Introduction

The Turkish Republic is a recent creation founded in 1923 by its first leader - Mustafa Kemal
Ataturk. President until his death, Atatürk linked Turkey's fate to the West through the adoption of a
modified Latin alphabet and a legal system based on the Swiss Fiscal Code and the Italian Criminal Codes.
Since the foundation of the Republic, the Turkish people have concentrated their efforts on the
transformation of their country into a pluralistic and secular democracy.

The Political System

Turkey is a Parliamentary Democracy, with a single chamber, the Grand National Assembly, which
is elected for up to five year terms. The President of the Republic is elected as head of state by
members of the Grand National Assembly.

The Regions

Turkey covers an area of 781,000 square kilometres. It is larger than most European countries and
exhibits an extremely diversified landscape which is characterised by seven distinct regions.

The major urban centres and the greatest economic development are found in the Marmara, Aegean
and Central Anatolia regions, which extend across central and north-western Turkey. The presence
of the major cities of Istanbul, Izmir, Bursa and Ankara within these regions has enabled them to
emerge as the predominant manufacturing and industrial districts. Additionally, there is a further
fast developing region in the South around Adana.

The Black Sea region is heavily forested and the landscape provides ideal conditions for the
cultivation of tea, nuts, tobacco and the processing of timber. In addition, several large ports create a vital
link for transit trade to Iran, the Russian Federation and the south-western members of the
Commonwealth of Independent States.

Rugged mountains and barren plateaus scatter Turkey's eastern and south-eastern landscape.
Agriculture is the dominant means of livelihood, although productivity and returns remain low because of
scarce population, insufficient modern machinery and the use of traditional farming techniques.

The Mediterranean region along the south-western coast of Turkey thrives on tourism. With all the
warmth and charm of the Mediterranean, its shores exhibit a wealth of astounding beauty and contain
some of the last unspoiled areas of Southern Europe. The land is well populated and intensively
cultivated.

Population, Language and Religion

Turkey's population growth rate is 2.2% and its current population is approximately 61 million.
Present trends indicate a fall in population growth rate to 1.9% and a peak population of some 80 million
after 2010. This would still give Turkey one of the largest population in the Middle East or Western
Europe. The population is heavily concentrated in the urban areas and migration from rural areas to
the cities is continuing. The cities not only offer better employment opportunities, but also provide
educational, cultural and health services.

The local civilian work force is 20.8 million. The young Turkish workforce (with 70% of the
population below the age of 35) is dynamic and hard-working. Turkish people are fast
learners, determined, focused and trainable by the foreign investor.

The official language is Turkish. However, many Turkish businessmen speak and conduct
transactions in English. French and German are also widely spoken. Islam is the dominant religion although
Turkey is a secular state. The Islamic religion is intertwined with Turkey's commitment towards a free
enterprise system and a democratic government emulating those of the Western world.

The Economy

In the 1980's, through a series of reforms, Turkey abolished its barriers to international trade,
opening the doors for foreign investors and multinationals. The government initiated outward growth
strategies aimed at achieving increased exports, sustainable growth and favourable medium-term balance of payments in a drive towards greater economic competition and stabilizations.

The current Government has set out the following policy goals:

• Trade and Financial Liberalisation

• Privatisation

• Export encouragement

• Infrastructure Development

• Promotion of Foreign Investment

• Entry into the European community as a full status member
(following Customs Union which was effective from 1 January 1996).

Other steps have included a more realistic exchange rate policy and a new banking act allowing
positive interest rates and aiding in the liberalisation of current account transactions. Together, these
changes have reversed the outward flow of capital and subsequently Turkey's average growth rate has,
apart from 1991 which was affected by the Gulf War, been high in comparison to other countries.

Inflation and an increasing government deficit have accompanied the impressive expansion.
Nevertheless, these growth related problems should not obscure the less frequently publicised successes in achieving substantial growth. Tourism revenues reached US$ 4 billion during 1993 and exports have
constantly increased. In 1994-1995 growth will slow down as Turkey confronts more directly some
of the problems associated with the high growth of the 1980's, but the economy is expected to pick
up again towards the last quarter of 1995.

The following chart depicts actual growth rates for GNP, GDP and various sectors within the
economy over the period 1990-1993.

Inflation & Foreign Debt

Inflation is, perhaps, Turkey's most serious economic problem, with both retail and wholesale prices
currently rising at more than 100% over previous years' levels. These high rates of inflation require
companies to maintain systems which permit management accounts to be prepared using inflation
techniques. The information included in financial statements on a historical cost basis in an inflationary
environment cannot present fairly the financial position of companies without adjustment, in particular to
the cost of fixed assets and cost of trading activities and finance. Responses to this need have been
International Accounting Standard 29 (IAS 29) issued by the International Accounting Standards
Committee and Statement of Financial Accounting Standards No. 52 (SFAS 52).

During the past 5 years Turkey's external debt has risen to $ 66 billion. The yearly increase is shown
below:

Debt principal repayments were 50% of exports in 1992 and 43% in 1993.

The Turkish government, in an effort to reduce foreign debt and inflation, introduced in early 1994,
an austerity measures package. The aims of this package were to decrease inflation, to stabilise the
Turkish currency, to encourage exports and accelerate privatisation. The government has also planned
to decrease public investments in the short term and to place limits on civil service salaries. Other
stabilisation measures are also being discussed with the International Monetary fund and the World
Bank. The steps that are indicative of Turkey's commitment to become a prosperous, developed
economy.

Privatisation

The privatisation programme in Turkey was started in the mid-1980's as part of the transition to a
full market economy. The plans for privatisation of State Economic Enterprises (SEE's) have faced
difficulties, mainly because of the reluctance of some to accept the need for large-scale personnel
reductions and the closing down of inefficient production units. Because of delay in their privatisation, the
SEE's have remained a major cause of the current economic imbalance and, in particular, the budget
deficit. The current government has, for this reason, concentrated on developing and executing the
nation's privatisation programme. The programme aims to:

• promote and develop the existing Capital Markets

• aid in the efficient allocation of resources

• increase competition in the economy

• ease the financial burden on the state

• contribute to the reduction of public deficits

• allow the state to concentrate on large infrastructure improvements which will
create an environment for free enterprise to operate successfully

According to budgets prepared by the Public Participation Administration (PPA), the government
body in charge of privatisation, approximately US$ 1.7 billion is expected in privatisation income for
1994. Over the next 4 years, the PPA aims to privatise a considerable portion of the state sector and
generate more than US$ 10 billion.

So far, only 10% of the State Economic Enterprises have been transferred to the PPA for
privatisation. The sectors in which privatisation has taken place, or is in progress are automotive, cement,
animal feed, meat, fish and dairy products, and mining sectors. The sectors being prepared for
privatisation in the future are the state operated iron and steel plans, the telecommunications, electricity
generation and distribution, petrochemicals, oil refining and the transport and distribution sectors including the state owned natural airline.

Foreign Trade

Growth in foreign trade since the adoption of an open-door policy, has been substantial. Imports
and exports have become a keystone in the economic development of the country. Turkey's major
trading partners include the European Union countries (headed by Germany), the U.S., the Islamic
countries, Eastern Europe and the CIS nations.

Throughout the 1980's, foreign trade rose from less than 19% to 34.6% of GNP in 1989 and
remained at this level.
In 1993 Turkey's economic programme forecasted an expansion in the volume of exports and
revenues. However, at the end of the year imports had risen 29% against an increase of only 5.3% in
exports leading to a significant trade deficit. The liberalisation of trade and in particular, the drastic
pruning of the import licensing system had allowed imports to increase significantly. In an effort to increase the international competitiveness of exports, the government devalued substantially the Turkish Lira in the first few months of 1994. An effect of this devaluation is that it should reduce domestic demand for imports. A stable foreign exchange rate and stronger economies in the West are expected to
lead to an increase in Turkish exports.

About 100 items still need an import license, and imports of arms, munitions, and narcotics are
prohibited. Other goods can be imported, provided the relevant duty or tariff is paid.

Customs Union

The Customs Union agreement between Turkey and the European Union came into force in January
1996 following the ratification by the European Parliament in December 1995. The agreement
covers the achievement of the full Customs Union between the EU and Turkey for industrial and
processed goods. This indicated the elimination of customs duties for goods originating in the EU and
alignment of Turkish customs duties towards third countries to the Common Customs Tariff (CCT) of the EU. Agriculture is excluded from the Customs Union Agreement. Only with the Association Council
meeting in November 1993, processed agricultural goods have been included in the Customs Union
process.

Turkey is the only country establishing a customs union with the EU without being a full member. As
a result of this exception, Turkey will be considered on the same ground as the Union members
especially on economic and commercial issues and will act like a full member without taking active part in
decision making process of the EU. That brings many obligations to be fulfilled by Turkey such as
adopting its trade policy towards third countries, which means signing autonomous and preferential
agreements in line with the EU's foreign trade policy. It also has to adopt its internal policies like
competition policy, intellectual and industrial property rights, patent and trade mark legislation, harmonisation of standards, non-discrimination in taxation and in export and in investment incentives to that of the EU policies.

The legislation on intellectual and industrial property rights has already been adopted in June 1995.
According to this, any artistic production, including software, are totally protected under this law.
Several decrees have been issued related to the Turkish Commercial Law, patent rights, protection of
commercial brands, industrial design and geographical indications. The Turkish Patent Institute was
established on 24 June 1995 with the Decree Law No:544 to ensure the protection of the patent rights in
Turkey. The only exception in patent protection is provided for pharmaceuticals which has been
excluded from the patent protection for a transitional period up to 1 January 1999 for both processes and
products.

There are some other minor derogations from the original agreement. For example, with the
Association Council decision on 6-7 March 1996, Turkey has been granted a five year transition in
adoption to CCT for the products identified as sensitive. Some of these products are gasoline, fuel oil, some types of heavy goods and vehicles. This list has recently been modified. Accordingly, goods such as
steel rope, motorcycle, bicycle and furniture are included in the list of sensitive goods and craftpaper
whereas goods such as petroleum products were excluded.
There is also a transitional period of one to three years in the reduction of industrial protection on
processed food and exemption of used cars from the Customs Union. The agreement left the
opportunity of imposing anti-dumping duties with the procedure of early warning. For electronic goods such as TVs, tape recorders, refrigerators etc. manufactured in Turkey, in case that there are third country originated components used, the CCT will be determined and a compensating duty will be imposed on the exports into the EU.

In terms of harmonisation of technical standards, Turkey has a transitional period of five years until
31 December 2000 to apply for EU standards. Accordingly, Turkey will have to allow EU products
that conform to EU technical standards to enter the Turkish market. However, as the institutional
framework in Turkey is not ready to apply for the EU standards, Turkish products will have to prove
conformity to EU legislation in one of the EU member states.

Decision 1/95 of 6 March 1995 releases the frozen Financial Protocol between Turkey and the EU
dating back to 1981 in the form of Financial Cooperation package. According to this, ECU 375
million from the Community budget is available over a period of five years from January 1996 onwards.
The beneficiaries of this facility are NGOs such as chambers of trade and industry, associations and
business unions. There is also an amount of ECU 300-400 million from the EIB for infrastructure
projects under the existing renewed Mediterranean programme of the EU covering a period of
1992-1996. The areas covered by this fund are mostly environment, energy and transportation under the
relevant Mediterranean programmes. ECU 750 million as EIB credits is available to finance adjustment
projects to adapt the Turkish economy to the international competition. The modalities on how to use
this credit will be discussed along with the implementation of the Customs Union. Turkey will also
benefit from the EU aid in the context of the EU's Mediterranean fund (MEDA) launched in 1996. The
share of Turkey is estimated to be ECU 700 million. Turkey will also be able to ask for assistance in
macroeconomic terms, which might be around ECU 300 million, to develop industrial competitiveness
of the economy.

The experience during the last few months is that the Customs Union between Turkey and the EU is
functioning without any major problems besides the Greek efforts to block the financial package and
institutional process. The expectation for Turkey in the short term is the worsening of trade balance
as a result of increased imports both from the EU and third countries. Another expectation is the
increase in foreign investment in Turkey both from EU and non-EU countries such as Far East countries
and the US.

Agriculture and Industry

Turkey has the largest area of arable land in Western Europe and is one of the few net food
exporting countries. A rapid drift towards the cities accompanied by increasing industrialisation has eroded the previous predominant role of agriculture within the economy. Although agriculture continues to
employ 50% of the civilian workforce its contribution to GDP is less than 18 %, compared to 26% for
industry and 56% for services. This current sectoral composition of the Turkish economy resembles
other newly industrialised nations. Current policy aims to increase productivity and the amount of
cultivable land.

The industrial sector accounts for almost 91% of exports and has surpassed agriculture, both in its
contribution to GNP and its share of exports. Encouraged by increases in investment, industrial output
rose by more than 16% between 1990 and 1993, to constitute 30.2% of GNP. The dynamic
growth of this sector, spurred by the emergence of multinational institutions, provides a solid base for
Turkey's future economic health and continued industrial development.

Turkey is a mixed economy, where the state accounts for nearly 40% of value added in
manufacturing. While its activities have traditionally weighed heavily in the primary and intermediate goods
sectors, the recent thrust of policy has been aimed at improving infrastructure. This has been reflected in a
movement towards the privatisation of state owned enterprises and a shift of public investment into
construction of roads, bridges, telecommunications and the generation of electric power.

Energy

Turkey has one of the world's largest energy expansion programmes. The most notable changes in
the pattern of energy consumption over the past decade have been the relative decrease in the use of
petroleum and the growth in the use of indigenous lignite, natural gas, and hydroelectric power.

There is a giant development project in Southeast Anatolia on the Euphrates and Tigris rivers. This
multi-purpose river basin project is designed to increase Turkey's irrigated land by an area over half
the size of Belgium, while almost doubling the output of electrical energy. The construction of 15 dams
and 18 hydroelectric plants to be completed in will cost approximately $ 20 billion.

Turkey has significant lignite reserves, however, imports of oil and natural gas still account for almost
half of Turkey's energy requirements. The construction of natural gas pipelines from the Russian
Federation and Commonwealth of Independent States will decrease the importance of lignite and is
helping to reduce atmospheric pollution.

Transportation

Various modes of transportation form a well developed and reliable network of travel routes
throughout Turkey. Airports link all major cities within Turkey and provide direct access to most
international destinations. There are currently 18 regional airports to which the investor is able to fly directly from Ankara or Istanbul. There are also direct international flights into Turkey's busy southern cities, Izmir and Antalya.

In addition, rail and motorways permit the transport of goods to all domestic ports and villages and
across borders. The main Turkish ports are Istanbul, Izmir, Mersin, Iskerderun, and Izmit plans exist
to upgrade motorway, port, and railway facilities. Metro and light rail systems are being developed
in Istanbul and Ankara are planned for other cities.

Communications

Although the telecommunications industry currently operates as a monopoly, the development of the
telephone network and telecommunications in the last ten years has been impressive. Late entry into
this area, has allowed Turkey to move quickly into digital exchanges, with generally more than 70%
of the network currently digital. Since 1991, private television and radio stations have been allowed,
whereas previously only government stations existed. With the planned privatisation of the Turkish
telecommunications operator, further development in this sector is expected, particularly now new
satellite links (TURKSAT) are coming into service.

At present, there are 16.5 telephone lines per 100 persons, however, this figure is relatively low
compared to the 30/100 ratio often considered to be the threshold level for the information revolution.

Education and Health

Turkey has a broad educational system, with primary education being compulsory until the age of
12. There are good secondary schools with the curriculum taught in English, German, French, Italian,
and Greek. Private colleges are also available. While more investment is required in education to
keep pace with the population growth and national development needs, the universities produce far more
young professionals than a decade ago.

The large urban areas of Turkey are equipped to meet the essential health care requirements of the
population. The leading Turkish hospitals have good specialists and there are also several foreign
hospitals, German, Italian and American.