Oxford Analytica (OA), in its 2005 report on Fiscal Transparency in Turkey, rated Turkey's compliance with the International Monetary Fund (IMF) 'Code of Good Practices on Transparency in Fiscal Policy' as "Enacted". In the 2006 Report on the Observance of Standards and Codes (ROSC) for Fiscal Transparency, the International Monetary Fund (IMF) noted that since the 2002 update, Turkey has continued to make progress toward meeting the requirements of the fiscal transparency code, in particular through a substantial overhaul of the legal system. The adoption, in December 2003, of the Public Financial Management and Control (PFMC) Law was designed to provide the necessary framework for further reforms. Its implementation is scheduled for completion in 2006. In spite of the progress made, further effort is required before Turkey will fully meet the requirements of the Code. Implementation of reforms can be hampered by uncertainty in the legislative environment. For example, numerous amendments to the PFMCL and other laws are now with Parliament, and the absence of hierarchy in Turkey's legal system exacerbates this uncertainty. In addition, a law approved in 2005 (the "Omnibus Law") allows the government to sidestep budget discipline in various ways, although under certain criteria -- for example by writing off debts of some public institutions. Thus there are increasing doubts about the resolve of the government to continue to increase fiscal accountability and transparency.

General Overview

In the 2006 Report on the Observance of Standards and Codes (ROSC) for Fiscal Transparency, the International Monetary Fund (IMF) noted that since the 2002 update, Turkey has continued to make progress toward meeting the requirements of the fiscal transparency code, in particular through a substantial overhaul of the legal system. The adoption, in December 2003, of the Public Financial Management and Control Law (PFMC) was designed to provide the necessary framework for further reforms. Its implementation is scheduled for completion in 2006. In spite of the progress made, further effort is required before Turkey will fully meet the requirements of the Code. Implementation of reforms can be hampered by uncertainty in the legislative environment. For example, numerous amendments to the PFMC Law and other laws are now with Parliament, and the absence of hierarchy in Turkey's legal system exacerbates this uncertainty. Further progress will hinge on the authorities' ability to continue to implement the new Budget legislative framework. The authorities should pay close attention to two major aspects of the reform program in this area: (1) in their current versions, these laws, which are designed to provide a broad legal framework for reforms, do not fully address the issue of fragmentation, nor other critical aspects of fiscal management; (2) achieving implementation in the proposed timeframe will be a challenge, requiring a strong build-up in the level of ownership at all levels of government, as well as a major effort in preparing the key actors for their new role. Against the backdrop of a substantially strengthened fiscal position, a more sustainable debt position, and positive steps towards EU accession, the ROSC provides a set of recommendations in the key areas of reform to assist the authorities in meeting the challenges described above. (IMF 2006a, p. 1)

According to the 2005 Report on Fiscal Transparency in Turkey by Oxford Analytica (OA), the PFMC Law of December 2003 provides the basis for harmonizing the financial management and control system with international best practice, including numerous innovations such as the introduction of a new budget classification system that is in line with international standards (GFS 2001), a new accrual-based accounting system medium-term budgeting (three year period), and performance-based budgeting. The Law also formalizes the reporting process. (OA 2005, p. 505)

There have been a number of improvements associated with the PFMC Law. The scope of the budget has also increased in terms of the number of institutions covered, and annexed budget agencies -- which used to face considerably less rigorous procedures -- are now to be included in the general budget. The Ministry of Finance (MoF) has also implemented a Medium-Term Budget Framework. This should improve transparency in a number of areas as the government will now be more accountable for its policy choices and it will be harder to diverge from previously set goals. Fiscal risks and sustainability should also be assessed in the process of drawing up the medium-term budget. Line ministries are now called upon to make press statements on their aims and objectives and mid-year reports on their progress. (OA 2005, p. 505)

However, the PFMC law is very broad and is still waiting for the promised secondary legislation to clarify some of the changes so they can be properly implemented. Legislation was due to be approved in June 2005, but it has now been delayed until 2006. A new law approved in 2005 (the "Omnibus Law") allows the government to sidestep budget discipline in various ways, although under certain criteria -- for example by writing off debts of some public institutions. Moreover, the government has submitted to parliament a large number of amendments to the PFMC Law. Thus there are increasing doubts about the resolve of the government to continue to increase fiscal accountability and transparency. However, the PFMC Law was prepared partly as a commitment to the EU, the IMF and the World Bank, and as such a certain degree of compliance will have to be attained in the near term. (OA 2005, p. 505)

New tax legislation was also approved in May 2005 creating a semi-autonomous revenue administration which will be responsible for tax collection, separating policy from implementation. Local tax offices now fall under the revenue department too. This should improve the efficiency and effectiveness of the tax system. The proposed Court of Accounts Law will empower the Court of Accounts to become the single, supreme audit body, and its scope and depth of audit will increase. However, it is not clear when this new law will be passed as it has been on the agenda for more that a year now. (OA 2005, p. 505)

Regarding fiscal policy, the November 2006 IMF review under the Stand-By Arrangement with Turkey noted that fiscal policy had been adding stimulus to aggregate demand since late 2005 and that reversing this trend would be beneficial for the inflation outlook, debt reduction, and investor confidence. While revenues were buoyant--and projected to remain so during the remainder of the year, mainly on account of higher-than programmed nominal GNP--this was partially offset by spending overruns, particularly on health. The authorities therefore agreed to implement measures to bring expenditure back within the program envelope and save any revenue overperformance. (IMF 2006b, pp. 15-17)

A package of policy actions--amounting to 0.6 percent of GNP--was agreed in addition to earlier revenue measures taken by the authorities for some 0.2 percent of GNP. The package comprised measures to contain health costs (without sacrificing the quality of services delivered) and cuts in lower-priority capital and other spending. To leave no doubt about their intention to save revenue overperformance, the authorities proposed a new performance criterion on primary spending, and reaffirmed their commitment to avoid tax concessions. On this basis, the authorities were confident that the 2006 primary surplus target of 61/2 percent of GNP could be exceeded by about 1/4 percent of GNP--a welcome development. (IMF 2006b, pp. 15-17)

The risks of procyclical tightening were discussed, but the IMF and the Turkish auhtorities agreed that these were outweighed by the confidence-enhancing effects of prudent fiscal policy. Containing expenditures to budget levels would imply tighter real spending in the remaining months of the year, given earlier overruns, higher inflation, and a more depreciated lira. In these circumstances, resisting wage and pension pressures would be particularly difficult, although the authorities were confident that existing budgetary allocations would be respected. With growth coming off a high base, it was agreed that the risk that tight policies may set the economy for a hard landing was small. A fiscal tightening, instead, was seen as effective in enhancing policy credibility, reviving confidence in the economic outlook, and limiting downside risks in a context where expectations were unsettled and the current account still large. (IMF 2006b, p. 18)

In terms of structural fiscal reforms, the IMF staff strongly welcomed the passage of the administrative and parametric pension reform laws as an essential and politically-difficult first step toward dealing with longterm inefficiencies and vulnerabilities. The IMF staff and the authorities agreed that adoption of these reforms would play a key role in underpinning medium-term fiscal sustainability in Turkey. The authorities indicated that they had already made good progress in merging existing social security institutions, which would help ensure that the new social insurance parameters were implemented at the start of 2007, as planned. To underpin this complex process--database amalgamation was especially difficult--detailed milestones were agreed for the merger of the three social security institutions. (IMF 2006b, p. 19)

Further, in the area of structural fiscal reforms, the authorities were reinvigorating tax administration reforms to help pave the way for future tax cuts. The authorities ascribed delays to date to the complex administrative challenges at hand rather than any substantive disagreement with the IMF staff on the objectives of the reform strategy. Accordingly, they committed to a comprehensive action plan, including completing the functional reorganization of the revenue administration and ensuring that the new tax policy unit at the Ministry of Finance was fully operational by end-July 2006, and completing the establishment of a large taxpayer unit by end-year, which is a structural benchmark under the Stand-By arrangement. To avoid further slippages in these areas, the authorities had also put in place full-time teams to oversee reform implementation. (IMF 2006b, p. 19)

The Principles

Clarity of roles and responsibilities.

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Oxford Analytica (OA), in its 2005 report on Fiscal Transparency in Turkey, rates Turkey's compliance with this principle as "Enacted." According to the report, the structure and functions of government are specified in a large body of legislation. The responsibilities of different levels of government and of the executive branch, the legislative branch and the judiciary are reasonably well defined. The duties, authorities and structure of local government organizations and their shares of tax revenues are set out in various laws. Provinces have limited autonomy and report to the Ministry of the Interior. Municipalities have strong elected mayors and weak councils. The new Municipality and Metropolitan Municipality Laws were approved in July 2004 and the Municipal and Special Provincial Administration Law was approved in July 2005. The new laws redefine the duties and responsibilities of the local governments, giving them greater authority to provide public services and renegotiate municipal debts. (OA 2005, p. 506)

In the 2006 Report on the Observance of Standards and Codes for Fiscal Transparency, the International Monetary Fund (IMF) notes that general government is broadly defined in accordance with Government Finance Statistics (GFS) principles. There are, however, several problems relative to GFS definitions. The general government sector according to the new Public Financial Management and Control Law (PFMCL) includes some commercial activities undertaken by certain revolving funds (the authorities have not yet performed a full assessment of their activities). On the other hand, the definition excludes foundations set up by line ministries. It also excludes the Iller Bank which, while nominally an investment Bank, operates under the Ministry of Public Works and has many characteristics of an extrabudgetary fund (it provides financial and other services to municipalities, and invests in municipal infrastructure). The definition of general government employed in the Central Bank of Turkey's (TCMB) monetary survey is slightly different: it includes ministerial foundations, but excludes the savings and deposit insurance fund. It, too, excludes Iller Bank. (IMF 2006a, p. 4)

Mechanisms for the management of budgetary and extra-budgetary activities are governed by various laws, including the PFMC Law of 2003, the Court of Accounts Law of 1967, the Public Procurements Law and the annual budgets; by periodic regulations issued by the Ministry of Finance (MoF); and by time-honored practice. The Public Administration Framework Law was approved by the parliament in July 2004. However, the president has vetoed certain articles of this law on the grounds that they are in conflict with the constitution. Although further legislative amendments are expected concerning local governments, this area is still widely considered as one that lacks transparency and has hampered the devolution process. (OA 2005, p. 506)

A range of institutions share the setting, implementation and ongoing scrutiny of central government finances while operating according to their own laws and regulations, and typically reporting to a different government minister. The Ministry of Finance (MoF) is responsible for budget preparation, budget execution, accounting and reporting, and revenue collection. It has separate departments for budgeting and fiscal control, for public accounting, and for revenues. The State Planning Organization (DPTM) prepares five-year plans, which are intended to give longer-term direction. Based on investment ceilings set by the MoF, it draws up investment spending allocations for each of the government departments, which feed into the budget each year. It also serves as secretariat to the High Planning Council, a statutory sub-committee of the Council of Ministers with an important role in the overall policy-formulation process. This year the MoF and the DPTM have also begun a Medium-Term Budget Framework and Fiscal Strategy. The Undersecretariat for the Treasury is responsible for cash management and the public payments system. It manages the public debt and provides loan performance guarantees. It oversees the operations of state-owned enterprises and is responsible for relations with international financial institutions. (OA 2005, p. 506)

According to OA, some commentators argued that the MoF, the Treasury and the DPTM should be merged, as fragmentation of financial management can create difficulties in coordination and decision-making. Others argued however, that as long as the role of each organization is clear, there should be no overlaps or gaps in procedures. A more likely solution to the administrative complications is to re-clarify the responsibilities of these institutions, while placing them all under a single Economy Ministry in order to improve coordination. Meanwhile, the formation in November 2002 of the first single-party government in eleven years improved coordination and facilitated the speedier progress of transparency efforts. Mechanisms for coordinating and managing revenues and expenditures that fall outside the scope of the main budget process are varied and often unclear, a situation replicated at the local government level. (OA 2005, p. 507)

Article 65 of the 1982 Constitution of the Republic of Turkey stipulates the monitoring of state enterprises by parliament under the auspices of the state enterprise committee. Nevertheless, state commercial banks and non-financial public enterprises (NFPEs) have operated under the aegis of various government ministers. State banks used to provide loans to favored businesses, in order to create a linkage between state authority and political interests. Loans were also provided at sub-market rates, for which the government rarely reimbursed the banks. As a result of these sectoral inadequacies and a very high interest rate, by 2001 the banks had to be recapitalized by the government at a cost of over 15 billion US dollars. Quasi-fiscal activities (QFAs) have since dramatically reduced, although given that there are still three state banks, commentators have suggested that there is some scope for banks to engage in such activities. Public nonfinancial corporations do carry out some QFAs, and these are made transparent in the budget. (OA 2005, p. 507; IMF 2006a, p. 7)

The use of NFPEs for quasi-fiscal or political purposes has been reduced. State enterprises processing tobacco, sugar and grain are no longer obliged to buy up crops at prices set by the government, unless they are reimbursed through the budget. NFPEs are pricing their goods and services increasingly on a commercial basis, and some have cut staff and services, indicating a reduction in hidden social spending by these businesses. In spite of this trend, the extent to which NFPE decision-making is influenced by non-commercial considerations remains difficult to monitor. Commentators have said that state enterprise accounts lack transparency. For example, accounts are only released yearly and many enterprises are subsidized, but the budget only shows a 'transfer sum' to all state enterprises and is not sector specific. (OA 2005, p. 507)

The delayed legislation on the governance of state economic enterprises (SEEs) is expected, inter alia, to clarify goals and financial targets, set new accountability standards and address accounting, reporting, and auditing arrangements. Some government officials feel the legislation to be over-ambitious in its goal to reform the entire SEE system. Further legislation is being discussed at the Council of Ministers and will be submitted to parliament to unify the three main social security institutions and to separate health from pensions, measures that should improve transparency. Important amendments made to the Central Bank Law in 2001 have enhanced the independence of the Central Bank of Turkey (TCMB) by clarifying its relationship with the government (including distribution of profit). According to the amendments, the central bank is no longer allowed to finance the government. It may support the Savings Deposit Insurance Fund (responsible for troubled banks) so long as the efficient conduct of monetary policy is not affected. (OA 2005, pp. 507-508)

According to the 2006 IMF report, the government owns significant shareholdings in a number of corporations, which are governed by appointed Boards. The 39 state economic enterprises in the government's portfolio (Table 1) are expected to produce earnings (before interest, taxes, depreciation, amortization, and other provisions) of about 2 percent of Gross Domestic Product (GDP) in 2005. Several of these enterprises are listed companies with minority private holdings, and are thus subject to more stringent audit and reporting requirements. The government also fully owns three large state banks, which account for 36 percent of banking system assets, and 41 percent of deposits. (IMF 2006a, pp. 4-5)

The legal framework for privatization is clear but modalities for the payment of receipts to the budget lack transparency. The Law on Privatization (#4046) defines the methodologies and norms for privatization. An annual plan alerts potential bidders to the types of assets offered for sale, and tenders are well-publicized. A tender committee drafts the specifications and method by which the decision on sale will be made, and all specifications are available through the Privatization Authorities' (PA's) website. (IMF 2006b, p. 8)

The Bank Regulatory and Supervisory Authority (BRSA) is responsible for regulating them, and Treasury, as their principal shareholder, appoints their Boards. The Treasury is also ultimately responsible for overseeing and monitoring the operations of state economic enterprises (the privatization authority also monitors enterprises assigned to it). Monitoring is on a monthly basis (for financing data) and semi-annual basis (for operational data). State enterprises have outside auditors, and are also subject to audit by Treasury's auditors. Decree Law 233 sets out the norms for state enterprise governance, and for each company establishes a quota of Directors to the enterprise's Board to be appointed by the Treasury and by the related line ministry. (IMF 2006a, pp. 5-6)

Since late 2001, the CBT is prohibited by law from purchasing government securities in the primary market, and from extending an overdraft facility to the government or to public institutions. The one exception is the Savings and Deposit Insurance Fund, which can apply for a loan on market terms in extraordinary conditions (for instance, if funds are required to take over a bank). In this instance, the loan would have to be approved by the CBT's Board of Directors. The CBT is required to remit all profits, after reserves, to its shareholders in the form of dividends (the government is the largest shareholder, with 54 percent of the equity). Conversely, commercial law requires compensation for losses, although these have not been paid recently (reflecting the availability of some capital reserves). The Treasury does not compensate the CBT for payment services rendered, and the CBT does not pay any interest on government deposits (with the exception of the balance on the risk account). (IMF 2006b, pp. 8-9)

Iller Bank is a government agency that provides municipalities with financial and technical support for infrastructure development. However, some of its operations are not transparent and there is scope for interference. All members of Iller Bank can apply for loans in principle, but in practice the bank focuses its lending operations on smaller and medium-sized municipalities. Loans are capped and small, and they are typically tied to projects, deterring wealthier municipalities from seeking such loans despite favorable terms (9 percent interest in 2005, which includes a nonrecorded subsidy). In case arrears are accumulated by a municipality either to the Treasury or to the Iller Bank, the bank has the right to "claw back," at rates determined by the Ministry of Finance, up to 40 percent of the transfer entitlement of that municipality. However, there is a degree of discretion in how the Iller Bank policy (including by exceeding the 40 percent limit) is applied, and this has introduced a degree of uncertainty and lack of transparency in intergovernmental fiscal relations. There are strategic plans to restructure Iller Bank as it is expected to play a role in implementing future EU (European Union) structural and regional programs and helping municipalities to meet EU standards. The Prime Minister's office expects to submit this legislation to parliament in 2005. (IMF 2006a, p. 11)

The 2005 'Bill Envisaging Amendments to the Civil Servants Law and the Pensions Fund of the Republic of Turkey and some other laws and Decree-Laws' (also known as the "Omnibus" Law) allows 'extra-budgetary loans' to be issued without being linked to the budget. This means the Treasury will be able to issue non-cash bonds outside the budget again. Secondly, debts and claims of public institutions can be offset against each other, meaning that public accounts will lose a degree of transparency. Thirdly, certain projects will be able to make use of credit unrecorded in the budget first, undermining budgetary spending procedures. Among other items, the Bill also writes off 41 billion US dollars of debt owed by the Savings Deposit Insurance Fund (also undermining Law 5021), restructures and reschedules farmers' debts, and allows the Treasury to pay 500 million euros to the TMO (soil products office) and 275 million euros to sugar factories to cover losses. All these amendments are seen as having a negative effect on fiscal discipline and undermine much of the transparency established over the last few years. Indeed, many commentators judge this bill as a step backwards. Special budget agencies are subject to the same arrangements as mainstream budget agencies under the new budget classification system. Managers of budget agencies will be given greater responsibility (and accountability) for spending decisions. Revolving funds will be eliminated by 2007. (OA 2005, p. 509)

Taxes are charged in line with detailed laws, and taxpayers' rights are protected. Tax allowances, rebates, exceptions and incentives also have a specific legal basis. The constitution states that taxes can only be imposed by law, although tax laws may empower governments to alter the amounts or rates within limits. In practice, the government can adjust tax rates, duties, fund levies and other rules pertaining to their implementation within the fairly broad parameters determined in legislation. Tax legislation is generally clear and the adoption of a direct tax reform in April 2003 that simplified the corporate tax regime and unified the income tax system. (OA 2005, pp. 509-510)

Law 5345, 2005, for the Organization and Duties of the Revenue Administration Presidency separates policy from implementation by making the General Directorate of Revenues within the MoF semi-autonomous and responsible only for tax collection. Local tax offices now report direct to this unit rather than via the provincial department as was the case previously. Implementation has been somewhat slow; a separate tax policy unit is still due to be established by the MoF, as well as a large taxpayer department. (OA 2005, p. 510)

The Civil Service Law (#657) defines standards of conduct for civil servants, and the more recent Law on Establishing the Civil Servants Ethical Board (#5176) has just recently established an ethical board and commission in each line agency charged with promulgating a code of conduct to employees. However, IMF noted that a key weakness in the code of behavior is the ability of some former civil servants, in particular tax auditors, to immediately upon resigning their position, represent clients in dealing with their former agency. (IMF 2006a, p. 17)

Open budget processes

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Oxford Analytica (OA), in its 2005 report on Fiscal Transparency in Turkey, rated Turkey's compliance with this principle as "Enacted." In the 2006 Report on the Observance of Standards and Codes for Fiscal Transparency, the International Monetary Fund (IMF) notes that the existing system of budget preparation is fragmented, largely incremental and based on an annual horizon although there are plans to move towards a multi-annual budgeting system. The Public Financial Management and Control (PFMC) Law, when fully implemented, will address some, but not all, of the weaknesses inherent in the current system of budget preparation. The PFMCL provides for a medium-term performance based budgeting system that will focus on achievement of government policies. Budgets will be formulated within the framework of the strategic plans which each spending agency is mandated to produce. A considerable amount of supporting documentation will also be included in budget documentation which should increase the level of transparency of public finances. As already indicated, however, the existing fragmentation in the budget formulation process will complicate the analysis of the linkages between investment budget related expenditures and the recurrent budget. If this system is to continue, it will be necessary to strengthen the coordination between the different institutions during the budget formulation phase. Although best international practice would dictate that a single institution should take control of the coordination of the budget formulation process there are a number of notable exceptions. Coordination is however key. Training of officials to implement the new system will also be a key component to ensure success of the initiative. (OA 2005, p. 513; IMF 2006a, pp. 17-18)

OA reports that in recent years, a large number of factors have obstructed the use of the annual budget as an instrument to obtain fiscal policy objectives. These include the short horizons from frequent changes of governments and ministers, high inflation and the urgency of the government's debt situation, as well as the limited scope of the budget, its overall lack of credibility and the scope for extra-budgetary expenditure and revenue. However, over the past two years, commentators judge that credibility has improved somewhat, and the new budget classification system has provided a more comprehensive and transparent budget process. The implementation of the Medium-Term Budget Framework should improve clarity of fiscal objectives further. First steps have been taken towards introducing an element of competition for funding allocations among public institutions. This is being piloted in six agencies whose responsibilities range from road junctions to health care for the elderly. For the most part, however, the budget is still not based on overall policy objectives, it is difficult to speak of new policies being introduced through the budget, and the objectives to be achieved by major programs are not yet clearly stated. (OA 2005, p. 513)

According to the 2006 IMF report, the medium term macro framework has recently been developed by the State Planning Organization (DPTM) in anticipation of the PFMCL requirement for a three-year medium term framework covering both revenues and expenditures. This could constitute the basis for a rolling medium term expenditure framework. In addition, the preparation of the multi-year EU (European Union) pre-accession economic program has contributed to the development of medium-term fiscal programming. There are no explicit fiscal rules with the exception of the conditionalities inherent to the program targets with the IMF. (IMF 2006a, p. 20)

The preparation of the budget begins with the publication of the prime minister's budget notice, which is prepared by the Ministry of Finance (MoF), in the Official Gazette in June. It includes a description of government priorities and fiscal objectives as well as general principles to be followed by the spending agencies. In addition, the macro framework decision of the High Planning Council indicates the macroeconomic parameters and guiding principles on fiscal policy and budget preparation process for the following year. In recent years, the IMF standby accords have also provided an overall macroeconomic scenario and fiscal targets (for up to three years in advance) against which budget agencies can prepare their budget proposals. Following the budget notice, budget agencies then receive instructions from the MoF on preparing their budget proposals, which are submitted to and negotiated with the General Directorate of Budget and Fiscal Control (under the MoF). Proposals related to investment spending are submitted to and negotiated with the DPTM, which maintains a record of ongoing approved investment projects. Under the constitution, the government is responsible for submitting the budget bill to parliament 75 days before the end of the calendar year. The budget is then debated in the Planning and Budget Committee and plenary sessions. (OA 2005, p. 513)

The General Directorate of Budget and Fiscal Control department has improved the budget memorandum during 2005. It is more comprehensive and contains more detail on figures and explanations. Comparisons are made between 2003 and 2004 by converting the 2003 figures into the new budget classification system that was used in 2004. The 2004 budget expenditures were classified under a new functional system. This has improved transparency, giving better information about how much is spent, and continued to shift more of the 'transfer items' from the Treasury and the MoF budgets to the budget of the relevant ministries. These changes are on top of those made in 2004 when agricultural subsidies were included in the budget of the agricultural ministry, as already done with social security institutions and students credits. A second improvement this year is the wider scope of the budget which now covers 165 departments as opposed to 98 previously, including institutions such as the universities, examination boards, state theatres, Atomic Energy Agency, and Capital Markets Board. These institutions have also received training in the new budget classification and accrual-based accounting systems. (OA 2005, p. 514)

For the first time, Turkey has implemented a Medium-Term Budget Framework in 2005 (under the PFMC Law), which has a series of stages. First, the DPTM sets out policy priorities and the main macroeconomic strategies in the Medium-Term Program before sending it on to the Council of Ministers who approved it on May 31, 2005. The second part is the preparation of the Medium-Term Fiscal Strategy by the MoF. This document includes expenditure ceilings for each institution and by economic classification, and targets for revenues, expenditures and deficits as a percentage of GNP. It was approved on July 2, 2005 by the High Planning Council (a sub-committee of the Council of Ministers). The third part is a budget call from the General Directorate of Budget and Financial Control in the MoF to all line ministries for a proposed budget. This is accompanied by a budget preparation guide. This year, the budget call was on 6 July and line ministries submitted their proposals by the end of the month. (The DPTM also publishes an investment program preparation guide for line ministries' investment spending proposals.) The General Directorate then finalizes these budgets and submits them to Parliament by October in keeping with the Constitution. All these documents are published in the Official Gazette and are publicly available. Among others, the Medium-Term Fiscal Strategy and the Medium Term Program are also available in English. However, the Ministry of Finance believes that the implementation of both the Medium Term Program and the Medium Term Fiscal Strategy will significantly enhance transparency and market confidence. (OA 2005, p. 514)

The budget is not accompanied by an assessment of the risks threatening the achievement of fiscal targets. However, under the Public Financing and Debt Management Law, the Treasury is required to submit to parliament a quarterly report on debt management, which provides details on, inter alia, contingent liabilities. (OA 2005, p. 514)

The fiscal rules governing budget preparation are not based on an ongoing assessment of medium- to long-term fiscal sustainability. There is no specific public assessment of the medium and long-term significance of factors such as the condition of the social security institutions or the government's responsibility to support further interventions in the banking system if necessary. Under the Public Financing and Debt Management Law, the Treasury is required to submit to parliament a quarterly report on debt management. This report provides details on debt sustainability and contingent liabilities. However, full implementation of the Public Financial Management and Control Law, especially the new three-year medium-term budgeting framework, will help to assess long-term fiscal sustainability. (OA 2005, p. 514)

The code structure of the budget is broken down into four different levels: administrative, functional, economic and financial. Revolving and extra-budgetary funds under the current system are not classified according to the same structure. However, revolving funds are in principle due to be eliminated by 2007, and extra-budgetary funds are to be brought under the new budget classification system. Under the new system, the cost of tax breaks will also be stated. (OA 2005, p. 515)

Ridding the budget of annexes is an important step towards greater transparency since annexed budget agencies often faced far more relaxed regulations than agencies under the general budget. Now general budget and special agencies will face the same rules. Regulatory agencies will have more financial autonomy, but will still have to report a budget. On the revenues side, local authorities' share of national tax revenues have been included in the budget for 2006. The various changes in the scope of the budget in principle represent improvements in transparency, but in the short term they also make it difficult for commentators to assess fiscal performance due to the difficulty of making comparisons with previous years. Still outside the scope of the budget are the four extra-budgetary funds (EBFs), and all of the revolving funds (of which there are approximately 1,440). According to the PFMC law these must be incorporated into the main budget by the end of 2007, but this is not an easy task and the law may have to be amended. However, their accounts will be incorporated into the budget next year on a more detailed level than previously. (OA 2005, p. 515)

At the end of this process, only social security agencies, state enterprises and local governments will remain outside the budget. Under Government Finance Statistics (GFS) they must be treated separately. However, they will all be using the automated accounting system. This will make it possible to calculate the overall fiscal returns or public sector borrowing requirement quicker and more accurately. At present the State Planning Organization makes some forecasts and estimates. (OA 2005, p. 515)

The new budget classification in line with the International Monetary Fund (IMF) Government Finance Statistics (GFS 2001) classification was introduced on a pilot basis in 2002. This was adopted formally in the 2003 budget, providing a clearer, more functional breakdown of the budget and making it comparable on an international level. Tax rebates are now deducted from tax revenues rather than counted as expenditure. Levels of social spending and their destinations will now be apparent, thereby significantly increasing transparency. The use of GFS classification is in force for central and general government and is being extended to local government. A project aimed at strengthening the budget preparation process commenced at the beginning of 2004, and has now been extended until 2008, also broadening the scope to Internal Audits. The Netherlands government is providing technical support for this and there have already been a number of study visits as well as a conference in May 2005. The project will cover: preparing secondary legislation according to the new law; enriching the budget guide (for the budget preparation process); the implementation of medium term budgetary framework and performance-based budgeting; and training. (OA 2005, p. 515)

In practice, the most common measures of the fiscal position are the primary central government budget balance and the overall central government budget balance. These measures are readily available and updated monthly. Data on the primary fiscal surplus performance according to the IMF definition has been publishing monthly since January 2004. Another innovation made in 2004 was the inclusion of special revenues and expenditures in the budget, which is an improvement in transparency. Commentators feel that the credibility of budgetary figures has increased in the last few years, and that budget targets -- while ambitious -- are far more realistic than they used to be. The MoF has made good progress in reducing the deviation between original projections and budget performance. (OA 2005, p. 516)

The PFMC Law sets out a comprehensive framework for budget preparation, execution, accounting, reporting, and internal and external audit. The law consolidates into the central government budget, under a common classification, revolving and extra-budgetary funds, annexed institutions, and all regulatory agencies, bringing the latter under parliament's oversight while preserving their financial and administrative autonomy. It also eliminates earmarking mechanisms. The law also states that all public revenues and expenditures have to be audited by the Court of Accounts, including those of the presidency and parliament. In line with international standards, there will be one external audit body -- the Court of Accounts. Internal audits will be conducted within each government agency by sound internal audit bodies. The Court of Accounts will then assess the internal audit system rather than assessing all transactions as at present. According to the PFMC Law, all central government agencies, budget agencies, social security institutions and local government have to follow the same new budget classification system, and have to use the same accrual-based accounting system. Autonomous budget agencies (regulatory agencies) will now submit their budgets separately to parliament thereby safeguarding their autonomy. Annexed budget agencies will cease to exist in 2006. These new arrangements are in line with international best practice. A special department of the General Directorate of Budget and Fiscal Control drafted a performance-based budget guide in preparation for the 2006 budget. Overall, however, performance budgeting is still at the implementation stage. Commentators stated that budget projections are now more realistic and have been attained in recent years. They found the monthly reporting of the budget performance generally satisfactory. (OA 2005, p. 516)

The Ministry of Finance (MoF) General Directorate of Public Accounts is responsible for public accounting. The lack of a uniform accounting system has been an obstacle to fiscal discipline and transparent fiscal reporting. However, as noted above, a new comprehensive, integrated, accrual-based accounting system was introduced in 2004. A new computerized accounting system is already in place. The new system is in line with International Accounting Standards (IAS) standards and the IMFAC public sector committee. (OA 2005, p. 516)

Under the constitution, the government is obliged to present the final accounts not later than seven months after the end of the calendar year. The government is not as yet legally obliged to present quarterly or half-yearly reports on the performance of the budget, or to update its projections on a regular basis. It had planned to publish quarterly budget reports from July 2005, but this has now been put back to 2006. These reports will provide the public with detailed explanations of budget performance, on top of the monthly press statements and conferences. The MoF General Directorate of Budget and Fiscal Control has authority for releasing and auditing budget expenditures, in conjunction with the budget offices of budgetary agencies. There is a complex, centralized system for releasing allocations and approving payments. Under the PFMC Law, the MoF is now authorized to set standards for financial control and reporting for the general government. (OA 2005, p. 517)

Starting in 2006, increasing decentralization will mean that each line ministry will have greater responsibility for preparing, implementing and auditing of their budgets. Up until this year, ministries have needed the approval of the Ministry of Finance to transfer expenditures from one purpose to another. Now agencies will be allowed to make transfers of up to 20% of total funds. In addition, accountability for line ministries is also increasing. Each ministry will have to make press statements stating their aims and objectives. Each July they will be required to make a mid-year statement on budget performance and fiscal risks to achieving targets set out at the start of the year. Based on these, the Ministry of Finance will put together an overall mid-year report including status on revenue targets and expenditure ceilings. At the end of the financial year, ministries must prepare an accountability report for the Ministry of Finance. The recent accession to the EU (European Union) will also present an additional challenge to Turkey in the coming years. Although the PFMC Law was prepared with the help of the European Commission, there will need to be wider scope for financial statistics, which should improve transparency further. (OA 2005, p. 517)

Public availability of information.

EN

Oxford Analytica (OA), in its 2005 report on Fiscal Transparency in Turkey, rates Turkey's compliance with this principle as "Enacted." In the 2006 Report on the Observance of Standards and Codes for Fiscal Transparency, the International Monetary Fund (IMF) notes that coverage in the budget documents of central government fiscal activities has strict limitations, but the provisions of the Public Financial Management and Control (PFMC) Law will greatly increase the coverage. At present, budget documents exclude EBF, social security institutions, regulatory boards, revolving funds, and ministerial foundations. OA further notes that the annual budget bill submitted to parliament covers: (1) tax, non-tax and special revenues, the expenditure of general budget agencies and the revenues and expenditures of annexed budget agencies and budgetary funds, and (2) transfers for interest payments, special budget agencies (including social security institutions), revolving funds, extra-budgetary funds, and local government. An annual economic report and an accompanying budget memorandum are submitted to parliament together with the budget bill. Starting in 2002, this documentation has also included the accounts and outlook for extra-budgetary funds, social security organizations (including arrears), revolving funds, financial and non-financial state enterprises, local authorities and contingent liabilities of the Treasury. (OA 2005, p. 511; IMF 2006a, p. 26)

The Treasury publishes quarterly information on contingent liabilities and on payments made by the Treasury in its capacity as a guarantor of debt and on the amounts owed to the Treasury by original debtors (municipalities, state enterprises, funds, banks). As of 2003, the net payments of the Treasury arising from loan and performance guarantees have been included in the budget. (OA 2005, p. 511)

There are four existing extra-budgetary funds. Data for those are published every year in the annual program, but there are no plans to publish the accounts more frequently. The Treasury publishes the monthly consolidated primary balances of the three extra-budgetary funds (Defense Industry Support Fund, Social Aid and Solidarity Fund, and the Privatization Fund). Under the 2002 Public Financing and Debt Management Law, funds coming from foreign grants and credits must be included in the budget as revenues. There has hitherto been no attempt to quantify tax expenditures, but this will now become obligatory under the Public Financial Management and Control (PFMC) Law. (OA 2005, p. 511)

The budget documentation includes comparisons with the projection for the preceding year and the outturns for earlier years. Information on budget performance in past years is also available from the Ministry of Finance (MoF)'s General Directorate of Public Accounts, although the changing scope of the budget makes some comparisons difficult. Budget forecasts are not available, although a broad scenario has been set out in the latest International Monetary Fund (IMF) standby agreement. A rolling three-year budget system similar to that in most Organization for Economic Cooperation and Development (OECD) countries is now to be introduced following the passage of the PFMC Law. (OA 2005, p. 511)

The General Directorate of Public Accounts provides monthly performance data in either a ministerial press conference or a press statement, usually within the first half of the following month. This includes a detailed breakdown of budget revenue and expenditures. The new budget classification system has been developed in accordance with international standards, which includes detailed information concerning the budget revenue and expenditures, previously unavailable. Performance-based budgeting, which was specified under the PFMC Law, is still very much at the introductory stages. It was piloted in eight government agencies in 2005 with training courses, and will now be introduced to a further 15 institutions next year, but it is unlikely that it will be fully implemented by the end of 2006. It will require government departments and agencies to publish accountability reports every year, which will then be evaluated by the Court of Accounts. (OA 2005, p. 511)

According to the OA report, economic analysts stated that they find it difficult to keep abreast of the performance of the social security institutions, state enterprises and local government. IMF standby accords in force since 1999 have in principle established targets for the 'consolidated government sector' -- which includes the social security institutions, the larger extra-budgetary funds and state enterprises as well as the budget. The Treasury publishes the monthly consolidated primary balances of the consolidated budget, State Economic Enterprises (SEEs), three extra-budgetary funds, social security institutions and unemployment insurance fund. The introduction of the new budget classification system and accrual-based accounting system, which will apply across the board, should address these problems. Extra-budgetary funds will be subject to the same rules as the rest of the budget, and will be included in the budget put forward by parliament. The new budget classification system -- introduced in 2003 -- creates a consolidated, comprehensive budget and clarifies its composition. The PFMC Law in general creates a unified concept of central government and "collects the various floating agencies and institutions. (OA 2005, p. 512)

Commentators, according to the OA report, feel that fiscal transparency would benefit from systematic written comments -- perhaps monthly reports -- explaining budget data throughout the year similar to those produced by the Central Bank of Turkey (TCMB) on inflation prospects. There is currently a lack of up-to-date data on local government, state economic enterprises, social security institutions and extra-budgetary funds. Commentators noted the need for projections for the social security institutions. According to the PFMC Law, the central government budget realization figures will be published on a monthly basis. Turkey has now passed a Freedom of Information Act. This act defines "the rights of citizens to request information and the obligation of public organizations to provide information". Some officials and commentators have stated that this law is effective, allowing access to previously unavailable government information. For example, public companies now have more information on their websites. However, others say that concepts such as "public secrets" are not precisely defined, thus giving rise to the possibility that government officials may interpret such concepts rather arbitrarily and by doing effective implementation would be limited. (OA 2005, p. 512)

There is comprehensive and timely publication of debt figures. The Treasury makes available data/information on its borrowing activities and publishes regular monthly data on borrowing and debt servicing, the level and composition of domestic debt, the level of Treasury-guaranteed foreign debts, and central government foreign debt. It also publishes quarterly data on foreign debt of all public and private sector institutions, including breakdowns by maturity, currency composition, type of instrument, lender, and borrower. The 2002 Public Financing and Debt Management Law increased the transparency of debt-management decisions. The Treasury is now required to submit to parliament a quarterly report on debt management, and this is also published on its website. This report also reviews debt sustainability. Debt management in general is perceived as transparent. As of 2003, the net payments of the Treasury arising from loan guarantees have been included in the budget. (OA 2005, p. 512)

Turkey subscribes to the IMF Special Data Dissemination Standard (SDDS) and is therefore committed to releasing data on fiscal performance and public debt in a timely manner and in accordance with advance release calendars. (OA 2005, p. 512)

Independent assurances of integrity.

EN

Oxford Analytica (OA), in its 2005 report on Fiscal Transparency in Turkey, rates Turkey's compliance with this principle as "Enacted." The State Planning Organization (DPTM) produces the macroeconomic forecasts used in the budget. The methods, assumptions, and data used for formulating these forecasts are not published or subject to independent scrutiny. However, Turkey meets the International Monetary Fund (IMF) Special Data Dissemination Standard (SDDS). The integrity of government accounts is assessed by the Court of Accounts (Sayistay), an independent judicial body with constitutional status that reports to parliament. The Court of Accounts prepares and manages its own budget and has free access to all documents and information. Its members are elected by parliament and remain members until they retire at 65. Its president is elected by parliament for a seven-year term. (OA 2005, p. 518)

According to the International Monetary Fund's (IMF)2006 Report on the Observance of Standards and Codes for Fiscal Transparency, external audit is independent of the executive branch and the Turkish Court of Accounts (TCA) reports directly to the Turkish National Assembly. The constitution states that central government accounts should be submitted to the Turkish National Assembly within seven months of the end of the fiscal year and that TCA should submit a notice of conformity within 75 days of that date. The President of TCA is elected by majority of the Turkish National Assembly for a period of seven years and can be re-elected upon expiration of this term. The law on the Court of Accounts (section 7) prohibits the dismissal of the President or members of TCA other than on the grounds of criminal conviction or medically certified incapacity due to health problems. Previously the removal from office had to be endorsed by majority vote of the Turkish National Assembly. This provision was annulled by the constitutional court. There has never been an audit of the TCA itself although Article 69 of the Public Financial Management and Control Law (PFMCL) provides for an audit to be conducted by an independent commission appointed by the Turkish National Assembly. Article 69 is due to become effective on January 1, 2006. (IMF 2006a, p. 30)

OA reports that until now, the Court of Accounts has not conformed to international standards and its scope of audit has been quite limited -- it has not been able to audit autonomous agencies or parliament for example. Until 1995, there was only the general confirmatory report once a year. Since then the Court of Accounts has also issued the treasury transactions report, which covers 70 per cent of budget transactions including public debts. As of 1997 performance audit reports were included. Since 2000 there have been two to five regular reports a year and all these reports are published on the Court of Account's website. Currently, it only audits to check for compliance, presenting a General Annual Conformity Report to parliament and commentators remain uncertain as to the Court's overall efficiency. However, under the Public Financial Management and Control (PFMC) Law, all public agencies will be under the scope of audit of the Court of Accounts. Over the past years, work has been carried out in conjunction with the World Bank and the European Commission to improve the capacity and functional efficiency of the Court. This will help prepare it for its expanded role under the new law. In compliance with the PFMC Law, there will also be a number of additional reports such as a General Evaluation Reports, Fiscal Statistics Evaluation Report and, when the Court of Accounts Law is passed, there will be an annual report on State Enterprises. (OA 2005, p. 518)

The Court is to become a proper supreme audit body. At present the Court checks all accounts transactions, which is not efficient. Under the PFMC law, government agencies will have their own sound internal audit inspectors, and the Court of Accounts will simply evaluate the activities and reports of the government agencies' auditors in an annual report in line with the new system of performance auditing. Additionally, the Court of Accounts will produce an annual report highlighting the most significant of all its budget findings. Both reports will be available to the public via the Court's website. The Court is aware of the need to produce more reports to parliament, and the new mandatory reporting requirements mentioned above should address this deficiency. In the past the Court's judicial function has tended to take precedence over the auditing function. (OA 2005, p. 519)

The Court is making considerable efforts to ensure that it has sufficient technical capacity for its expanded role. It feels it has sufficient IT capacity, and has addressed previous concerns over training. New auditors are given two years training. While it feels its current training arrangements are sufficient for the current methodology, it acknowledges that the expanded methodology requires expanded training. As a result, a large portion of the Court's auditors are working with the UK National Audit Office. A twinning program has also been arranged with the European Union, which will continue until the end of 2006, and should increase the skills and capabilities of staff. This program should also help the Court to move towards more financial and performance audits. (OA 2005, p. 519)

The Court of Accounts Law, when passed, will complement amendments to the PFMC law to improve the court's profile and transparency. In addition, a permanent public accounts committee will also be created by parliament in order to receive the Court of Account's reports. The lack of such a committee until now has been partly responsible for the insufficient number of reports produced by the Court for parliament. An opposition member of parliament could head the committee. The creation of this committee is in the government program, though no specific date has been set for this to take place. (OA 2005, p. 519) (OA 2005, p. 519)

The Court of Accounts follows up on its reports, tracking any changes or progress made during implementation. It then takes them to the Parliamentary Planning and Budget Committee. . The Court audits municipalities and local government administrations annually at present. Increasing importance is being given to the audit of municipalities, given that they use significant public resources due to real estate revenues and funds from central government. Municipal companies ('municipal economic enterprises') are not covered. The proposed Court of Accounts Law will allow the Court to audit any transfer of public funds. (OA 2005, p. 519)

At present there are a number of bodies with inspection control in addition to the Court of Accounts. Under the proposed Court of Accounts Law, the Court is to take over some of the duties of the High Audit Board (YDK), thus improving coordination. State Economic Enterprises -- at present under the control of the High Audit Board -- will also come under the control of the Court, as will social security institutions and the four remaining extra-budgetary funds. There is also a State Audit Board (DDK) attached to the presidency, which carries out ad hoc audits at the request of the President and investigations on any part of the public sector, except for the courts and the military. The central bank and some state enterprises including the state banks are already externally audited. The new Municipalities Law also enables the interior minister, upon the request of concerned mayors or the Internal Audit Coordination Board, or where serious possible risks of fraud are detected, to order authorized audit personnel to inspect all financial management and control systems of local administrations for compliance with financial decisions and related legislation. (OA 2005, p. 519)

The State Institute of Statistics, the national statistical agency, enjoys technical independence but in practice it does not verify the quality of the fiscal data provided by the MoF and the other various data-compiling agencies. (OA 2005, p. 519)