Erdogan Refuses to Negotiate IMF Deal for Turkey

Official data released after the local elections in Turkey shows that the global financial crisis has affected the economy more severely than the ruling Justice and Development Party (AKP) has acknowledged. Turkey’s economic growth dropped sharply in the last quarter of 2008, and its exports declined by around 35 percent last month. These developments have increased the pressure on the government to conclude a prompt loan deal with the IMF, but Prime Minister Recep Tayyip Erdogan remains unconvinced.

Many analysts attribute the decline in the AKP’s electoral fortunes in the local elections to the government’s failure to either acknowledge or take action over the economic crisis. Many economic indicators, including unemployment reaching its highest level in recent years, have undermined the government’s claims that the crisis was not affecting Turkey as badly as other developing economies. Indeed, the AKP’s loss of votes within major industrial centers such as Denizli, Kayseri, Bursa and Gaziantep was caused by soaring local unemployment rates, and if the government fails to redress these trends, it could face a rapid collapse in its popular support.

Turkey’s official statistics agency (TUIK) announced on March 31 that GDP fell by 6.2 percent in the last quarter of 2008, while the annual rate of growth dropped to 1.1 percent (www.tuik.gov.tr, March 31). This sharply contrasts with the Turkish economy’s average 7 percent annual growth rate, and marks the first contraction of the economy since the AKP came to power in 2002. These figures also indicate that private investments shrank significantly, while government spending increased ahead of local elections. Although the government introduced various small-scale stimulus packages to help support public investments and prevent a sharper decline in GDP, this also increased the current account deficit.

Additional evidence of the impact of the economic crisis on Turkey appeared in the unofficial export figures released by the Association of Turkish Exporters (TIM) on March 30 (Anadolu Ajansi, April 1). According to the TIM, Turkey’s exports fell in March by 34.92 percent to $7.1 billion compared with last year. Official statistics released by TUIK also confirmed that in February, the country’s exports declined by 24.9 percent to $8.3 billion, whereas imports fell by 47.6 percent (www.tuik.gov.tr, March 31). Exports in the automotive industry, Turkey’s flagship export, continued to drop during the past six months, plunging by 53.8 percent in the first quarter of 2009, according to the local exporters association in Bursa (Cihan Haber Ajansi, April 1).

A comparison of Turkey’s economic downturn with other developing economies reveals it is among the most rapidly shrinking economies in the world. Noting that other countries have managed to grow, or contract at lower rates despite the global crisis, Turkey’s economic slowdown may have started even before the present crisis, and the government should admit its own failures and take urgent measures (www.cnnturk.com, April 1). Indeed, given the shrinking domestic demand and declining exports, some forecast that the annual growth rate will continue to drop, and fall behind the government’s projected growth rate of 4 percent in the 2009 budget. The budget deficit is expected to widen in response to lower industrial output and falling tax revenues. In the first quarter of 2009, the government reached its budget deficit estimates for the entire year (Hurriyet Daily News, April 1).

Representatives of the working class and the businessmen are now repeating their criticisms of the government’s economic policies. They believe that the election results should be viewed as a warning sign for the AKP, consequently forcing it to prioritize the economy. The government is facing growing pressure to revise its spending plans and modify the 2009 budget in order to resume talks with the IMF, which were suspended over disputes relating to financial regulations and the government’s spending and tax policies. The head of the Turkish Industrialists’ and Businessmen’s Association, Arzuhan Dogan Yalcindag, called on the government to revise the budget so that it realistically reflects the conditions of the Turkish economy (www.haber7.com, April 1). Many observers expected the government to conclude an agreement with the IMF after the elections, because IMF loans might ease Turkey’s fiscal problems and stimulate the economy. Last month, the IMF forwarded revised proposals to Turkey aimed at addressing Erdogan’s concerns about the contents of the standby agreement (EDM, March 16).

Before his departure for the G20 summit in London, Erdogan said that he objected to an IMF condition that Turkey should adopt strict tax auditing measures requiring a comparison of individuals’ wealth and their spending. These measures were most likely intended to prevent tax evasion and increase state revenues. However, fearing that such measures might reduce cash flows to the markets, Erdogan challenged the IMF by saying "we will not sign such a thing" (www.ntvmsnbc.com.tr, April 1). Erdogan and his economic minister might be meeting IMF officials in London, but there is still no indication as to whether Turkey will resume direct talks. Although the AKP is expected to be more cooperative towards the IMF, especially following the outcome of the local elections, Erdogan appears determined to maintain his populist pre-election rhetoric, adding to the uncertainty about the future of the Turkish economy.