CHAPTER 24 FINANCIAL AND MONETARY SYSTEM The country's financial system shows the results of an accelerating process of modernization which was affecting the entire economy during the 1960's. The government was committed to a comprehensive long-range development plan, emphasizing a mixed economy with large participation by the state, and strict controls over the private sector. Efforts to achieve substantial economic growth, particularly to industrialize, caused strong inflationary pressures and a strain on the country's international reserve position during the late 1960's, which restrictive fiscal and monetary policies, including programs to increase government revenue, and strengthened controls over credit, liquidity, and profit margins, were only partially successful in counteracting. As a result of the drive toward modernization since World War II, practically all exchanges of goods and services take place for money. There is very little barter and although the individual villagers do not command any great sums, even the more remote rural economy is monetized. An expanded and modernized banking system consisting of a network of private commercial banks, and a number of large state-owned institutions that finance, own or direct the government's industrial enterprises, provide the framework for the money economy and play the leading role in financial affairs (see ch. 20, Industry). As the controlling agency for the banking structure, the Central Bank of Turkey performs the usual functions of a central bank, including acting as the government's fiscal agent, supervising the country's banking system, and carrying out the government's monetary policy. Both the public and private banks in the banking system not only share the task of financing most of the country's current production and trade, but comprise the mechanism through which investment for development is accomplished. Domestic financial resources, however, are limited because of both the relatively underdeveloped state of the economy and lingering public suspicion of banks due to unfamiliarity and conservatism, particularly on the part of the rural people. Many of those who are able to save prefer either to hoard or put their money into real estate. Consequently, the banking system as a whole in the late 1960's was having difficulties in mobilizing savings, and the government, among other measures, had adopted a system of forced saving through payroll deductions for compulsory government bond purchases. Turkey joined the International Monetary Fund (IMF) when it was founded in 1948 and established for the Turkish lira (LT) an official par value of LT 2.80 per dollar. A devaluation to LT 9.00 per dollar, on recommendation of the IMF in mid-1960, brought the lira's official value more into line with its real value, which eased pressure on the country's foreign exchange reserves and helped to brake domestic inflation (see ch. 23, Foreign Economic Relations). Nevertheless, domestic credit and the money supply continued to increase, but at less than half the rate for the decade of the 1950's. These increases were accompanied by a rise in the cost of living (computed for Istanbul) at an average rate of some 5 percent per year. To command the investment funds necessary to sustain the momentum of development, and to finance the operations of the country's expanding social and economic infrastructure, the government's policy in the late 1960's was to depend on official loans from foreign sources and on domestic credit to supplement the normal revenue. Fiscal policy also included a program for reform of the tax structure and collection process in order to increase revenues and eliminate inequities, and a campaign to make the state-owned business enterprises more efficient and self-sufficient in terms of development financing. The government's annual budgets showed continuing deficits during the 1960's and by the end of 1967 the public debt, both foreign and domestic totalled about LT 36 billion -up 250 percent since 1961. BUDGETARY PROCESS The major instrument of public finance is the national budget which specifies both the expenditures and revenues of the government and is operative for the fiscal year which begins with March and ends on the last day of February. It has two parts—an ordinary or general budget and an annexed budget (see table 30). The ordinary budget which represents the largest part of the government's spending allocates funds for administrative activities and the operations of the various ministries. The annexed budget finances certain state institutions which have special status. Included among these are universities, religious foundations, highways and waterworks, forestry and others. As a first step in preparing the budget, the ministries and the annexed budget agencies submit their requests for funds for the Table 30. Turkey's Proposed Budget for 1968 and Approved Budget for 1967 (in millions of Turkish liras 1) 2 Includes grants-in-aid from the Treasury to the annexed budgets. 8 To avoid double counting, grants-in-aid to annexed budgets are deducted from the totals of the annexed budgets. Source: Adapted from Union of Chambers of Commerce, Industry and Commodity Exchanges of Turkey, Turkish Economic Review, VIII, Nos. 8 and 9, November-December 1967. coming fiscal year to the Ministry of Finance. These initial estimates are reviewed to see if they comply with the targets and objectives set forth in the annual development programs which are published yearly by the State Planning Organization to implement the 5-year plan. A draft of the proposed budget is then prepared and submitted to the Joint Budget and Plan Committee of the Grand National Assembly at least 3 months prior to the start of the new fiscal year. After a period of no more than 2 months the budget is presented to the Senate. Generally it is accompanied by a draft of a budget law which contains proposed changes in tax and revenue collections and administrative spending as well as recommendations concerning any borrowing that may be necessary to implement the proposed budget. The Senate has 10 days to complete discussion and pass it on to the National Assembly, which is required to approve and enact the budget bill before the end of February so that it will come into force by the first of March, the start of the new fiscal year. Supplementary funds can be appropriated by special legislation throughout the year. In some years these additional allocations create a substantial modification of the original budget, while in other years they are relatively insignificant. At the close of each fiscal year, a final accounting record is prepared. This is the responsibility of the General-Directorate of Public Accounting of the Ministry of Finance who compares the approved revenue and expenditure estimates with those which actually occurred during the period under consideration. This tabulation, which generally takes several years, is filed with the Auditor-General of the National Assembly who examines it for discrepancies. Formal acceptance of the budget record is made by the National Assembly. Budgetary practices have been refined in recent years. Before 1963 the national budget allotments were separated into two major categories current expenditures and investment expenditures. Included among the latter were real estate purchases, expropriations, debt repayments, and capital accumulation, as these could not be considered expenditures on current account. Starting in 1964 the previous classification was expanded to present a more meaningful picture of the public accounts. Since then budgets have been drawn up to incorporate three types of spending-current expenditures (pertaining to purchases of consumer goods and services); investment expenditures (as defined in the annual programs); and capital formation and transfer payments (including both current and investment transfers). The various ministries in drawing up their individual budget proposals are required to comply with this new three-fold classification scheme. The major effects of this change have been greater efficiency in government operations and closer coordination between the budget estimates drafted by the National Assembly and those proposed in the development programs. Also, the new classification has caused a reduction in the number of ministerial subdivisions of the budget. The possibility of applying the same system to the classification of local administrations was under study in 1968. EXPENDITURES Since the early 1950's government spending has risen substantially, representing the ever-increasing role played by the state in the economic activity of the country. In 1950 appropriations for normal administrative and ministerial operations (the ordinary budget, exclusive of annexed agencies) totaled approximately LT 1.5 billion (LT 2.80 equaled US$1 until August 20, 1960; thereafter LT 9.00 equals US$1). By 1960 this figure had reached LT 7.3 billion. Government expenditures for 1968-69 were estimated to be nearly LT 21.5 billion (see table 31). Among the factors responsible for the rise in government expenditure is the increased cost of current government operations caused by higher prices and wages. Also, the state has had to expand and improve its provision of certain services such as education, health, transportation and communications in order to keep pace with growth of the population and the increasing tendency for people to migrate toward the urban centers (see ch. 4, Population and Labor Force). However, the two main factors contributing to the rise in government spending have been the maintenance of a large defense establishment and the country's ambitious development program which requires large sums of expenditure to be undertaken by the government. For example, the First 5Year Plan (1963-67) called for an average annual increase in government spending of slightly more than 9 percent. Conditional estimates for the period 1968-72 indicate a rise of nearly 10 percent per year. Analysis of the composition of the ordinary expenditures for 1968-69 reveals that the Ministry of Finance received the largest Table 31. Trend of Expenditures and Revenues of the General Budget of 1 Proposed budgets, exclusive of budgets of annexed agencies. 2 LT2.80 equaled US$1 until August 20, 1960; thereafter LT9 equal US$1. Includes normal and special revenue. Source: Adapted from Central Bank of Turkey, Monthly Bulletin, Nos. 4-5, May 15, 1967; and Union of Chambers of Commerce, Industry and |