 The things that they discussed with the policy makers as well as the academicians and all concerned whether the economies should be fiscal and citadel or We have to have Austerity measures at the moment it seems that the authorities has opted for in order to put the things right by introducing policies of Austrian measures When we look at our own experience Back in 2001 and afterwards of course Turkey opted for in order to put Its own house in order for fiscal austerity But the one difference that takes is then and today is that the at that time Turkey was ill But the rest of the was left of the world was healthy therefore Almost everyone is ill Therefore, there are some merits in those discussions that the The fiscal fiscal stimulus may help in some circumstances, but in our case it was the fiscal Austerity that saved us from the problems that we faced at that time. So what I am going to do in the remaining Time of the seminar is that I will present first What was the out Turkish economy before 2001 and then I will briefly describe the In a brief summary of what we did in in 2001 and that the reforms afterwards and what we are now at the moment if I may put in a nutshell what May characterize the Turkish economy before 2001 was that it was a fiscal indiscipline that caused the problem It was in a nutshell. It's a fiscal indiscipline We then Secretion our legs not according to our blanket. I would say it was Depending more than what it is collected in taxes and in revenues. Basically, it was the Public sector disorder that caused the problems in Turkey if you look at the let's say the what was the picture exactly before the 2001 and the events that leading to the crisis was that As you see in the graph the public sector borrow requirement was too high In 1999 it was close to 13 percent Why this has happened is because that there was a provision the central bank law saying that the if any government wanted to spend That's a hundred unit in fiscal year They had the legal access to the central bank resources for the 15 percent. So if 15 percent they could borrow from the central bank Usually what used to happen was that sometimes especially during the Coalition governments coalition governments the budget that was Put forward at the beginning of the year were used to be all the appropriate used to be spent at the end of the third term The government used to bring in another Substantial budget and another 15 percent of this extra budget used to be taken from the central bank And therefore it was as I should say before it was the fiscal indiscipline that caused the Turkish problem This can be seen in the public sector as well as the share of the interest payments in the budget. It was an area of 35 years, stemming from early 1970s to 2001. Turkey lived in a high but ironically stable inflation environment. Average inflation was about 70%. Interest rates were very high. But it did not go into a high for inflation. Had it gone into a high for inflation, probably we would have done things better than that. But 35 years, 40 years, we lived in a high but stable inflation environment of around 75%. Again, when we look at the fiscal conditions in terms of numbers and percentages, public sector borrow and recommend to GDP, interest payments as a share of the GDP, domestic debt to GDP and foreign debt to GDP. All along the year from 1975 to 1970s, things were worsening because of this fiscal indiscipline. As I said, what lies behind this deterioration in the fiscal balance of the country were because of the utilization of the central bank resources. As you see from the graph, at one point, the central bank financing as percentage of this budget went up to 2% of the GDP. We had a small banking crisis financially in 1994. It was a homemade and self-made because towards the end of 1993, the government then did not extend the maturing debt. They had the auctions but because of that they considered the interest was too high, which was around 75%. Eight maturing debt were paid to the market but government did not borrow from the market. Therefore, the system was with excess liquidity and because of that there was a fixed exchange rate regime. The banks and the people with excess liquidity went to the market and bought the foreign exchange and the central bank reserves come down. Then we went into the financial crisis of 1994. After that, there was a change in the central bank. Gradually the 15% short-term advance from the central bank to the central government were reduced from 15% to 3% at the end of 1998. But it was not enough to eliminate the crisis that ended up in 2001. Again, this was that the crowding out. There was no resources left to the private sector to invest, to increase economic activity. It was mainly an economy between government and the banks. The banks were collecting deposits from the public. They were lending to the government and the government was paying back. If you look at the credit developments at that time, of course the indebtedness of the Turkish households were very low. But it was the indebtedness of the public sector that caused the problem. Consumer credit went up towards the end of 1999 because from the beginning of the year 2000, we had an exchange rate-based stabilization program with IMF. We pre-announced the likely pass of the basket of dollars and the Euro den. This was followed for one and a half year and afterwards when we reached the target, reducing the inflation and the interest rate, then the gradual Turkish currency would be left to floating. But before reaching the end of the program, the program collapsed at the October 2000 and also led to the February 2001 crisis, which was the full-fledged banking crisis. Again, the total financial assets of the GDP was very low but towards the end of the period it increased. Again, the banking sector was very weak because the foreign exchange positions of the banks were very high. The assets compared to the liabilities were very high and therefore it was open to currency attacks. This was what happened in 2001. As I said, because of these developments, the government financed itself from the central bank resources and also because of this high open FX position as well as the high interest rates and the inflation caused the banks to have a large open position. They usually had access to the central banks in effect financing the banks in an unlimited amount. And therefore, as you see from the light and graph, open market operation interest rates in 2000 was very high. This was the end of exchange rate-based stabilization program. But afterwards, because of the measures taken, it came down. Average borrowing cost of the treasury. As you see in the graph, at one point in 1994, it went up 160%. And therefore, what was the government was borrowing from the market was not sufficient to pay the interest burden. And therefore, it was an economy borrowing from the public and collecting the revenue and paying back to those who lent the central government. As I said, this is an economy where the fiscal discipline was flying very high. Again, same graph in numbers. You see the interest rate, both coefficient of variation as well as the mean and also the exchange rate developments. The inflation rate, as I said, at one point it went up to the three digit numbers. And because of this high inflation environment, people, businessmen didn't know how to plan, how to act, how to invest. And therefore, growth rate was very erratic. We had a positive 5%, 6% growth, one year minus same amount next year. Under these circumstances, of course, the economy became very volatile. And therefore, neither the consumers nor the businessmen were able to see the future and behave accordingly. Again, same graph with the numbers, inflation and the GDP growth. Of course, under these circumstances, the current account deficit was always posed a problem in Turkey's history. It is only in those periods, years that Turkey had a negative growth, Turkey has a positive current account surplus. It is still the same problem today. There is a trade-off between Turkey's current account deficit and the growth rate. If Turkey wants to grow faster and higher, we have to have higher current account deficit. It is because the dependency of the Turkish export as well as the Turkish industrial production on the important content of the economic activity is too high. So all these developments led to a crisis in 2001. And before this IMF support stabilization program, of course, as I said at the end of 1999, we had an exchange rate-based stabilization program. The objective of the program was, of course, fighting the chronic inflation, stabilizing the economy, controlling the public debt. Through what means we were going to do, it was through a pre-announced crawl and peck system, monetary and fiscal discipline and structural reforms. But because of the huge ethics position in the banking system and the long-delayed measures in terms of the structural problems and also unsustainable current account deficit resulted in the full-fledged crisis in 2001. This is the end result of the crisis. As you see, Turkey's risk premium went up, Turkish currency depreciated. Then Turkey has come to the end of what can be done by fiscal expansion. We have to put our house in order and therefore we had a full-fledged banking crisis in 2001. With that crisis, of course, we initiated a reform program. At that time, there were three anchors for the Turkish economy. One was the EU accession program and the EU standards. And the other one was the IMF program with the December agreements and, of course, the Turkish own internal dynamics. With the new policy after the crisis, first of all, structural reforms have to be enacted. In this respect, public sector reform, financial sector reform, and on enhancing the role of the private sector. These were the aims of the three September agreements that Turkey signed with the IMF. And the fiscal policy aimed at a primary surplus of 6.5% on a yearly basis, which was very difficult to achieve. And building credibility, improving debt and composition, and on the monetary policy side of the central bank became independent. The law was amended in April 2001. And the central bank, given the task of the mandate of bringing down inflation and price stability as well as the financial stability. Therefore, out of these reforms that the December agreement with the IMF initiated, we aimed at single-digit inflation, debt reduction, and achieve the sustainable growth. In terms of banking restructuring, we had what was called the transition to the strong economy in May 2001. At that time, of course, the banking system was, as I said, very weak. Therefore, we had to close down about more than 20 banks. We set up what is called the bad bank, and they taken all the assets of these failing banks into this bad bank. And we managed their assets through that bank. And also, until 2001, in Turkey, banking regulation and supervision was in the hands of Turkish Treasury. And with this program, with the IMF initiative, we, in a sense, emulated the UK system. We separated the central bank functions and the banking regulation supervision, and we set up an independent body, and we authorized these licensing and all that. And with those set up, the deposit insurance fund was responsible for sorting out the failing banks. They overtaken the assets of the bad assets of these banks, and they resold it and tried to recoup the money that they spent from the owners of the banks. And this banking law was changed, and at the moment in Turkey, bank owners. And the general manager is responsible under the third degree of their relatives. If any credit is lost because of their credit examination and all that. In terms of monotheraples, as I said, the central bank's primary objective was the price stability, and the central bank became independent in April 2001. And the central bank aimed at first, increased its operational capacity, analyzing the incoming data, and putting a meaning on it, and acting accordingly. And therefore, for a certain period up until 2006, what we called was not open inflation targeting, but we prepared ourselves for open inflation targeting until 2001. Therefore, not only the inflation, the price stability, but also the financial stability become very important. Because if you don't have financial stability, then price stability does not mean much. And this is the on a time scale, what we did from 1989 to 2012. So with these policies implemented, what was the outcome? What is the outcome? Where we are at the moment? As you see from the graph, the public sector borrowing requirements percentage to the GDP has considerably come down. And therefore, public sector has made huge savings because of the primary surplus that was initiated by the IMF program. 6% of the GDP, 6% of the GDP every year we have to aim. And of course we have not been able to achieve the 6% primary surplus, but it was on average for the year from 2001 to 2010. It was about 5.7% as you see the development of the primary surplus. And also at the time before the crisis, government were borrowing on a short term and the percentages of the domestic issues, that instruments as well as the foreign currency delimited depths were not even distributed. Because of the high interest rates, government were borrowing from abroad if markets allowed it. And therefore the share of the domestic foreign currency in the domestic borrowing was high as you see on the right hand graph. Also the maturity was about 65 days, no more than two months, but from 2002 up until today, I think the maturity of the Turkish average debt stock has increased to around 16 months. Average cost of borrowing has come down. Because of the lower interest payments, government has a fiscal rule, fiscal rule in order to do things that it was not able to do before. Public debt stock, it was in 2002, it was 74% to the GDP, it is now around less than 40%, probably our fourth quarter GDP rate, growth rate has not been announced yet, it will be announced at the end of this month. Therefore we are expecting the 2012 debt to GDP ratio around 36.5%. With the medium term program, we are aiming at 31% debt to GDP ratio by the end of 2015. Again under the fixed exchange regime, of course the foreign exchange risk was on the public sector. When there is a run on the currency, government has to supply the needed foreign exchange, provided that the reserves are allowed to give the old required demand, to meet the required demand. But after the crisis Turkey left the fixed exchange regime, now we are fully fledged, floating exchange regime, under this regime of course the exchange risk is on the market. And therefore the composition of the central government debt has changed, and the domestic debt because of the contained inflation and the lower interest rates enabled the government to borrow more from the domestic market rather than from international markets. Therefore the composition changed in favor of domestic currency. Again inflation rate, as I said it was at one point in 1994 went up to three digit numbers, and from 1983 to 1994 average was 62%, 95% to 2071%, 2002 and 2011, it is 11.2%. And the latest figures is around 6.32%, and government and the central bank together announces three year inflation target, and the targets as you see in the graph 5.3% this year and 5% and 5% in 2014 and 2015. Because of the inflation has been contained and was under control, accordingly interest rate has come down. At the moment central bank's policy rate is below 5%, and at the market but policy rate is 5.25%, the interest rate on the two year government loan is around 6% at the moment. Benchmark interest rate. Of course with this macroeconomic stability, lower inflation, lower interest rates, elimination of foreign exchange risk and all that has led to bring a situation where the economic agents were able to see their future in a better way and therefore improvement in the economic activity led to a higher rate growth rate. And average growth rate as you see from 2002 up until the crisis, the international crisis, the Lehman brothers and all that in 2008, 7.2%. And it has come down since then 2.5%, and medium term program at the moment aims at 4% growth this year and 5% the year after. This of course, this situation has that improvement in the GDP per capita and it was 3.4,000 at the end of 2002, it is now around 13,000. Of course this situation has led to an improvement in the employment conditions but in Turkey there is an argument that some people claim that all of these developments did not create an employment because this growth was without any employment. I think this is not correct. Turkey has created about 4,000 jobs after 4 million jobs but because of the improvement in the economic conditions, labour force participation has also increased. Labour force participation rate was around 45%, it is now over 50% and mainly the extra participation comes from the female section of the working force. As for the income distribution, the equity purposes, there is a slight improvement in terms of general coefficient. This means that the distribution of income is getting better but there are pockets of sections in the society who are underprivileged. Therefore, this does not explain everything in the economy but in order to make international comparisons, we have to give this to international audience so that where the Turkish equity, that is income distribution, where was it and where has it come from. Of course this reduction in the debt level and also the government borrowing from the market has enabled the private sector to have more of the resources and therefore the main source of the Turkish growth has been due to the private sector. It is not the government sector, it is the private sector that growth and also because more resources left to the private sector have reduced inflation, reduced interest rates and the less borrowing requirement by the government. Of course this situation has led to a situation where the credit expansion has increased. One of the things that the problems that the Turkish is facing now is overheating of the economy. Why this has happened is because that first of all the indebtedness of the Turkish households is very low. It is around at the beginning of 2006 and 2007 it was around 6% of the GDP. It is now 18% of the GDP. This number as you know in the East European countries around 33-35% in Europe is 66-65% in the United States even higher. And the second element is the interest rate because of the control of inflation has come down from around 16.75% to what it is now, less than 5%. And therefore it enabled all because of the low indebtedness, low interest rates and the high capital adequacy ratio of the banking system. Every banking capital adequacy ratio in Turkey as defined by the BIS and the banking committee is around 18% at the moment. And the Turkish authorities does not allow the banks to go below 12%. The legal rate as you know is 8%. They have the right to go below 12% but if they go they are not fine. But if they come to the authorities to open a branch, authorities does not allow them to open the branch. And therefore the minimum flow for the banking system's capital adequacy ratio is 12% but actual number is close to 18%. At one time it went over 20%. There are both these three elements. The low indebtedness, low interest rates and the ability of the banking system to extend the credit has caused Turkish economy the growth of the credit market credit. And this credit has hit enough the economy and therefore it created some concerns for the financial stability. And at one point last year the current account deficit was close to 10% of the GDP. Of course this created a concern for financial stability and the crisis. And therefore authorities enacted a policy whereby they being able to reduce the current account deficit from around 10% of the GDP to 6.5% at the moment. Of course this was done at the cost of lower growth rate. Therefore the problem that Turkey is facing at the moment is a trade-off between a sustainable current account and a higher growth rate. If Turkey wants to have a higher growth rate as we had in 2010 and 2011 which was 9.2% in 2010, 8.5% in 2011 but the current account went up to 10%. Therefore there is a strong trade-off between current account deficit as well as the growth rate. Therefore we have to find an appropriate level where we can have the growth rate which is closer or above the potential growth rate of the economy and a current account deficit which does not create a crisis environment. This is the problem that Turkey is facing at the moment for policymakers. As I said this NPLs and the capitalistic ratios in the graph which I have already said. Of course one of the things that Turkey suffered during the high inflationary and high interest data environment dollarization because the people lost confidence in the domestic currency. If you put 100 liras in the pocket of your citizens at the beginning of the year and because of the 70-80% inflation at the end of the year purchasing power of 100 liras comes to 30 liras. No one will accept use your own currency and therefore Turkish economy highly dollarized before the crisis. At one point the deposit in the banking system went up to 65-66%. As you see in the graph there is still an important level of dollarization in the economy. This is because if the society lives 35-40 years in a high inflationary environment it is not easy to erase all memories from the mind of the people. And still people in terms of both liability dollarization as well as the asset dollarization there is a dollarization in the Turkish economy. In terms of asset dollarization it is mainly the households who keep some of their savings in the banking system. But in terms of liability dollarization it is the private sector who borrows from abroad. Therefore one of the things that Turkey has to watch in the future this dollarization by the private sector at the moment total debt of the private sector is 230 billion dollars. So any movement in the affixed rate may adversely affect them. As you see the current account deficit the history from 2001 and also projection into the 2015 it was close to 10% in 2011 9.7% it is now gradually coming down. But of course at the cost of lower economic growth. Why Turkey experiencing high current account deficit is because of the import content dependency of the Turkish manufacturing industry. At one point there was a numbers circulating in the system that in order to manufacture one unit of goods. I think the manufacturer has to import no less than 80, 0.80% imported goods. Therefore this high dependency on the imported intermediate goods as well as the raw materials causes the Turkish current account deficit. But the bulk of it is energy consumption, energy import. Therefore if we look at the current account deficit and trade balance including energy and excluding energy of course picture improves a lot without the energy but Turkey has to import this. Therefore there are many energy saving measures that is Turkish economy and the policy makers has to undertake in the future to come. Again 12 month cumulative US dollar current account deficit with portal current account as well as the current account without energy. In the past the main trading partner of Turkey used to be it is still the same the European Union. In 2008 56% of the Turkish export were the European markets and the bulk of it to the EU zone. But with the start of the problems and the collapse of the Lehman brothers and all that at the moment our export to European markets is less than 40%. But we have been able to diversify our export markets as well as the goods that we export. And therefore one of the positive impacts of this crisis that the pressure that it put on Turkey is to diversify it is export markets from the north of Caucasian, Georgia, Azerbaijan through the eastern part of the country to the north Africa, Gulf countries and as well as any part of the world. And therefore this one of the benefits of the crisis that the Turkey has caught. Of course international reserves is very important and the Turkish international reserves because of the inflow of foreign currency because of the improved conditions at home which causes sometimes problem because of excess supply of foreign currency leading to appreciation. Appreciation of the currency it is a problem and Turkey has to take it in consideration it is one of the pillars that the Turkey policy makers has to take this into consideration but the positive side of this enabled Turkey to build up its reserves as you see in the graph. This is the risk premium of Turkey in the international markets. At the time credit default supports were above 1000 for the number of European countries, Turkey's credit defaults was around 280, 290 and it is still the same as you see in the graph. Exchange rate is stabilized volatility has become less and less and the credit rating. Because of these developments the credit agency one of the credit agencies has upgraded Turkey's at the moment it is triple B minus and we are expecting other rating agencies to do the same but they have some reservations. It is because of this fact that the dollarization of the private sector is a little bit higher this as it puts some hesitation on the some of the rating agencies. All of these developments of course has led to improvement in the Turkish competitiveness in international context as you see in the graph it is a much better position at the moment. Of course where we go from here of course all of this economic activity is to improve the living conditions of these people at large and being about a sustainable growth and so that the per capita income increases. And in terms of our accession and the relation to the European average income of course we are has made great improvement in terms of growth rate itself. But if you compare this to the per capita income increase in other countries relative position of the Turkey has improved it is as you see in the graph it was about 35% of the at the beginning of 2003 it is now about 57%. Of course there are long way to go in order to catch up to 100% average GDP per capita income in the Eurozone. Of course these measures that taken and the improvements in the public management of the economy has brought about the situation where public debt levels has become less and less and manageable well below the master criteria. Of course there are things that should be done in order to catch up this income gap in order to close the income gap. The Turkish authorities has put forward not it is a plans structured and the programmed measures but have idealized a situation at the 100 years of Turkish republic in 2023. Where the aim was is to have an economy of 2 trillion dollars which will bring the Turkey to 10th largest economy in the world and to have a trade volume more than 1 trillion dollars of which around more than 500 billion dollars will be Turkish exports. And to have per capita income around 25% sorry 25,000 dollars and bring down the unemployment rate from the current level of around 9.2% to 5.5%. Can it be achieved? Of course it is difficult. In order to have a 2 trillion dollar economy from now to until 2023 which is about 11 years we have to grow no less than 5 to 5% without any interruption. In order to do it I think the Turkish Turkey has to invest at least 25% of its GDP as an investment. But in order to make 25% of the GDP as an investment you have to have financing of it. How are you going to finance it by savings? Saving are very low in Turkey at the moment because of the young generation they are spending more rather than saving. Because of this demographic structure at the moment saving ratio to the GDP is around 12 to 14%. Therefore the gap between the investment that Turkey has made and the financing requirement is rather large and it gives a current account deficit. Therefore these are the measures in order to close the gap between investment and the savings and through structural changes. These structural changes of course Turkish authorities are working hard on it. Basically I think we have to do number one in this respect is the education and making the Turkish working population more secure than ever before increase the productivity. In the past because of this religious education controversy and all that I think the vocational education suffered a lot in Turkey. I think this should be overcome and the government has initiated a new educational program making the education compulsory for 12 years. It is now 8 years but what will result it is an open question and the hotly being debated at the moment. And with these things I end my presentation if there is any questions I am ready to answer.