Debt Sustainability and the Exchange Rate: The Case of Turkey

The paper attempts to estimate the primary surplus requirement for debt sustainability in Turkey, taking into consideration not only the operational deficit and seigniorage factors but also the exchange rate factor. In estimations, a modified version of the approach suggested by the World Bank (2000:16-18; 121-124) is used (see Appendix A for the derivation of the original formula, which is slightly different from the one in the document mentioned). The analysis is carried out in two steps. First the real interest rate is estimated and then the results are plugged into the primary surplus equation. The exchange rate factor is taken up during the estimation of the real interest rate in TL, on FX-related debt. The debt sustainability issue is evaluated by comparing the estimated primary surplus-to-GNP ratios required for debt sustainability, with the targeted primary surplus ratio, taking into consideration the real interest rate and composition of the existing debt stock.