The OECD says the economy could grow by 3.5 per cent in 1995, and inflation could fall to an annualised rate of 50 per cent at the year-end. However, this will depend on the government taking decisive measures on structural reform and fiscal consolidation.

In its half-year economic outlook, the organisation warns that delay will risk renewed instability in the financial markets, cause debts to spiral again, and jeopardise prospects for economic growth.

The report’s main points are:

Gross domestic product (GDP) is expected to contract by 3.9 per cent in 1994, and average inflation to reach 118 per cent. However, healthy rates of growth and a fall in inflation to below 30 per cent in 1996 could be achieved if the government carries out targeted public spending cuts, the report says.

Exports will be the main engine for growth in 1995 if the current rate of lira devaluation is maintained. In inflation-adjusted terms, the lira in late 1994 had depreciated on foreign exchange markets by around 30 per cent from a year previously.

Real interest rates remain very high despite the falls in the treasury’s benchmark borrowing rates since the summer. The high rates indicate entrenched inflationary expectations. According to official figures, consumer prices soared by 8.1 per cent in November, taking the end-month, annualised rate to a record 119.7 per cent. Wholesale prices also rose sharply by 6.4 per cent, raising the annualised rate to 137 per cent.

Turkish analysts say the pressure of high inflation will result in further depreciation of the lira. However, they do not expect this to lead to another foreign exchange crisis because the extent to which hard currency reserves have been rebuilt in recent months as the current account has moved into surplus. Total reserves are now more than $18,000 million, including some $6,500 million held by the central bank.

Dealers say they expect the exchange rate to drop to about $1=TL 45,000- 51,000 at the end of March 1995, and to reach

$1=TL 57,000-67,000 by the end of the year. The rate at the end of December 1994 was about $1=TL 38,000.