Turkish economy: Key figures, 2001

GDP growth: -8% GDP per head: $2,100 Annual inflation: 69.4% Exchange rate: 1,556,000 lira = $1 Exports: $31.6bn Imports: $39.6bn External debt: $111bn

The decision of British construction firm Balfour Beatty to withdraw from the $1.5bn Ilisu project has dealt Turkey a double blow.

It damages the country's already shaky reputation as a target for foreign investment deals.

And it provides a major setback to the country's attempts to keep pace with rampant electricity demand - something that is proving an ever more pressing problem.

Economic slump

This has been a grim year for the Turkish economy.

A massive loss of confidence among international investors has seen the currency lose half its value, prompting the International Monetary Fund (IMF) to put together an emergency rescue package.

Mass lay-offs have caused civil unrest

But political concerns have dogged delivery of the IMF's money, creating months of economic uncertainty and popular unrest.

The government's lacklustre attempts to tackle the country's underlying economic problems - including the closure of loss-making firms - have resulted in a surge in unemployment, without going far enough to meet the demands of international donors.

The economy is likely to contract by a whopping 8% this year, and inflation - once considered a problem neatly solved - has surged as high as 70%.

Investors shy

The sort of economic jitters seen this year, coupled with ongoing fears over the security situation, have ensured that foreign investment into Turkey is rarely more than about $1bn a year - less than one-tenth of the amount poured into much smaller Poland, for example.

Balfour Beatty's defection is likely to increase corporate caution over doing business there.

In a statement after announcing its decision, Balfour said the wearisome process of coming to terms with various business partners, government agencies and lobby groups was a major factor.

"The project could only proceed with substantial extra work and expense and with considerable further delay," the company said.

Business people in the country complain about heavy levels of bureaucracy - a tendency that can drift into corruption and political interference.

In the latest corruption perceptions index from analysis firm Transparency International, Turkey ranked 54th, below Bulgaria, Colombia, Panama and South Africa.

Running out of energy

The more concrete problem is that Balfour's departure shakes a key pillar in the government's energy strategy.

Turkish power consumption is growing by an annual 8%, far more quickly than the overall economy, and fast outpacing the country's ageing energy infrastructure.

Periodic black-outs and power shortages are already common, and the government says the sector needs $4bn-4.5bn in annual investment merely in order to keep pace with demand.

Ilisu is among the largest of six new hydro-electric plants planned for construction, as part of the $32bn Southeast Anatolia hydropower project, one of the biggest energy development schemes in the world.

If, as seems likely, Balfour's pull-out at least delays the construction of Ilisu, the deficiencies of the Turkish power sector are likely to become even more glaringly evident.

Delicate handling required

A lot now rests on how Turkey handles the future of the Ilisu project.

An angry backlash against foreign investors and donors could further damage the country's reputation among foreign investors, throwing into doubt its ability to finance the rest of the Southeast Anatolia energy project.

Worse, it could throw off track the country's slow progress towards beginning negotiations on entry into the EU - a key long-term ambition.

If the government handles the matter delicately, however, it could not only find another partner to replace Balfour Beatty, but secure some of the billions of dollars in aid it needs to help smooth over the current economic crisis.

But a quick resolution is unlikely

After all, the Ilisu project was first dreamt up nearly 50 years ago, and construction has not even begun yet.