TURKEY - The Economic Base.

According to official statistics, Turkey's economy in 2003 expanded by 5.8% in 2003. The Central Bank says it will grow by 5% more this year. The annual inflation rate last month stood at 11.8%. This compares with 14.3% in February, 30% in June last year, and about 70% in 2002. The last time Turkey had single-digit inflation was in September 1972.

The easing of inflation has led the Central Bank to cut interest rates twice this year, from 26% to 22%. In short, Turkey's economy is on track to meet economic requirements for European Union accession; but some of the EU powers have doubts about this (see News Service of this week's APS Diplomat Package).

The impressive GDP growth last year came despite fallout from the US-led war in Iraq, devastating suicide bombs in late 2003 and internal political tensions. Speaking on the sidelines of the World Economic Forum (WEF) early this year, Turkey's Minister of State for the Economy, Ali Babacan, said the country's economy was improving in a way that few had forecast.

The Minister said: "The impact of the first Gulf war (in early 1991) was so bad on our country that many expected a similar experience this time (in 2003). Instead our economy quickly revived."

Babacan's remarks came as an IMF delegation visiting Ankara completed the first part of an economic review to determine the country's eligibility for a $500m loan that was part of the IMF's $19 bn package for the country. The IMF then announced that Ankara had agreed to cut discretionary public spending by 10% this year to cover increases in the minimum wage and pensions.

The first Gulf war in 1991 had reduced Turkey's GDP growth to less than 1%, sent inflation shooting past 80%, significantly increased real interest rates and prompted citizens to withdraw more than 10% of bank deposits. But now, Turkey's economic growth is the fastest in the OECD world.

Interest rates have dropped considerably over the past year. The risk premium on the government's debt has come down significantly. More recently, Babacan was quoted as saying: "A continuation of (GDP) growth through the five-year term of the current government in 2007 would enable Turkey to exceed its economic requirements for entering the European Union. The message to Europe is that Turkey will exceed all economic expectations to become a member".

The predominantly Muslim country is eager to join the EU and has carried out sweeping political changes over the past two years as it tries to meet EU standards. Ankara has abolished the death penalty and has granted greater cultural rights to Kurds, who are not recognised as an official minority.

Integration with Europe will be important for the country's development on both the economic and political fronts, Babacan said, adding: "When we asked people three years ago why they wanted to join Europe, they cited economic reasons. Now the reasons they give relate to human rights and freedoms... Failure to integrate Turkey's economy with the surrounding region and with Europe will create problems of stability and security".

While less than 5% of Turkey's external trade involves the neighbouring markets of the Middle East, more than 50% of the country's trade involves Europe. Babacan says: "This has implications that go well beyond economics".

The government has implemented much of the legal reforms required by the EU. The other two challenges ahead are reducing public debt and integrating the informal economy. Babacan said during the WEF in early 2004: "We must change people's attitudes, old habits and long-held habits about the law. The informal economy reduces our tax collection base".

The government is trying to eliminate long-standing bureaucratic bottlenecks to the economy. Babacan said: "We used to have 19 steps required to set up a company in Turkey. Now there are only three steps and they can be finished in a day". While such steps might be perceived as aimed at helping foreign investors, Babacan said domestic companies had shown great enthusiasm at the changes.