ISTANBUL – Turkey’s progress toward the European Union is adding momentum to an economic reform process which has helped the large Muslim country rebound from a deep recession sparked by a financial crisis in 2001. But Ankara faces daunting challenges in curbing its huge public debt, reforming an unwieldy farm sector, slashing red tape and corruption and tackling a sharp disparity in income levels between western Turkey and the impoverished east. The European Commission is widely expected to recommend in a report on October 6 that the EU open entry talks with Turkey. EU leaders will make a final decision at a December summit and the negotiations, if launched, are likely to last many years. While attention in Brussels focuses mainly on Ankara’s efforts to fulfill the political criteria for membership, investors are taking a close look at the country’s large growth potential as it seeks long-term convergence with the EU. The IMF expects its economy to expand 10 percent this year, the third year of strong growth under a $19 billion IMF loan accord. Turkey is set to begin a new IMF deal in 2005 and the prospect of EU membership will help reinforce the positive mood. «The EU accession process could serve as an engine of transformation for Turkey,» said Mehmet Simsek, emerging markets economist and strategist at Merrill Lynch. Before finally joining the EU, Turkey must earn the tag of «functioning market economy» and be deemed able to cope with the competitive pressures of the single market. Turkey has made strong progress in this direction in recent years. Prime Minister Recep Tayyip Erdogan’s government has cut inflation to 10 percent, down from triple digits in the 1990s, and has committed itself to fiscal discipline and public sector reform. Most importantly, the banking sector has been reformed at a cost of nearly $50 billion. This has fueled public debt, which stood at some 80 percent of gross national product in 2003, compared with around 40 percent in new EU member states. «The government needs to concentrate on reducing inflation, the net public debt to GDP ratio and the budget-debt-to-GDP ratio as well as structural reforms,» said Raymond James chief economist Ozgur Altug, referring to the EU’s «Maastricht criteria» which Turkey would have to meet to join the eurozone. Turkey’s economy has suffered a series of financial crises and chronic high inflation for decades and last saw the current moderate inflation levels in the 1970s. The lira lost more than 50 percent of its value in the February 2001 crisis. But since then the prospect of joining the EU has become an embedded positive factor in Turkish markets, helping the wider economic stabilization process. Foreign investment The prospect of EU membership could also help propel Turkey’s faltering privatization process as it seeks to attract much-needed foreign direct investment (FDI). FDI inflows since the 1980s have averaged less than $1 billion a year. «Turkey has failed miserably to attract FDI in the last 30 years. FDI is key to long-term economic performance. Investment is the key driver of productivity and EU candidates tend to attract significant FDI inflows,» Simsek said. Analysts said one of the biggest challenges faced by the Turkish economy was the transformation of the huge agriculture sector, which accounts for a third of employment. Europe’s agriculture chief Franz Fischler said last week Turkey’s farming sector would have great difficulty adapting to tough EU standards on food safety and hygiene and also noted its big price differentials with the bloc. A Turkey inside the EU could absorb as many funds under the expensive Common Agriculture Policy (CAP) as all 10 of the mostly ex-communist states which joined this year, he said. But Oguz Demiralp, Ankara’s ambassador to the EU, told Reuters in an interview on Tuesday that by 2013, farm subsidies in the EU would disappear, spurred by reform of the Common Agricultural Policy and the results of World Trade Organization negotiations. «The EU cannot sustain agricultural subsidies any more in the context of world trade. They will disappear. We do not expect anything from the agricultural side,» he said. According to Faruk Selcuk, assistant professor at Ankara’s Bilkent University, Turkey should move to producing a multi-year budget instead of an annual budget in order to increase visibility in economic planning.