The document discusses the theory of public finance and management of public funds in Turkey. It covers several topics: 1) The management of public money flow, including the various sources of state revenues and expenses. A portion of revenues are continuous while some expenses are temporary in nature. 2) Monetary policy and its tools to influence money supply, interest rates, and economic outcomes. There are requirements for effective monetary policy implementation. 3) Public debt management, including domestic and external borrowing. Debt instruments, costs, and the measurement of debt stock and burden are outlined. 4) Management of state-owned enterprises and other public shares. Reasons for their establishment and oversight in Turkey are summarized.

1. THEORY OF PUBLIC FINANCE
RESEARCH
8.01.2016
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ÇUKUROVA ÜNİVERSİTESİ

2. THEORY OF PUBLIC FINANCE
RESEARCH
THE MANAGEMENT OF PUBLIC MONEY FLOW
The Management of Public Money Flow and The Relation with Monetary Policy
The management of public money flow comes in the first place of Treasury’s oldest known
functions.It can be described briefly as follows ; storing,evaluating,planning of usage and
executing activities of the documents representing money and money in the hands of the
public sector or more narrower sense ‘the state’.
To the State Treasury becomes an input of money from various sources for a variety of
reasons.It is possible to sort these resources in summary such as the following;
 The collection of mandatory revenues such as taxes,duties,fees.
 The revenues derived from sale and rental of immovable property of the state or
operating in another way.
 The profits that are obtained from various economic institutions of the state and
transferred to the Treasury,dividend incomes,etc.
 Proceeds from the privatization of state-owned economic enterprises in various ways.
 Facilities provided by domestic and foreign borrowing.
 Various internal and external grants and assistance.
 Incomes are provided from sale and rental of movable property under state ownership
or on the operation in other ways.
 Deposited in the bank accounts of public money and yields such as interest rates
obtained from sources such as bonds.
 Some monopoly rights and the income derived from the concessions granted to certain
institutions owned by the state.
 Proceeds from the sale of securities.
 Tax penalties, traffic fines and other penalties.
A portion of these revenues of the State Treasury in a continuous section, there are also
expenses of a temporary nature. It is possible to collect the state's continuous expense around
the following major components;
 Salaries, wages ,allowances,disease and treatment costs of an officer and employees in
the public sector.
 The state required for the performance of its direct investment activities.
 Various subsidies and support expenses.

3.  State requires that the goods and services or hire purchase payments for service
provision.
 Mature principal and interest payments of internal and external borrowings of state.
Also some state expenses exhibits a temporary structure, it is possible to count the following
as examples;
 Grants and assistance to other states or international organizations.
 War, earthquakes, natural disasters and other miscellaneous expenses required in
exceptional cases.
 Various indemnities.
Monetary Policy
Monetary policy is the process by which the government, central bank, or monetary authority
of a country controls the supply of money, availability of money, and cost of money or rate
of interest to attain a set of objectives oriented towards the growth and stability of the
economy. Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy rests on the relationship between the rates of interest in an economy, that is
the price at which money can be borrowed, and the total supply of money. Monetary policy
uses a variety of tools to control one or both of these, to influence outcomes like economic
growth, inflation, exchange rates with other currencies and unemployment. Where currency is
under a monopoly of issuance, or where there is a regulated system of issuing currency
through banks which are tied to a central bank, the monetary authority has the ability to alter
the money supply and thus influence the interest rate (to achieve policy goals).
Quantity Theory Of Money
An economic theory which proposes a positive relationship between changes in the
money supply and the long-term price of goods. It states that increasing the amount of money
in the economy will eventually lead to an equal percentage rise in the prices of products and
services. The calculation behind the quantity theory of money is based upon Fisher Equation:
Calculated as: M*V=P*Q
In this equation;
 M: represents the money supply.
 V: represents the velocity of money.
 P: represents the average price level.
 Q: represents the volume of transactions in the economy

4. There are three fundamental requirements to conduct monetary policy effectively;
 The exclusion of the influence of political power by the monetary authority: A central
bank should be independent from the political mixtures of the monetary authority, and
monetary policy must be tied to specific rules.
 Prevent an environment that allows Treasury and other institutions constituting the
public sector to use credit from the Central Bank easily.
 There is one institution that manages the flow of public money is to be applied to
create the opposite of the Central Bank monetary policy. If more than one public
institution that manages the flow of money in the economy is inevitable to encounter a
cash flow management contradictory inconsistent with each other.In this case,Central
Bank in the monetary authority position,to ensure coordination between and across
institutions can not be expected to make them compatible with the demands of
monetary policy. No other options from a single central Treasury and managing the
public money flows across the monetary authority for the implementation of a robust
monetary policy.
The Management of Public Money Flow in Turkey
Treasury cash management was conducted with a method called the Single Treasury Account
from 1972 until 2007.In this process,all collections of public institutions and Treasury
payments were made from this account.The essence of this method, was the basis for the
mutual equalization of revenues and expenses.At the end of the day,surplus in the public
institutions account transferred to Treasury Single Account and deficit were covered from this
account.
In 2007,a protocol was signed between the Ministry of Finance, the Treasury and the Central
Bank, was passed to the Treasury Single Current Account method instead of the Treasury
Single Account method.Starting from the end of 2010,was passed to the Government
Electronic Payment System.Payment and collection transactions of all the provinces and the
central accounting departments gathered in one place.
Monetary Policy in Turkey
On 21 April 1994, limitations were imposed on the Treasury’s use of CBRT funds; and with
the protocol signed between the Bank and the Treasury in 1997, it was concluded that the
Treasury would not use short-term advances from the CBRT from 1998 onwards.
The monetary program targets are as follows;
 Preventing the growth of the total balance sheet beyond a certain extent.
 Limiting the growth of total domestic liabilities.
 Limiting the growth of net domestic assets of the Central Bank.
 Limiting the growth of the Central Bank Money.

5. The formation of the TC Central Bank's total domestic liabilities:
Emissions + Reserve requirements of banks + Free deposits at the TC Central Bank of the
banks + Credit facilities available on TC Central Bank of the banks + Fund accounts + Non-
bank sector deposits at the TC Central Bank = Reserve Money + TC Central Bank's debts
arising from open market operations = Monetary Base + Free deposits at the TC Central
Bank of the public sector + Credit facilities available on TC Central Bank of the public sector
= TC Central Bank Money + Followed as foreign currency deposits = TL liabilities of the
TC Central Bank+ Foreign currency deposits of banks = Total domestic liabilities
DEBT MANAGEMENT
The Public Sector Borrowing Requirement
The public sector borrowing requirement occurs due to deficit resulting from public
expenditure is more than public revenue . The standard definition of the public sector
financial deficit is differences in public expenditures and total public revenues except for
changing in debt.It is formulated as;
Public Sector Financial Deficit = Public Revenue – Public Expenditures
Public Sector Financial Deficit Balance = Borrowing From Private Sector Financial
Surplus+Borrowing From Foreign Finance Surplus
Borrowing requirement,the way finance public sector financial deficit, becomes inevitable
when public sector financial deficit grows.
For measuring the public sector borrowing requirement in Turkey,the public sector financial
deficits shown below are included in the calculation:
The consolidated budget deficit+ Funding deficits of state-owned enterprises+ Financing gap
of non-budgetary funds+ Financing gap of local governments+ Financing deficits of the social
security institutions+ Financing gap of organizations having revolving funds= Total public
sector deficit/GNP= The public sector borrowing requirement.
Treasury's Domestic Borrowing
The Instruments and The Cost of Borrowing
The Instruments of Borrowing
Government bonds are the name given to Treasury’s one year and longer-term debt securities.
Teasury bonds are the name given to Treasury’s less than one year term debt securities.

6. Domestic Borrowing Interest Methods
 Normal interest
 Discounted paper borrowing interest
 Coupon paper borrowing interest
Domestic Borrowing Methods
 The auction method of borrowing
 Borrowing from the market without the auction.
 Borrowing from Central Bank
External Borrowing of The Public Sector
Credit Rating
Credit rating of a country can be measured in several ways.IMF Article 4 Consultation
Report,Recent Economic Developments Report,Country Economic Memorandum and OECD
Annual Country Review Reports contain detailed information about the country with these
aspects these reports are references for creditors.In addition, journals such as Euromoney and
rating agencies are referenced institutions and organizations.
Sources,Purpose and Form of External Borrowing
Treasury's external borrowing can be exemined by divided into two types in terms of
resources.Firstly,external debts supplied from Foreign States or International
Organizations.Secondly, external debts supplied from the International Monetary and Capital
Markets or Foreign Markets briefly.
The first group is usually called concessional loans and longer maturities and lower interest
rates, although it is a type of debt that allows borrowing refers to borrowing facilities
provided by the second set of market conditions.
External debt of the Treasury can be said that two general objectives. The first of these, the
financing of the balance of payments, and secondly, the provision of external resources
needed for the execution of a specific project.
Treasury is borrowing from international institutions involved in two ways.Firstly,Treasury to
borrow directly from international organizations on behalf of the state and uses its own debt
or transferring to another public institution that allows the use of its,secondly,Treasury
provided a guarantee to the public institutions which borrow from international organizations,
enables the debt of these institutions
Debt Stock,Debt Burden,Debt Service
Public Sector Debt Stock= Public Sector Internal Debt Stock+Public Sector External Debt
Stock
Public Sector Total Debt Burden= Public Sector Total Debt Stock / GNP

7. Debt service includes various complex issues regarding the payment of the debt such as,the
payment of expenses such as the principal,interest and commission arising from domestic and
foreign debt, extend the maturity of existing debt, changing the interest of an existing debt,
conversion into capital of debts.
Debt Management in Turkey
The Public Sector Borrowing Requirement in Turkey
Measuring Public Sector Borrowing Requirement in Turkey;
Total Public Sector Financing Gap= Consolidated Budget Deficit + Total Funding Deficits of
State-owned Enterprises+ Total Financing Gap of Non-budgetary Funds+Total Financing gap
of local governments+Total Financing Deficits of the Social Security Institutions+Total
Financing gap of organizations having revolving funds
The Public Sector Borrowing Requirement= Total Public Sector Financing Gap / GNP
Treasury Domestic Borrowing in Turkey
In Turkey, Treasury borrowing through auctions were conducted with selling Government
Bonds or Treasury Bills between 1985-1994. After 1994, this method has become corrupted,
weekly tenders were often canceled without notice and reliability has been greatly
damaged.The second half of 1997 is the period to tender process based the rules. During this
period, a monthly calendar of auctions and the estimated volumes were being announced
previously,then the calendar is removed to three months.
Treasury External Borrowing in Turkey
There are two different opinions as regards external debt in Turkey. The first of them to
continue the external debt will not exceed debt service and without harming the credibility of
the country, the second is to increase the external debt and resolving internal financing
problem with resources provided here .
Turkey should continue its external debt without harming the credibility and in parallel with
the external debt service. Through foreign borrowing it is impossible to solve the problem of
the internal economic balance without solving the problems which are the reasons behind
internal financing imbalances such as failure to collect taxes,indiscipline in funding costs,the
amount of investment and employment exceeding the size in state-owned enterprises and first
and foremost,lack of political will is the most important issues needed to solve the current
economic problems.Especially in 1993,Turkey have tried to solve internal financing
imbalances by increasing foreign borrowing with these resources. Only that practice has
shown that after the settlement of internal imbalances, increasing the foreign debt to be used
for productive investment which appears to be the right choice.

8. MANAGEMENT OF PUBLIC SHARES
The Concept of Public Share
Public Share is the capital share of public sector existing in a variety of economic
organizations.Treasury executes representation of such State's capital share on behalf of the
state due to Treasury the legal entity of the state.
Reasons for the Establishment of State-owned Enterprises
 An important element among economic reasons, assumption in the form of the private
sector can not be left to profit maximization principles in the pricing of some of the
basic quality goods and services.Through state-owned enterprises established for this
purpose, it is trying to reconcile the principles of profitability and overall benefit in
some degree.
 The objective of providing revenue for the public sector is at the beginning of fiscal
reasons.State-owned enterprises while using a hand tool to reconcile profitability and
overall benefit, while income surplus obtained through these organizations constitute
an alternative factors of obtaining income by getting taxes.
 In some cases, state-owned enterprises are established to fill the vacancy created in
areas where it is not suitable to profitable investment or where private sector have
inefficient source.
 The ideology of the ruling party may give rise to the establishment of this
organization.
A business entity can be considered state-owned enterprises is accepted due to the presence of
three criteria.
 State is the largest shareholder of the company concerned or includes management or
control in his hand.
 The company engaged in the production of goods and services sold to individuals and
organizations.
 The main objective of the company is not the profit maximization,it is to reconcile the
profitability with overall benefits at the optimum balance.

9. The Management of State-owned Enterprises in Turkey
In Turkey, evaluation of the state-owned enterprises in the framework of the Annual Overall
Investment and Financing Programs has emerged as a result of principles of the planned
economy and planning concepts come from 1961 Constitution. State-owned enterprises
Annual Overall Investment and Financing Programs consists of annual funds flow statement
jointly organized by Treasury and State Planning Organization.
Funds flow statement consists of three sections;
 Resources table
 Payments table
 Financial balance sheet
Management of Other Public Shares
Other public shares are state-owned capital shares in private companies located outside the
state-owned enterprises. These shares are formed as a result of the public sector to participate
in some companies, mostly owned by the private sector for various reasons.State shares in
these companies are not represented by the Treasury,these are represented by a Partnership of
Public Administration.
BUDGET FINANCING
Fiscal Policy
fiscal policy is implementation of tax and other income with public expenses in accordance
with monetary policy as a policy tool in order to ensure rapid economic growth, high
employment and a stable price level.Fiscal policy tools are;
 Automatic stabilizers: No need for legal arrangements.Operate as a first preventive
against inflationary and deflationary economic development.Mainly tasks, mitigate the
first and immediate effect of economic fluctuations and in later stages gain time to
implement more extensive measures.
 Stability policy instruments:Legal arrangements are necessary.In this reason it is both
difficult and time consuming to activate.
Budget Financing in Turkey
The public sector consists of two main categories and their subcategories below.
(A) General administration
1. Central administration
(a) Public administration are managed within the overall budget: Grand
National Assembly of Turkey, Presidency etc.
(b) Authorities under special budget: Higher Education Council, universities
etc.

10. (c) Regulatory and supervisory agencies: Capital Markets Board, Bank
Regulation and Supervision Agency etc.
2. Social security institutions
(a) TC Pension Fund
(b) Social Security Institution
(c) Bag-Kur
(d) Turkey Business Council
(e) Eregli coal basin accumulating worked and help fund
3. Local governments
(a) Municipalities
(b) Special Provincial Administrations
(c) Associations established by Municipalities and Special Provincial
Administrations
(B) State-owned enterprises
1. Operators State-owned enterprises
2. Financial State-owned enterprises
The main revenues and expenses items of consolidated budget of Turkey.
1. Revenues
 Tax revenues
 Non-tax revenues
 Private revenues and funds
2. Expenses
 Current expenses
 Personnel expenses
 Other current expenses
 Investment expenses
 Transfers
The amount had to be financed by the Treasury is also responsible is a greater amount of the
cash deficit and the budget deficit.This amount is called the budget financing requirement.
Budget balance= Budget revenues -Budget expenditures
There are three types of budget balance;
Budget balance > 0,if Budget revenues > Budget expenditures. In this case there is budget
surplus.
Budget balance < 0,if Budget revenues < Budget expenditures. In this case there is budget
deficit.
Budget balance = 0,if Budget revenues = Budget expenditures. In this case it means budget is
balanced.

11. Budget revenues =Tax revenues + Non-tax revenues
Budget expenditures = Personnel expenses + Other current expenses + Investment expenses +
Transfer expenses
Budget balance =( Tax revenues + Non-tax revenues) – (Personnel expenses + Other current
expenses + Investment expenses + Transfer expenses)
Primary budget balance=Budget revenues - Budget non-interest expenses
Budget cash balance=Budget balance - Budget trusts+Advance payment
Budget cash balance= ( Tax revenues + Non-tax revenues) – (Personnel expenses + Other
current expenses + Investment expenses + Transfer expenses) - Budget trusts+Advance
payment
If Budget advance payments = Budget trusts , Budget cash balance = Budget balance.
If Budget advance payments > Budget trusts , Budget cash balance > Budget balance.
If Budget advance payments < Budget trusts , Budget cash balance < Budget balance.
Budget financing requirements= Budget cash balance+ Internal debt principal
payments+External dept principal payments
Budget financing requirements=( Tax revenues + Non-tax revenues) – (Personnel expenses +
Other current expenses + Investment expenses + Transfer expenses) - Budget trusts+Advance
payment – (Internal debt principal payments+External dept principal payments)
If Internal debt principal payments+External dept principal payments=0, Budget financing
requirements = Budget balance
If Internal debt principal payments+External dept principal payments>0, Budget financing
requirements > Budget balance
The amount that had to be financed by the Treasury = Budget financing requirements + Other
Treasury financed this amount in three ways;
 New internal and external borrowing
 Using short-term advances from the Central Bank.
 Other resources
Treasury financing= New internal borrowing + New external borrowing + Using short-term
advances + Other Financing items
Treasury financing general equation = ( Tax revenues + Non-tax revenues) – (Personnel
expenses + Other current expenses + Investment expenses + Transfer expenses) - Budget
trusts+Advance payment – (Internal debt principal payments+External dept principal
payments) = Budget financing requirements + Other = The amount that had to be financed by

12. the Treasury = New internal borrowing + New external borrowing + Using short-term
advances + Other Financing items
FINANCIAL MARKETS – TREASURY RELATIONS
Financial markets and Financial institutions
Financial market is a market where supply of the loanable funds meet to demand intended for
these funds. The main function of the financial market is providing to transfer loanable funds
and financial capital from income surplus ones to expenses surplus ones. Two types of
funding is the subject of this market;
 Direct funding occurs in the form of income surplus ones direct lending their savings
to expenses surplus ones .
 Indirect funding occurs in the form of savings collected from income surplus ones by
intermediaries to be directed to expenses surplus ones.
In today's world,common funding form is indirect funding.Financial intermediaries are called
to individuals and institutions that mediate indirect financing.The major ones are revenue
collecting institutions such as banks, insurance companies, social security institutions and
brokerage companies.
In general, financial markets can be grouped under two headings;
 Money market
 Capital market
Money market is a market that 1 year or less short-term loanable funds suppliers meet with
who demands this kind of short-term funds.Transfer of loanable funds from suppliers to to who
demand carried out with the use of paper as a less than one year short-term bonds and checks.
The presence of Treasury’s less than one year short-term debt securities puts this institution
into the parties of the market.Interest rate is a measure of market balance in the money
market.
The stock exchange is called where the capital market is created. The stock exchange is where
the purchase and sale of stocks and bonds is performed between people who are members of
the stock exchange.Important stock exchanges of the World are Tokyo Stock Exchange,New
York Stock Exchange and London Stock Exchange. The stock exchange is a market that more
than one year long-term loanable funds suppliers meet with who demands this kind of long-
term funds.

13. SOURCE:
Eğilmez, A. Mahfi. Hazine. Diyalog Yayınları, 1997.