




































American Research Journal of Economics, Finance and Management 

Volume 11 Issue 1, January-March 2023 

ISSN: 2836-9416 

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FISCAL SUSTAINABILITY AND MACROECONOMIC STABILITY 
IN TURKEY: AN EMPIRICAL STUDY 

 
 

Dr. Erkin Gültekin 
Ph.D., T.C. Ziraat Bank A.S., Eskisehir, Turkey 

 
Abstract: In today's globalized and technologically advanced world, economies around the globe 
are deeply interconnected, leading to varying economic balances in both developed and emerging 
nations. Maintaining macroeconomic stability in these countries is crucial, and this brings us to the 
concept of sustainability. 
Sustainability, while lacking a precise definition in economics literature, generally encompasses the 
idea of ensuring the continuity and self-sufficiency of an economy. It goes beyond the stability of 
individual macroeconomic indicators, emphasizing the harmony and coherence between these 
indicators. Among the first concepts related to economic sustainability is fiscal sustainability. 
Fiscal sustainability, a frequently used term in economics, gained particular importance in economic 
policy planning during the 1990s. Although its definition lacks clarity, various perspectives exist. 
Buiter (1983) views fiscal sustainability as the implementation of policies that stabilize the net value 
of the budget deficit relative to GDP. In contrast, Blanchard et al. (1991) define it as achieving 
convergence of the Public Debt/GNP ratio to its initial level while ensuring the ability to service debt 
with public revenue. Edwards and Vergara (2002) suggest that fiscal sustainability exists when the 
Public Debt/GDP ratio remains stable and consistent with the overall demand in an economy. 
Analyzing the sustainability of the public sector involves calculating the primary balance required to 
maintain a sustainable and stable Public Debt/GDP ratio. Izquierdo and Panizza (2003) define fiscal 
sustainability as a country's capacity to meet its budget deficit. Among various methods to achieve 
balanced budget conditions, public debt is a widely employed strategy. 
Keywords: sustainability, fiscal sustainability, macroeconomic balance, economic stability, public 
debt 
  
1. Introduction   
Today, many countries in the world implement free market economies, and the economies of countries 
and markets are integrated with the advancements in globalization and technology. This process has 
caused different economic balances in emerged and emerging economies. These conditions of economic 
balance do not only manifest themselves within emerged and emerging economies; they can differ 
between these countries, as well. In this context, preserving the macroeconomic balance of these 
countries is as important as providing it. Preserving macroeconomic balance leads us to the concept of 
sustainability.  
Sustainability is a concept often used even though it does not have a clear definition in the economics 
literature. This concept generally defines the provision of continuity of the economy and enough 
sufficiency to ensure this continuity. From this perspective, sustainability can be interpreted as not only 

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the stability of a macro indicator but also the balance and compatibility between macro indicators. The 
first concept to have appeared related to economic sustainability is fiscal sustainability.  
Fiscal sustainability is a concept often used in the economics literature and was especially important in 
the planning of the economic policies of the 1990s, but it does not have a clear definition. Buiter (1983) 
defined fiscal sustainability as the implementing of policies that stabilize the net value of the budget 
deficit ratio, which is the difference between budget revenue and budget expense, to the GDP rate. On 
the other hand, Blanchard et al. (1991) defined fiscal sustainability as the convergence of the Public 
Debt/GNP ratio to the starting level and being able to meet loans with public revenue. According to 
Edwards and Vergara (2002), if the Public Debt/GDP ratio is stable and consistent with the total 
demand in an economy, then fiscal sustainability is present in that economy. Calculating the primary 
balance of the public sector that is compatible with a sustainable and stable Public Debt/GDP ratio is 
an important element in the sustainability analysis of the public sector. Izquierdo and Panizza (2003) 
defined fiscal sustainability as a country’s sufficiency to meet the budget deficit. Balanced budget 
conditions can be provided with different methods. Public debt is one of these methods and it is widely 
used by many countries.   
Therefore, budget constraints alone are not sufficient conditions for the provision of fiscal 
sustainability. In light of these definitions, it can be said that fiscal sustainability focuses on two main 
points: sustainability of the budget balance and sustainability of external debt stock. The sustainability 
of the External Debt Stock/GDP ratio in the long term is based on the fact that this deficit is not covered 
by higher interest rates and thus inflation. Therefore, in addition to a reasonable course of external debt 
stock, financial sustainability requires a macroeconomic environment that supports stable economic 
growth, stable money and credit flow, and openness to foreign markets. In other words, coordination 
is needed between growth factors and money policy in order to ensure a sustainability level that will 
support all macroeconomic goals of the economy. In an economy that has a low Debt/GDP ratio, a low 
real interest rate and high seigniorage revenue can be provided in an environment of high inflation. In 
an economy with a high Debt/GDP ratio, on the other hand, sustainability can be ensured with high 
real economic growth and other stable variables (Fraser, 1999).  
Emerging economies resort to external borrowing due to the fact that they cannot finance economic 
development without an external source of loans, importing intermediate and investment goods and 
meeting public expenses with public revenue; the costs of internal borrowing are also high. Therefore, 
a healthy debt structure is vital to an emerging economy. As Burnside (2005) stated, fiscal sustainability 
is the power of meeting the debt load of the public authority as well as preserving the same set of 
policies. Accordingly, protecting the same set of policies requires the correct identification of the factors 
that cause fiscal deficit.  
Whether this deficit stems from public savings deficit or private sector savings deficit, the financing of 
this debt through borrowing is legitimized in today’s economies as long as the debt service is 
sustainable. Since a public savings deficit means a budget deficit, or in other words the difference 
between public revenue and public expense, the concept of budget deficit sustainability is sometimes 
used in the literature instead of fiscal sustainability (Karatay Gögül, 2016, p. 90). However, following 
the privatization practices in emerging economies, public sector involvement in the economy decreased 
as private sector investment percentages in manufacturing and services increased. In these countries, 

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the financing needed for new investments of the private sector is financed with internal borrowing 
and/or external borrowing. Therefore, private sector borrowing is as important as public borrowing for 
the concept of sustainability. Importing public budget deficit stock in the provision of internal funds 
may negatively affect the investments of the private sector by restricting internal fund provision. This 
situation, which is known as “crowding out,” may lead the private sector to use more external sources 
of loans. Savings deficits in emerging economies make it difficult to provide resources. Furthermore, 
problems of high inflation in these economies cause an increase in interest rates. Access to low-cost 
external sources is important. Therefore, both the public sector and the private sector seek external 
resources.  
Even though external debts provide resource transfer at the moment they are obtained, resource loss is 
evident when the interest rate and the capital are repaid. Thus, it is necessary to consider how much 
the loan contributes to the production potential of the country when the benefit and cost of the external 
debt are analyzed (Karluk, 2002, p. 147). Sustainability of the external debts makes the balance between 
the real interest rate being paid and the real growth rate of the economy important. The integration of 
financial markets led to the free movement of portfolio investments made to countries. It is seen that 
emerging economies cannot take long-term and fixed-rate loans with national currency in each period. 
Countries with insufficient internal savings are required to offer a sufficient real return in order to 
attract portfolio investments. However, both external borrowing and the flexibility of the portfolio 
investments bring about currency and interest risks. 
Sustainability of the debt stock becomes harder as the ratio of the debt stock to GDP increases. Once 
more, when the real interest rate is higher than the growth rate, the ratio of the debt stock to GDP will 
increase mathematically. The primary surplus of the budget is an important nominal anchor in terms 
of public finance. Even though the real interest rate is higher than the growth rate, public finance can 
prevent the increase of the public debt stock by having a primary surplus. However, when both the real 
interest rate is higher than the growth rate and public finance has a primary surplus, the ratio of the 
debt burden to GDP will increase rapidly and the economy of the country will be fragile (Karatay Gögül, 
2016).  
The primary surplus of the budget is a nominal anchor for public finance while having higher real 
interest rates than growth rates makes it difficult to maintain financial sustainability of the private 
sector. This also increases the cost of internal borrowing for the private sector. Resource provision is 
easier for large companies, while this process is harder for small and medium-sized companies.   
Furthermore, an inflow of foreign capital to the country is needed to sustain external debts. The most 
efficient way to ensure this is to increase net exports. Utilizing the finance provided by loans, especially 
in the sectors related to exports, contributes to the conversion of external debt. When all of these 
conditions are taken into account, the concept of sustainability should be considered as not only fiscal 
sustainability but also as financial sustainability. The macroeconomic balance achieved with both the 
public and the private sector can be used to define financial sustainability. For this matter, both public 
and private sector loan usages and the sustainability of these debts are vital.  
Turkey is one of the aforementioned countries for which borrowing is seen as a problem. Sustainability 
of the debt stock particularly came into prominence after the economic crisis of 2001 and it has 
remained one of the most important problems on the agenda since then (Göktan, 2008). After the 

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economic crisis of 2001, attempts were made to control fiscal discipline, and the nominal anchor of 
primary surplus was used as a control mechanism. However, the current deficit increased swiftly after 
this period, bringing about the need for financing and providing continuity in economic growth due to 
the fact that manufacturing requires imports. Privatization gained momentum and the private sector 
started to replace the public sector in the economy. Low internal savings and in particular high real 
interest rates until 2008 caused an increase in the external debt level of the private sector. The global 
economic crisis after 2008 and global liquidity expansion enabled implementation of more flexible 
policies. The debt sustainability of the emerging economies began to be questioned after statements 
towards a global consolidation period and the steps to be followed were explained in 2017. All of these 
developments made the continuity of financial sustainability important for Turkey, as well. 
Many studies have employed stationarity series tests and co-integration tests to empirically measure 
fiscal sustainability. The application of stationarity tests is a standard approach for testing the 
sustainability of budget deficits. This method was first used in the works of Hamilton and Flavin (1986), 
Trehan and Walsh (1988, 1991), and Ahmed and Rogers (1995) (Şen, Sağbaş, & Keskin, 2010, p. 111). 
The variables examined in stationarity test methods are analyzed by applying unit root tests. If series 
are stationary in the test results, then it is concluded that the relevant series have sustainability.  
In this study, some variables used for examining fiscal sustainability and some variables that may 
indicate financial sustainability were employed to analyze financial sustainability in Turkey. The 
variables of EU-Defined General Government Debt Stock/GDP, Public Net Debt Stock/GDP, Net 
External Debt Stock/GDP, Nonfinancial Private Sector Loan Usage/GDP, GDP Growth, Real Interest 
Rate of Commercial Credits, and Real Interest Rate of Government Domestic Debt Securities were 
analyzed with stationarity tests and the levels of difference between the variables of GDP Growth and 
Real Interest Rate of Commercial Credits and Real Interest Rate of Government Domestic Debt 
Securities were examined.  
2. Literature  
Hamilton and Flavin (1986) examined the budget policies of the period between 1960 and 1984 in the 
USA with an approach that they developed and found results suggesting that sustainability was 
ensured. In the work conducted by Kremers (1988), following that of Hamilton and Flavin (1986), it 
was indicated that an insufficient gap lag was used in the regression equation. Kremers repeated the 
analysis for the same period and claimed that the budget deficits of the USA were unsustainable. The 
method developed by Hamilton and Flavin (1986) was also employed in different countries: in Canada 
by Smith and Zin (1991); in Italy by Baglioni and Cherubini (1993); and in Greece by Makyrdakis, 
Tzavalis, and Belfoussias (1999). These authors all reached results indicating unsustainable budget 
deficits. Feve and Henin (2000) examined the fiscal sustainability of G-7 countries with unit root tests 
and found that fiscal sustainability was not ensured in some of those countries.  
Croce and Juan-Ramon (2003) carried out fiscal sustainability research in their study that included a 
group of countries and found that Turkey, Argentina, and Brazil did not have sustainability in the 1990s 
while Belgium, Indonesia, Ireland, and Mexico did have fiscal sustainability in that period. Ono (2008), 
in his work on the fiscal sustainability of G-7 countries, employed both standard unit root tests and unit 
root tests depending on nonlinear time series for sustainability research and found results in favor of 
fiscal sustainability for these countries, except for Japan. Studies conducted on Turkey have generally 

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shown that the economy of Turkey does not have fiscal sustainability. When we look at the studies 
conducted on the fiscal sustainability of Turkey, those of Göktan (2008) and Aslan (2009) hold an 
important place in the literature. Göktan (2008) used quarterly data of 1999-2006 and examined the 
fiscal sustainability of Turkey in terms of debt stock, debt stock/GDP, primary balance, and primary 
balance/GDP criteria with both ADF unit root tests and co-integration analysis. The results found by 
Göktan (2008) showed that Turkey did not have fiscal sustainability in the examined period.  
On the other hand, Aslan examined the sustainability of the budget deficits on both a monthly (2006:1, 
2009:6) and a yearly (1980-2005) basis and employed ADF unit root tests and co-integration analysis. 
The findings showed that budget deficits in Turkey were sustainable when analyzed on a monthly basis, 
but not on a yearly basis. In both analyses, standard ADF unit root tests and co-integration analysis 
were employed and non-consistent results were found. Ucal and Alıcı (2010) used quarterly data of the 
periods of 1989:1-2000:12, 1989:1-2008:12, and 2001:12008:2 and examined fiscal sustainability with 
budget revenues, budget expenses, interest payments, and debt stock data by employing unit root and 
co-integration tests. They found that fiscal sustainability was weak in the periods of 1989:1-2000:12 
and 1989:1-2008:12, while it was strong in 2001:1-2008:12. Şen, Sağbaş, and Keskin (2010) used yearly 
data of 1975-2007 and examined fiscal sustainability with the variables of budget deficit, debt stock, 
budget revenues, and budget expenses by employing both ADF and PP unit root tests and a co-
integration test. They found that fiscal sustainability was not ensured in the period of 1975-2007. 
Hepsağ (2011) used the quarterly data of 1990:1-2008:4 and examined fiscal sustainability with Debt 
Stock/GDP data by employing a periodic unit root test with structural break and found that fiscal 
sustainability was not ensured.  
3. Data and Methodology  
In this study, quarterly data on the variables of EU-Defined General Government Debt Stock/GDP, 
Public Net Debt Stock/GDP, Net External Debt Stock/GDP, Non-financial Private Sector Loan 
Usage/GDP, GDP Growth, Real Interest Rates of Commercial Credits, and Real Interest Rate of 
Government Domestic Debt Securities/GDP were used to examine financial sustainability. The EU-
Defined General Government Debt Stock/GDP data were limited to the period of 2006:1-2018:4, since 
only data for this period were published; all the other data span the period of 2002:1-2018:4. Table 1 
shows the variables used in this study, their abbreviations, and the sources of the obtained data. 
 
 
 
 
 
 
 
 
 
 
 
 

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 Table 1. Variable Description 
Variable  Definition  Source  
NFPrivateSectorLoan  Non-financial Private 

Sector Loan  
Usage / GDP  

The Central Bank of The 
Republic of Turkey  

EUDefinedGovDeptStock  EU-Defined General 
Government Debt Stock 
/ GDP   

Ministry of Treasury and 
Finance  

PubNetDeptStock  Public Net Dept Stock / 
GDP  

Ministry of Treasury and 
Finance  

NetExtDpetStock  Net External Debt Stock 
/ GDP  

Ministry of Treasury and 
Finance  

GDPGrowth  GDP Growth  Turkish Statistical Institute   
RIRComCredits  Real Interest Rate of 

Commercial Credits    
Generated from data of 
Turkish Statistical  
Institute and The Central Bank 
of The  
Republic of Turkey  

RIRGovDomDeptSec  Real Interest Rate of 
Government Domestic 
Dept Securities  

Generated from data of 
Turkish Statistical Institute 
and Bloomberg Terminal   

  
Even though Schwarz (1978) claimed that the ADF test is the best unit root test, Campbell and Perron 
(1991) proved that ADF tests are liable to lag length and suggested that tests be chosen in accordance 
with suitable lag lengths. Furthermore, structural breaks interpreted as changes in the parameter can 
affect the intercept term and slope parameter in the time series for the subperiods. The probability of 
faulty results increases in unit root tests carried out without taking these breaks into account. Perron 
(1989) suggested adding structural breaks into unit root tests with the help of dummy variables as a 
solution for this problem. Perron (1989) determined the date break as external, but later, approaching 
this situation critically, tests were developed in which date break was determined as internal. Zivot and 
Andrews (1992) suggested unit root tests that focused on an internal single break. Even though tests 
that enabled multiple breaks were developed later on, tests with more than one break may cause faulty 
results since they show unit root series as stationary.  
Therefore, the stationarity of the series was examined in this study by employing the ADF unit root test 
with the Zivot-Andrews unit root test and the financial sustainability of Turkey was examined with these 
methods. The EViews econometrics program was used in the unit root tests. 
The following graphics show the variables used in the study.  
  

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4. Results and Discussion   
First, ADF unit root tests were carried out on variables in this study and the results were recorded. 
Stationary levels of the variables were evaluated with 5% significance in the ADF tests. The Schwarz 
information criterion was used to determine lag length in unit root tests.   
According to the ADF unit root test results, the variables of GDP Growth, Real Interest Rate of 
Commercial Credits, and Real Interest Rate of Government Domestic Debt Securities are stationary. 
Non-financial Private Sector Loan Usage/GDP is not stationary in the intercept model, while it is 
stationary in the trend and intercept model. EUDefined General Government Debt Stock/GDP is not 
stationary in the intercept and trend and intercept models. Public Net Debt Stock/GDP is stationary in 
the intercept model, while it is not stationary in the trend and intercept model. Finally, the variable of 
Net External Debt Stock/GDP is not stationary in either the intercept or the trend and intercept model. 
Table 2 shows the ADF unit root test results of the variables. 
 
 
 
 
 
 
 
 
 
 
 
 
 

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   Table 2. ADF Unit Root Test Results  

Unit Root 
Test   Variable  

Test  
Statistic  

MacKinnon %5 
Test  
Critical Value  

Result  

ADF  
(Intercept)  

NFPrivateSectorLoan  0,278969  -2,905519  Non-
stationary  

EUDefinedGovDeptStock  -
2,369767  

-2,919952  Non-
stationary  

PubNetDeptStock  -
3,408658  

-2,90621  Stationary  

NetExtDeptStock  -1,954706  -2,905519  Non-
stationary  

GDPGrowth  -7,053619  -2,905519  Stationary  

RIRComCredits  -3,512247  -2,905519  Stationary  

RIRGovDomDeptSec  -
2,963208  

-2,905519  Stationary  

ADF (Trend  
and 
Intercept)  

NFPrivateSectorLoan  -3,852173  -3,478305  Stationary  

EUDefinedGovDeptStock  -2,251045  -3,502373  Non-
stationary  

PubNetDeptStock  -
0,520477  

-3,479367  Non-
stationary  

NetExtDeptStock  -
2,330987  

-3,478305  Non-
stationary  

GDPGrowth  -7,112413  -3,478305  Stationary  

RIRComCredits  -
4,045669  

-3,479367  Stationary  

RIRGovDomDeptSec  -5,687251  -3,478305  Stationary  

However, as mentioned before, carrying out unit root tests without taking the structural breaks of the 
variables into account may cause faulty results. Therefore, Zivot-Andrews unit root tests that take the 
structural breaks of the variables into account were employed. Table 3 shows the Zivot-Andrews unit 
root test results. 
 
 
 
 
 
 

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 Table 3. Zivot-Andrews Unit Root Test Results  

Unit Root 
Test  

Variable  
Test 
Statistic  

ZA %5 Test 
Critical Value  

Result  

ZA  
(Intercept)  

NFPrivateSectorLoan  -4,487321  -4,93  Non-
stationary  

EUDefinedGovDeptStock  -3,272866  -4,93  Non-
stationary  

PubNetDeptStock  -1,494329  -4,93  Non-
stationary  

NetExtDeptStock  -3,867323  -4,93  Non-
stationary  

GDPGrowth  -7,86777  -4,93  Stationary  

RIRComCredits  -4,454673  -4,93  Non-
stationary  

RIRGovDomDeptSec  -5,446295  -4,93  Stationary  

ZA (Trend)  

NFPrivateSectorLoan  -4,508125  -4,42  Stationary  

EUDefinedGovDeptStock  -3,048714  -4,42  Non-
stationary  

PubNetDeptStock  -2,459687  -4,42  Non-
stationary  

NetExtDeptStock  none  none     

GDPGrowth  -7,14999  -4,42  Stationary  

RIRComCredits  -4,221672  -4,42  Non-
stationary  

RIRGovDomDeptSec  -4,876577  -4,42  Stationary  

ZA  
(Intercept 
and Trend)  

NFPrivateSectorLoan  -4,510362  -5,08  Non-
stationary  

EUDefinedGovDeptStock  -3,242678  -5,08  Non-
stationary  

PubNetDeptStock  -2,448594  -5,08  Non-
stationary  

NetExtDeptStock  -3,398871  -5,08  Non-
stationary  

GDPGrowth  -8,029259  -5,08  Stationary  

RIRComCredits  -4,630437  -5,08  Non-
stationary  

RIRGovDomDeptSec  -5,620651  -5,08  Stationary  

  

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According to the Zivot-Andrews unit root test results, the variables of GDP Growth and Real Interest 
Rate of Government Domestic Debt Securities are stationary in all three models. Non-financial Private 
Sector Loan Usage/GDP is not stationary in the intercept model and trend and intercept model, while 
it is stationary in the trend model. EU-Defined General Government Debt Stock/GDP is not stationary 
in all three models. Public Net Debt Stock/GDP is not stationary in all three models. The results of Net 
External Debt Stock/GDP are not stationary in the intercept and trend and intercept models (an error 
was obtained in the test results of the trend model). Finally, the variable of Real Interest Rate of 
Commercial Credits is not stationary in all three models.  
According to the results of both unit root tests, the variables of EU-Defined General Government Debt 
Stock/GDP and Net External Debt Stock/GDP are not stationary. In particular, the Net External Debt 
Stock/GDP variable is not stationary in all tests and this shows that the external debt stock is not 
sustainable. EU-Defined General Government Debt Stock/GDP is also not stationary in the tests. 
However, when we examine the graph for this variable, we can see that it has a downward trend.  
The variable of Public Net Debt Stock/GDP is not stationary in many of the test results. When we 
examine the graph related to this variable, it is seen that it has a decreasing tendency, except for the 
increases in 2008 and 2018. The variable of Non-financial Private Sector Loan Usage/GDP is not 
stationary in either of the Zivot-Andrews test results. When we examine the graph related to this 
variable, non-financial private sector loan usage has had an increasing tendency ever since 2005.  
According to the results of both unit root tests, GDP Growth and Real Interest Rate of Government 
Domestic Debt Securities are stationary. Real Interest Rate of Commercial Credits is stationary in the 
ADF tests while it is not so in the Zivot-Andrews tests. As mentioned above, the levels of differences 
between real interest rates and GDP growth are vital in the examination of financial sustainability.  
When we examine the level of difference between GDP Growth and Real Interest Rate of Government  
Domestic Debt Securities in Graph 8, we can see that Real Interest Rate of Government Domestic Debt 
Securities was higher than the growth rates between 2002 and the end of 2009, but the difference was 
balanced in 2010. When we examine Graph 3, we can see that the public net debt stock had a decreasing 
tendency until 2008; similarly, in Graph 4, the Net External Debt Stock variable has a decreasing 
tendency until 2006 and it is balanced between the years of 2006 and 2008. In this period, high real 
interest rates were applied in public internal borrowing, decreasing the net debt stock. After 2010, 
balance was restored between Real Interest Rate of Government Domestic Debt Securities and the 
growth rate.  
  

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When we examine the level of difference between the variables of GDP Growth and Real Interest Rate 
of Commercial Credits in Graph 9, we can see that the real interest rate of commercial credit is higher 
than the growth rate and there is no balance, except in some periods. After 2005 (Graph 1), the non-
financial private sector’s loan usage increased, while net external debt stock increased after 2008 
(Graph 4).   
5. Conclusion   
Discussions on sustainability in Turkey became especially prominent after the 2001 economic crisis. 
Resource requirements of the private sector became as important as the resource requirements of the 
public sector. This period not only raised the importance of fiscal sustainability but also brought up the 
issue of the sustainability of the debts of the private sector. The loan usage of both the public and private 
sectors and the sustainability of these loans lead us to the concept of financial sustainability. This study 
examines the concept of sustainability not only as fiscal sustainability but also as financial while 

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previous studies focused solely on fiscal sustainability. This study has used the quarterly data from the 
years of 2002-2018, analyzed the stationarity of the variables with ADF and Zivot-Andrews unit root 
tests, and examined the interactions between the variables with graphs. In many studies conducted on 
fiscal sustainability in Turkey, it was seen that fiscal sustainability is not ensured. According to the 
findings of the analysis and examinations of this study, there is no clear positive or negative result on 
fiscal sustainability, while financial sustainability cannot be ensured.   
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