I. GENERAL PROFILE
Area: 779,452 sq km
Population: 64,385,000 (1999)
Population density: 82.6 per sq km
Capital: Ankara

GDP (2000): $ 203.8 bln
GDP (2000) per capita: $ 3,165
2000 GDP growth: 7.5%
Budget deficit as % of GDP: n.a.
CP Index Change (2000): 55%
Foreign debt: $ 109 bln

Government: Republic since 1923. Head of State: President Ahmet Necdet Sezer since 2000. Head of Government: Prime Minister Bülent Ecevit since 1999.

Religion: Muslim with a small Christian minority. Turkey is a secular state, which guarantees complete freedom of worship to non-Muslims.

Turkey is a dynamic emerging market economy. It is strategically located between Europe and Asia, and borders the Mediterranean, Aegean and Black Seas. The country has a vibrant young population of over 64 million people-over 73 percent of which lives in urban centers-and a reputation for private sector entrepreneurship. In 2000, Turkey's GNP was about US$200 billion equivalent-or about US$2,900 per capita). Agriculture accounts for some 16 percent of GDP, industry for 24 percent, and services for 60 percent. Turkey's investment rate is in the range of 24 percent of GNP, while imports and exports together represent about 50 percent of GNP. Turkey signed a customs union agreement with the European Union in 1996 and became a candidate for EU membership at the Helsinki summit in December 1999.

The sudden turmoil that hit Turkey's financial sector in late November 2000 will probably affect the economy in the next couple of years. The impact of the turmoil is not reflected in the macroeconomics projections included in the Country's Assistance Strategy, which were prepared earlier. The problem quickly spread throughout the banking sector, leading to a massive outflow of foreign exchange and rapid rise in domestic interest rates.
The Government has responded by strengthening its reform program. Macroeconomics policies will continue to target a reduction in inflation to single digits by 2002. Structural reforms are being accelerated particularly in the areas of banking, energy and privatization.

II. DEFENCE BUDGETS - OVERVIEW (1999-2001)

Defence/GDP proportion. Turkey and Greece stand out among their NATO allies for their inability (or unwillingness) to reduce their defence spending (as percentage of GDP) after the collapse of the Warsaw Pact and the Soviet Union. While the average size of the defence expenditures relative to the GDP fell to 2,7% among NATO countries, it remains at Cold War-high level in Turkey (and Greece).
Turkey is unique among NATO countries in that it is fighting an active conflict on its own territory. The long-standing Kurdish insurgency in the southeast of the country, where Turkey deploys around 250,000 troops, costs an estimated $3 billion a year.
As a result of the specific political environment, Turkey keeps her defence/GDP proportion relatively high (about 5%). It was 5,3% in 1999 because of the negative GDP growth. The proportion works out at 4,7% and 4,9% in 2000 and 2001 respectively. (See Chart 1.) Turkish officials maintain that high defence spending and a modernization program are required to guarantee the security of the country.

Total defence expenditures. The geographical position of the Republic of Turkey, at the heart of the most unstable triangle in the world-the Balkans, Caucasus and the Middle East, makes it imperative to maintain a strong and modern military. The Ministry of Defence, which plans to modernize its armed forces' is financed mainly by the national budget and the Defence Industry Support Fund and partly by foreign military loans and contributions in connection with the Conventional Forces in Europe (CFE) Treaty. Introduced in 1996, the Turkish military's $150 billion program aims at a wholesale modernization of the armed forces over a period of 25 to 30 years.
Defence expenditures data for 1999-2001 are shown in Table 1 (USD and local currency) and depicted in Chart 2 (USD values only). Focusing on the dollar values the negative macroeconomics indicators in 1999 bring about a 4% decrease of the total defence costs in 2000. It is compensated by a 19% rise in 2001 that promises a strict implementation of the long-run defence program.




Chart 2. Total defence expenditures (1999-2001)

For a functional breakdown of the USD totals, see Chart 5 below. Commentary on the main categories follows.



Operating costs. These came out at $ 5,98 bln, $ 5,7 bln and $ 5,8 bln in 2001, 2000 and 1999 respectively. The relative shares of personnel costs and operations and maintenance costs (the two major components of operating costs) show certain fluctuations (See Chart 3). The personnel costs portion (percentage of the total defence expenditure) fall from 36-37% to 29,1% in 2001. The operations and maintenance costs share rose from 21,8% in 1999 to 23,7% in 2001. Obviously, this growth rate could not compensate for the relative fall of the personnel costs. As a result, the operating costs portion of the defence budget has dropped as well.


Chart 3. Structure of the operating costs (1999-2001)

Procurement and construction costs. These categories accounted for 41,7% of total defence expenditure in 1999, 40% in 2000, and 47,2% in 2001. These estimations show that Turkey keeps to a comparatively high level of defence investments. Turkey is historically among the most active buyers of weapons in the world (ranked third on the list of major recipients of weapons in the second half of the 1990s). Among its NATO allies, Turkey consistently spends the highest percentage of its military funds on equipment. Since the end of the Cold War, most Western European countries have cut defence spending to levels sufficient for little more than maintenance of the existing forces. Western European NATO members spend on average 60 percent of their defence budget on personnel and only about 16 percent on new equipment. By NATO estimates, Turkey spends nearly twice the NATO average of its defence budget on new weapons and facilities. (For the breakdown between procurement and construction, see Chart 4.)


Chart 4. Structure of the procurement and construction costs (1999-2001)

Research and development costs. These expenses amount to less than one percent of the total defence expenditures. In 1999 they came to 0,04% of the defence budget, compared to 0,05% in 2000 and 2001. All the research and development expenditures are realized in the field of basic and applied research.



Defence forces costs. The military forces structure of the defence budget is characterized by domination of the Land forces costs and the Central support costs. In 2001 the Central support costs take the leading position with an amount of $ 4,3 bln or 38% of the total defence expenditures, followed by the Land forces costs (the former leader in 1999 and 2000) with an amount of $ 3,1 bln or 27% of the defence budget.

Land forces expenses. The Army stands to benefit the most from the $150 billion modernization program. The anticipated purchase of 1,000 main battle tanks would allow Turkey to add to the firepower of the aging M60 and M48 tanks. With addition of new tanks, such as the U.S.-made M1A2, the Turkish armed forces would gain better armor protection, improved night-vision capability, and a more powerful gun. Additionally, Turkey upgrades its existing M60 tank, including conversion to a larger 120 mm gun.
The personnel costs of the Land forces are traditionally the highest among all the defence forces (32% of the total personnel costs). The procurement costs of the land forces run up to $ 896 mln in 2001, in comparison with the naval forces ($ 207 mln) and the airforces ($ 361 mln). The procurements for the military forces have similar range in 1999 and 2000.

Naval forces expenses. The country's strong Navy plays a crucial role in preparations for a possible conflict. A couple of years ago the United States agreed to sell four frigates to Turkey under an agreement which also provides the same number of vessels to Greece. The Turkish Navy also added two German-built Salihreis frigate to its fleet in 1999. Several additional frigates are being built at Turkish shipyards. Navy's share of the $150 billion modernization program has been put at $45 billion.

Airforces expenses. The Turkish airforces spend annually about $ 530 mln on personnel, just the approximately same amount as on operations and maintenance. The procurement costs decrease from $ 661 mln in 1999 to $ 404 mln in 2000 and $ 361 mln in 2001. This could be explained by the decrease in the spending on ammunitions and aircraft as a result of the expired in 2000 Gulf War fund ($ 2,5 bln). It was set up by the United States, Kuwait, and Saudi Arabia to repay Turkey's support during the Gulf War, and was used to finance local production in Turkey of the F-16 fighter jet.

Administration and command expenses. The administration and command costs show drastic fluctuations as they figure out at $893 mln in 1999, $196 mln in 2000, and $561 mln in 2001. Their portion works out at 9% of the total defence expenditures in 1999, compared to 2,1% in 2000, and 5% in 2001.

Central support expenses. Central support stands out for its important portion of the defence budget. It reaches its highest level of expenses in 2001, coming up to $4,3 billion or 38% of the total defence expenditures. In comparison with this, Central support costs add up to $2,8 billion (29%) in 2000, and $2,7 billion (27%) in 1999.

Paramilitary forces. Turkey has a large contingent of paramilitary forces, on which it annually spends more than $1 billion. The paramilitary costs run up to 9% of the total defence costs in 2001, 12% in 2000, and 12% in 1999. Their absolute amount (in USD) shows a permanent year-to-year decrease. The personnel costs are the major component of the paramilitary expenditures. They figure out at 83% of the total paramilitary costs on average for the period.



III. ESTIMATED TRENDS OF DEFENCE EXPENDITURE 2001-2005

Defence/GDP proportion.
During the next 20 years, a significant number of combat weapons and equipment currently in the Turkish Armed Forces inventory need to be modernized or replaced with systems incorporating new technologies. The cost of all these systems, including operation and maintenance, is approximately USD 150 billion. During this period, the army ground forces will need USD 60 billion, the navy USD 25 billion, and the air force USD 65 billion in arms and equipment.

If Turkey manages to get over the negative consequences of the financial turmoil in November 2000 and manages sustainable economic growth through the next 5 years, it can be expected a steady defence/GDP proportion at the level of 5% through the 2001-2005 period, as depicted in Chart7.


Chart 7. Total defence expenditure as % of GDP (1999-2005)

Development of the defence budget. According to the estimates of the Turkish Ministry of Defence, the defence budget functional structure in the 1999-2001 period will be the pattern of its development through the next four years. Extremely high portion of defence investments, stable personnel and O&M cost trends, and 1%-R&D costs, will be the major characteristics of the 2002-2005 period, as shown in Table 2 (and Chart 8).