Looking at the past, we see lax fiscal policies and monetary policies, which had to accommodate them. The latter was accompanied by pegged or foreseeable exchange rate regimes. The outcome of this scenario was high inflation and periods of volatile and unbalanced growth. In such an environment, expectations deteriorated because the public sector led the excessive increase in domestic demand, maturities were shortened and uncertainty increased, the current account deficit widened, and measures continued to fell behind. With the addition of the adverse trigger-effect of domestic or external factors to this environment, an increase in foreign exchange demand and pressure on the foreign exchange reserves of CBRT was inevitable, resulting in crises and devaluation. However, the present circumstances of the Turkish economy are very different from those of the past. To start with, as you all know, unlike the past, a floating exchange rate regime is being implemented. The most apparent feature of the floating exchange rate regime is that it is shock-absorbent. In other words, changes in the demand or supply of foreign exchange are reflected in the level of the exchange rate, and in contrast to pegged or foreseeable exchange rate regimes, the exchange rate goes up or down.
The ratio of net public debt stock to national income declined to 64.5 percent end-2004 and the Treasury borrowed with a fiveyear maturity for the first time in the domestic market. Sustainability of debt will soon be taken off the agenda soon. In this framework, it will be possible for the risk premium and consequently real interest rates to go further down in the upcoming period, as public finance has been equipped with a sustainable structure  14  BIS Review 36/2005  with the continuation of tight fiscal policy and the launch of structural reforms in the areas of banking, taxes and social security. Graph 12: Budget Deficit, Primary Surplus and Domestic Debt Stock (% GNP) 80 70  Budget Deficit  Primary Surplus  60  Domestic Debt Stock  50 (%)  40 30 20 10 0 -10 -20 2004  2003  2002  2001  2000  1999  1998  1997  1996  1995  1994  1993  1992  1991  1990  1989  1988  -30  Source: Turkish Treasury. Now, I would like to underline a specific point related to the current tight fiscal policy. As I have mentioned earlier, tight fiscal policy played an important role not only in alleviating the public debt problem, but also in the improvement of expectations. The key factor regarding the tight fiscal policy in the said period was the target of a high primary surplus.