Turks are bracing themselves for what is widely feared could be a year of recession and economic crisis. Jon Gorvett reports from Istanbul.

After high growth rates throughout the 1990s - albeit accompanied by high inflation - end of year reports for 1998 revealed a slow down in production and bad news in some of Turkey's staple industries. First quarter growth for 1998 was around nine per cent, but this had fallen to 1.9 per cent by the end of the third quarter, and is widely thought to have ground to a halt by the year end. At the same time, imports - another indicator of economic buoyancy - had dropped five per cent compared to their 1997 equivalent.

But the most startling news is in that mainstay of Turkey's export industry, textiles. Some two million people are employed in this sector, accounting for 40 percent of the country's exports. Union officials claim that half a million of these workers lost their jobs last year as factory closures gathered pace. In the leather goods industry, over 400 tanneries in the Tuzla, Corlu, Gerede and Izmir areas alone closed last year.

The blame here has been laid squarely at the door of the global recession, particularly due to the identity of its two primary victims - the Far Eastern economies and Russia. With Far Eastern currencies depreciating as much as 70 per cent against the dollar, textiles from the former Asian tigers are now vastly cheaper than Turkish products. In addition, the economic meltdown in Russia has killed off an already dwindling trade in textiles and manufactured goods that once saw $2 billion go back and forth across the Black Sea - largely in the suitcases of small traders.

Yet there was also another more fundamental problem in the textile sector that illustrates wider concerns over Turkey's economic health. Over the last four years $25 billion has been invested by Turkish business in over 300 new textile factories, creating a large supply surplus. This concentration of so much capital in one industry put far too many eggs in one basket - at least according to Oztin Akguc, an economic commentator with the Turkish daily Cumhuriyet.

"Turkey's investment pattern is wrong," he claims. "Heavy investment in textiles, iron and steel was not a good idea. The country really has to change this pattern."

These sentiments have been echoed by other commentators, particularly with regard to the growing disparity in the country between investment in the so-called "real" economy (manufacturing and industry) and in the money markets.

Since the previous economic crisis of 1994, when the government announced a crash austerity package that sent the Turkish currency, the lira (TL), into freefall and saw prices double overnight, high inflation and high interest rates have left investment in the real economy at virtually zero. In addition, the returns on equities and in the debt market have been consistently greater than those in bricks and mortar for so long that more and more of Turkey's financial resources have become tied up in money market transactions. With banks offering interest rates as high as 115 per cent, even an inflation rate of around 70 per cent still makes this an attractive proposition - for foreign investors too, who are used to five or six per cent rates, at best, back home.

These high interest rates are largely due to the government's efforts to finance its large debts. In the first quarter of 1999, Turkey has to repay $1.41 billion in foreign debts and $16.32 billion in domestic debts. Marmara University's Professor Osman Zekai Orhan claims that "in the last 10 years, 60 per cent of government revenue has been spent on domestic debt servicing."

With this kind of outflow, Turkey is being faced with a shortage of financial resources. Markets have been suffering from a liquidity shortage since November 1998, despite the Turkish Central Bank providing the market with funds by depleting its foreign exchange reserves.

In January caretaker Prime Minister, Mesut Yilmaz, called for a new round of meetings with the International Monetary Fund (IMF) to press for financial support. Turkey signed an 18-month monitoring agreement with the IMF last summer, but this made no financial aid available and was aimed only at speeding structural reforms. Turkish Central Bank Governor Gazi Ercel has said that Turkey needs some $15 billion in aid. However, this seems unlikely to materialise until Turkey has established a new government - raising another factor in the country's economic troubles: continuing political uncertainty.

The no-confidence vote in the government of Yilmaz in November 1998 left the country without an established leadership, and with elections due in April 1999, the caretaker administration looks unlikely to be able to effect any major policy initiatives during its short term of office.

This is not good news for the Turkish Treasury, which is seeking to maintain a policy of fiscal stringency - in line with IMF requirements - by not relying on Central Bank resources to finance budget gaps and instead looking to increased overseas borrowing to keep the economy ticking over. Emin Dedeoglu, the Treasury's public finance department chief, announced recently that the Treasury plans to borrow $500 million abroad in the first quarter of 1999 while extending maturities on domestic debts. "Our main aim is to set up a longer-term yield curve," he said recently, and declared that he was confident that he would be able to do so - but again, foreign loans will depend to a great extent on how foreign investors judge the risks, and politics will undoubtedly play a role here.

The IMF austerity programme has also had an affect on drying up further sources of finance. Banks have begun to call in debts - sometimes even prematurely. Turk Petrol Holding, heralded in the newspapers as the first "major victim" of the crisis, recently saw the Turkish bank Egebank call in some $5.9 million owed by the company via a court order. The banks have also kept offering higher and higher interest rates in order to attract deposits. In 1998, bank deposits gave higher returns than either the stock exchange or foreign exchange transactions - the latter being in the past a favoured method of many ordinary Turks, who transfer their money into hard currencies to guard against the depreciation of the lira. However, the interest rate problem is undoubtedly storing up trouble for the future. "In the long run it is a big problem," says Akguc, who does not see the making of a new IMF agreement as any real solution.

"Making an agreement with the IMF will not solve Turkey's economic problems," he says. Aside from the need to change investment patterns, he highlights two other factors that need to be dealt with. "Turkey's other problems are first the current account deficit of $4-5 billion, second that tax income is not sufficient even to pay the high interest rates in the banking sector. There is a great need for tax reform."

Tax evasion is endemic in the country and has created a large "black economy" of unregistered workers and businesses. The size of this economy is unclear, but some observers calculate that it could be worth at least 50 percent of the visible, recorded economy. It is even claimed that liquidity in the black economy largely saved the day after the 1994 financial crisis.

Taken as a whole, the economy probably represents the biggest challenge facing any new Turkish government this year. The uncertainty is whether a new administration can put aside the party infighting that has characterised recent Turkish politics and move on to tackle the more fundamental issues.