.0   

ELECTRICITY, GAS AND WATER SUPPLY

    148,789        190,211        28,970        88,884        73,861        -18.0        27.8        -84.8        206.8        -16.9   

Electricity, gas and steam

    148,789        190,211        28,970        88,884        73,861        -18.0        27.8        -84.8        206.8        -16.9   

WHOLESALE AND RETAIL TRADE

    631,901        534,800        605,984        672,861        445,282        39.9        -15.4        13.3        11.0        -33.8   

Except of motor vehicles and motorcycles

    631,901        534,800        605,984        672,861        445,282        39.9        -15.4        13.3        11.0        -33.8   

OTHER BUSINESS ACTIVITIES

    583        544        3,422        2,556        1,967        -71.4        -6.7        529.3        -25.3        -23.0   

Other business activities

    583        544        3,422        2,556        1,967        -71.4        -6.7        529.3        -25.3        -23.0   

SOCIAL AND PERSONAL ACTIVITIES

    4,997        2,307        15,113        4,043        4,145        38.1        -53.8        555.2        -73.3        2.5   

Recreational, cultural and sporting activities

    4,996        2,286        15,107        4,024        4,144        38.1        -54.2        560.8        -73.4        3.0   

Other service activities

    1        21        6        18        1        427.3        1880.5        -68.6        183.3        -93.6   

Total

    134,906,869        152,461,737        151,802,637        157,610,158        143,838,871        18.5        13.0        -0.4        3.8        -8.7   

 

* Excluding shuttle and transit trade

Source: TURKSTAT

 

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

Table 26

 

    2011     2012     2013     2014     2015     2011     2012     2013     2014     2015  

Total

  134,906,869     152,461,737     151,802,637     157,610,158     143,838,871     100.0     100.0     100.0     100.0     100.0  

A. European Union Countries (EU-28)

    62,589,257        59,398,377        63,039,810        68,514,370        63,998,494        46.4        39.0        41.5        43.5        44.5   

B. Turkish Free Zones

    2,544,721        2,294,934        2,412,824        2,269,841        1,906,792        1.9        1.5        1.6        1.4        1.3   

C. Other Countries

    69,772,890        90,768,426        86,350,002        86,825,947        77,933,585        51.7        59.5        56.9        55.1        54.2   

1. European Countries

    12,734,548        14,166,917        14,213,880        15,183,962        14,141,058        9.4        9.3        9.4        9.6        9.8   

2. African Countries

    10,333,821        13,356,851        14,145,543        13,754,398        12,448,924        7.7        8.8        9.3        8.7        8.7   

3. American Countries

    7,925,943        9,623,267        9,711,457        10,082,687        9,225,109        5.9        6.3        6.4        6.4        6.4   

4. Asian Countries

    38,134,133        53,025,802        47,591,498        46,974,351        41,393,124        28.3        34.8        31.4        29.8        28.8   

Middle East Countries

    27,934,772        42,451,153        35,574,660        35,383,669        31,085,756        20.7        27.8        23.4        22.5        21.6   

5. Other Countries

    644,445,405        595,589,099        687,623,705        830,548,890        725,370,353        0.5        0.4        0.5        0.5        0.5   

Selected Country Groups

                   

-OECD Countries

    67,113,921        66,289,740        68,683,836        76,674,897        75,368,261        49.7        43.5        45.2        48.6        52.4   

-EFTA Countries

    1,887,252        2,601,134        1,661,908        3,795,180        6,202,203        1.4        1.7        1.1        2.4        4.3   

-Black Sea Economic Cooperation

    17,767,964        18,791,305        20,367,992        19,687,232        14,590,290        13.2        12.3        13.4        12.5        10.1   

-Economic Cooperation Organization

    9,291,735        16,563,295        11,898,400        11,716,861        9,566,766        6.9        10.9        7.8        7.4        6.7   

-Commonwealth of Independent States

    13,376,636        15,074,703        16,924,418        15,616,469        10,568,768        9.9        9.9        11.1        9.9        7.3   

-Turkish Republics

    5,039,884        5,840,703        6,908,137        7,107,785        5,289,671        3.7        3.8        4.6        4.5        3.7   

-Islamic Conference Organization

    37,325,434        55,218,487        49,370,615        48,625,211        42,737,552        27.7        36.2        32.5        30.9        29.7   

-D-8 Organization for Economic Cooperation

    —          —          8,790,044        8,573,992        8,155,651        —          —          5.8        5.4        5.7   

Selected Countries(1)

                   

Germany

    13,950,825        13,124,375        13,702,577        15,147,423        13,417,033        10.3        8.6        9.0        9.6        9.3   

United Kingdom

    8,151,430        8,693,599        8,785,124        9,903,172        10,556,393        6.0        5.7    &nbs