Overview

Turkey is one of the largest upper middle-income partners of the World Bank Group (WBG).  With a Gross Domestic Product (GDP) of $ 799.54 billion, Turkey is the 17th largest economy in the world. In less than a decade, per capita income in the country has nearly tripled and now exceeds $10, 500. Turkey is a member of the OECD and the G20, and an increasingly important donor to bilateral Official Development Assistance (ODA).

Turkey’s rising prosperity has been shared. Between 2002 and 2012, the consumption of the bottom 40 percent increased at around the same rate as the national average. Over the same period, extreme poverty fell from 13 to 4.5 percent and moderate poverty fell from 44 to 21 percent, while access to health, education, and municipal services vastly improved for the less well-off. Since the global financial crisis, Turkey has created some 6.3 million jobs, although increases in the labor force, including through a rise in the participation of women, has kept unemployment at around 10 percent. Turkey’s achievements and future potential have been a source of inspiration for other emerging markets, and the World Bank has completed a report on Turkey’s Transitions describing the country’s experiences in order to share them with interested developing countries.

The EU accession process has been a significant anchor for reforms in Turkey, but progress has slowed in recent years. The EU is Turkey’s largest economic partner, accounting for around 40 percent of Turkish trade. Turkey has benefited significantly from deepening integration with the EU through the growing sophistication of both exports and imports and access to financing. Turkey became a candidate for full EU membership at the Helsinki summit in 1999. Accession negotiations began in October 2005, but progress has slowed in recent years in the face of a number of political obstacles (including relations with Cyprus). Both sides are making efforts to regain momentum, with a focus on economic cooperation, in particular the modernization of the Customs Union and energy relations. 

Since 2012, however, growth has moderated. In 2013–14 and 2015, election-related uncertainties, geopolitical developments, and concerns over the Government’s handling of corruption allegations dampened confidence and weakened private demand. After growing 4.2 percent in 2013, the economy slowed to 2.9 percent in 2014. Moreover, Turkey has been vulnerable to changes in investor sentiment and, together with other emerging markets, has experienced significant currency and financial market volatility since mid-2013. Moderate growth and a weaker lira narrowed the current account deficit (CAD) to 5.7 percent of GDP in 2014 from close to 10 percent in 2011.

Growth is estimated to have increased to 4.2 percent in 2015, much higher than expected. Despite depressed consumer confidence and intensified election uncertainty, private consumption became the main driver of growth, thanks to real wage growth, large decline in oil prices, the wealth effect from currency depreciation, and the influx of refugees largely from Syria. Government spending continued to support growth, while private investment remained depressed amid a weakening business climate. Exports slowed sharply due to slower demand from EU, economic crisis in Russia, and geopolitical developments in MENA. However, real exchange rate depreciation triggered a shift from foreign goods to domestic goods, which led to a decline in imports and a positive contribution of net exports to growth in 2015.

External adjustment continued thanks to lower energy prices. The gold-adjusted current account deficit narrowed by 0.3 pps to 5.0 percent of GDP in 2015, thanks to the large fall in energy prices. However, the improvement was much smaller than the savings from lower energy imports because the core current account deficit actually widened. This deterioration in fundamentals highlights difficulties in strengthening exports, and that external adjustment is driven by cyclical factors instead of structural reforms. On the financing side, inflows to Turkey slowed sharply, as short-term inflows dried-up due to domestic political uncertainty and a deterioration in the global risk appetite, leading to a decline in Central Bank reserve assets.

Currency depreciation stoked inflation in 2015. FX pass-through on prices for transport, clothing, furnishings, and recreation brought 12-month inflation up to 9.6 percent by January 2016, significantly above the Central Bank`s target band of 3-7 percent.

November 1 election created much-needed clarity. The Justice and Development Party (AK Party) regained the majority in the November 1 parliamentary elections, which mostly resolved political uncertainty. However, attempts to bolster AK Party’s support in parliament and push for constitutional changes could prove a major distraction in the near future.

A recovery in imports is likely to slow growth to 3.5 percent in 2016 despite sustained domestic demand momentum. We expect private consumption to continue to be the main driver of growth in 2016, thanks to the 30 percent rise in the minimum wage introduced in January. Public spending is expected to contribute positively, albeit at a slower rate. Continued demand pressures are likely to make disinflation a slow process, and inflation is projected to be around 8.5 percent by end-2016. Lira depreciation has strained balance sheets and raised the debt service burdens of the corporate sector, which has large foreign exchange exposures. These weigh heavily on private investment, along with a widespread perception of deteriorating institutional quality and business climate. On the external side, firming activity in the EU is helping exports, but net exports should turn negative as imports recover. Russian sanctions and disappointing global growth are likely to reduce export growth in 2016.  Moreover, low oil prices are expected to stabilize the current account deficit at around 4.6 percent of GDP in 2016.

To realize its underlying growth potential, Turkey needs to accelerate structural reforms and improve trust in its institutions. Turkey’s main assets include a young, dynamic population, a large domestic market, and a strategic location, combined with strong infrastructure and much improved public services. However, domestic and foreign investors remain deterred by the unpredictability and lack of transparency in the business climate and a lack of trust in key institutions. An increase in business investment and innovation as well as in education and skills is needed to boost productivity growth and create enough high-productivity jobs to accommodate Turkey’s rapidly growing labor force. The recently unveiled action plans for the 25 priority transformation projects of the 10th National Development Plan provide for an ambitious reform agenda, but the gap between policy announcements and implementation has widened in recent years and needs to be closed to regain investor confidence.

Last Updated: Apr 07, 2016

Turkey has been a member of the World Bank Group for more than 60 years, first joining in 1947.

The World Bank Group continues to support the government of Turkey in achieving its development goals through the implementation of a program that is highly focused on results, through lending and the provision of technical advisory services. Strategic areas of engagement include private sector development, public finances, energy, climate change, health, education, environmental management and municipal services.

The most recent Country Partnership Strategy (CPS) for Turkey 2012—2016 envisages financing levels of US$ 10 billion and the increased provision of analytical and advisory services, as well as new services and instruments, including fee-based services. This latest CPS has three main strategic objectives and pillars:

i) Enhanced Competiveness and Employment

ii)   Improved Equity and Public Services

iii)   Deepened Sustainable Development

The current CPS (FY12–16) has so far delivered financing of over US$9.2 billion during FY12/15. This includes US$3.8 billion from the International Bank for Reconstruction and Development (IBRD), US$4.4 billion from IFC, and US$982 million from the Multilateral Investment Guarantee Agency (MIGA).

Turkey is IBRD’s sixth-largest client by loans outstanding. The current portfolio is concentrated and strategically focused, with 11 investment projects and US$4.3 billion in net commitments.[1] The investment portfolio supports the energy sector (56 percent), financial and private sector development (13 percent), urban development (29 percent), and health (2 percent).

With a portfolio of around US$4.3 billion, Turkey represents the third-largest country exposure for IFC globally. In FY15, IFC had a third consecutive record year in Turkey, investing US$1.8 billion in projects to support sustainable energy and infrastructure development, improve municipal services, develop PPPs, promote local capital markets, and help Turkish companies increase competitiveness and impact. IFC also advised businesses and government bodies on initiatives to encourage private sector growth.

Last Updated: Apr 07, 2016

Turkey’s development achievements are impressive, and the country is on track to meet its Millennium Development Goals. The World Bank Group has supported these achievements in selected areas, such as competitiveness, employment, health, education, and the energy sector.

Enhancing Competitiveness and Employment

Turkey is positioned as a typical middle-income country in global competitiveness rankings. It occupies 45th place in the 2014–15 World Economic Forum’s Global Competitiveness Index and is ranked 55th in the World Bank’s Doing Business rankings. Net foreign direct investment (FDI) inflows averaged less than 2 percent of GDP between 2002 and 2014, below China, Russia, Brazil, Mexico, Poland, Malaysia, and other upper-middle-income countries in Europe and Latin America.

Key achievements supported by the World Bank include:

In addition to financing through lines of credit, Bank support has focused on policies to improve the investment climate; boost SME performance; promote innovation; encourage the start-up of knowledge-based companies; facilitate the commercialization of public research and development (R&D); and enable technology adoption. Bank analytical work has also included a report on Competition Policies, with a focus on professional services, and technical notes on Industrial Land Allocation and Secured Transactions that address specific weaknesses identified in the Doing Business report.

Labor Markets

A major medium-term challenge is to boost the participation of youth and women in the labor force. Despite notable success in job creation in recent years, almost half of the Turkish working-age population (WAP) does not enter the labor market, mostly due to the low labor force participation (LFP) rate of women, which is around 30 percent, less than half the OECD average of 65 percent. About 35 percent of youth, mostly women, are neither working nor attending school—the highest share of inactive youth among OECD countries Labor market rigidity and the high cost of labor are important constraints to job creation in Turkey. Minimum wages are high (the ratio of the minimum/median wage is 69 percent, the highest in the OECD), and Turkey has a very generous severance payment system. The Government has prioritized job creation in the 10th National Development Plan and has recently approved the National Employment Strategy.

Key World Bank contributions include:

The ongoing Shared Prosperity DPL series supports reform of Turkey’s labor market policies and programs. Other work includes technical advice and studies related to: managing labor markets through the economic cycle; improving labor market flexibility and worker protection; activating and strengthening public employment services and Active Labor Market Programs (ALMPs); and defining and creating good jobs in Turkey. Enhancing job opportunities for women is a major focus of the current program. In this regard, the Bank has been implementing a Swedish International Development Cooperation Agency (SIDA)-funded project to support the increased access of women to economic opportunities in Turkey, together with the Ministry of Family and Social Policies.

Poverty and Social Protection

With rapid economic growth after the 2001 crisis, Turkey’s social outcomes have improved. Poverty decreased from 44 percent in 2002 to 22 percent in 2012. Large inequalities persist, however, and social mobility is still limited. Turkey’s Human Development Index (HDI) increased from 0.671 in 2005 to 0.759 in 2013, putting Turkey in the high human development group. However, Turkey’s inequality-adjusted Human Development Index (IHDI)—which adjusts for inequalities in health, education, and income measures—is 16 percent lower than its nominal HDI. The Syrian refugee crisis, now entering its fourth year, has placed significant strain on the Turkish Government and Turkish host communities.

Key World Bank contributions include:

A series of World Bank policy-based loans supported the implementation of Turkey’s social security reforms. A study of Turkey’s social assistance system is being undertaken. Technical assistance is ongoing to help ISKUR improve the targeting and effectiveness of its employment support and activation services, and the World Bank is working with the Ministry of Development on subnational poverty dynamics. In addition, the World Bank is starting work with the Government of Turkey to undertake analysis on the identification and quantification of the impact of the Syrian refugee crisis on host communities.

Education

Turkey has made significant progress in increasing access to schools. As of 2014–15, Turkey had achieved almost universal primary school enrollment at 96.3 percent, with secondary enrollment at 79.4 percent. The Government is actively seeking to expand secondary school enrollment to comply with the new “4+4+4” law on education, which mandates compulsory education up to grade 12. The gender access gap has disappeared in primary education and narrowed significantly in secondary education. In parallel with rising enrollment rates, Turkey’s average PISA performance scores have improved significantly, and inequality in student performance has declined. Key World Bank contributions include:

Analytical reports on education quality have been prepared in consultation with the Turkish Government. Policy dialogue has focused on school selection, financing, and autonomy, and more recently on higher education financing and quality assurance. Further work on higher education governance is also planned, a topic urgently in need of attention.

Health Care

Turkey’s Health Transformation Program is an inspiration and example to others of how poor health performance can be turned around quickly. In 2003, the Government introduced the Health Transformation Program (HTP) to reform the way health care was financed, delivered, organized, and managed. Turkey has achieved near universal health insurance coverage, increasing financial protection and improving equity in access to health care nationwide. Going forward, the key challenge will be to keep costs under control as demand for health care increases, the population ages, and new technologies are introduced. Total health expenditure as a share of GDP has been increasing steadily since 2003, reaching 6.7 percent in 2011, which is on par with countries with similar income levels. As access has widened, the Government has focused attention on efficiency improvements and cost control, while maintaining high-quality services for the entire population.

Key World Bank contributions include:

Turkey’s HTP was supported by the provision of two Adaptable Program Loans (APLs). Studies include a joint OECD-World Bank report on health system performance that benchmarked Turkey globally and brought international policy experience to bear on the system. A health sector integrated fiduciary assessment has also been conducted. A new investment lending operation to support Turkey’s focus on strengthening public health and primary care, increasing the efficiency of hospital management, and enhancing the evidence-based policy-making capacity of the Ministry of Health was approved by the Board in September 2015.

Energy and Climate Change

Turkey’s energy sector reforms have attracted significant private investment and ensured, through a variety of interlinked measures, that capacity has kept pace with the economy’s needs. These measures include legislation regarding electricity, gas, renewable energy, and energy efficiency; the establishment of an energy sector regulatory authority; energy price reform; the creation of a functional electricity market and the large-scale introduction of natural gas; the restructuring of state-owned energy enterprises; and large-scale private sector participation through privatization and new investment. A legal, regulatory, pricing, and institutional set-up to promote energy efficiency has been established, including a comprehensive set of energy-efficiency regulations. Climate change is a threat to Turkey and the Government is stepping up its engagement internationally and domestically. Turkey became a party to the Kyoto Protocol in 2009. A National Climate Change Strategy was approved in 2010, and a National Climate Change Action Plan was issued in July 2011.

Key World Bank contributions include:

The energy sector is a key area of focus. The World Bank is supporting renewable energy development, increased energy efficiency, improved electricity and gas supply security, the financial viability of the electricity sector, and greater private sector investment in the energy arena. Turkey was the first country to benefit from the Clean Technology Fund (CTF). The Environmental Sustainability and Energy Sector Development Policy Loan (ESES DPL) series[2] has played a central role in supporting the energy sector, enhancing private sector clean technology investments and integrating climate change considerations in policies and programs. An EU IPA-funded technical assistance operation to deepen reforms of the power and gas markets, support energy efficiency, and promote renewable energy integration is under implementation.

Environmental Management and Municipal Services

In the context of harmonization with EU standards, Turkey is developing public policies and incentives that support sustainable environmental management. The demand for quality urban environmental management and municipal services is expected to continue to rise in Turkey. Turkey is experiencing rapid urbanization, with about 72 percent of Turkey’s population living in urban areas, amid expectations that this will increase to more than 80 percent by 2030.

Key World Bank contributions include:

Technical assistance supported the Government’s preparation of a National Watershed Management Strategy, and a cumulative environmental impact assessment was delivered. Two new projects extend this engagement. The Sustainable Cities program expands the existing Municipal Services Project and aims to provide financing to municipalities for the implementation of sustainable development plans and investments, including the high-priority areas of urban transport and energy efficiency. The Integrated Basin Management Project will support the implementation of river basin management plans and pilot investments in two river basins, focusing on the coordination of various public institutions and different water users. Additionally, the Bank has helped upgrade Turkey’s land registration and cadastre system and supported the introduction of new land valuation pilots.

Disaster Prevention and Management

Since the 1999 earthquake, Istanbul has emerged as an internationally noted example of good practices in disaster risk mitigation. Istanbul is implementing a Seismic Risk Mitigation and Emergency Preparedness Project (ISMEP) that is strengthening critical public facilities for earthquake resistance while supporting measures for enforcing building codes and land use regulations.

Key World Bank contributions include:

The World Bank supports the ISMEP, including the retrofitting or reconstruction of public buildings and historical monuments. The institutional support provided to improve overall disaster risk-management capacity in Istanbul has now been tested and used in various emergency situations of heavy snow and floods.

Last Updated: Apr 07, 2016


LENDING

Turkey: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments