Turkey Proceeds with its Economic Recovery Plans

Publication: Eurasia Daily Monitor Volume: 6 Issue: 174

Turkey's Economy Minister Ali Babacan

On September 16, Turkey’s Economy Minister Ali Babacan revealed the government’s medium term economic plan for 2010-2012, prepared by the state planning agency. Babacan acknowledged that the contraction in growth by the end of the year may reach 6 percent, rather than the previous estimate of 3.6 percent. According to his forecasts, the economy will experience growth rates of 3.5 percent in 2010, 4 percent in 2011 and 5 percent in 2012. The government also expects the budget deficit to reach 62.8 billion TL ($42.9 billion), then starting to fall to 50 billion TL ($33.8 billion) in 2010 and 45.1 billion TL ($30.5 billion) in 2011, and 39.1 billion TL ($26.4 billion) in 2012. Similarly, the current account deficit is also forecast to reach $18 billion. Babacan acknowledged that despite a modest recovery, unemployment is set to remain at around its current rate of 14 percent in 2010, which is well above the pre-crisis rate of 10.8 percent (www.cnnturk.com, www.ntvmsnbc.com, September 16).

The global financial crisis was a serious blow to the Turkish economy, which led to a drastic decline in production and employment in sectors heavily dependent on exports. Although the government initiated several economic stimulus packages, their effectiveness has proven limited. They slowed the contraction of the economy, but are far from stimulating a sustainable economic recovery. The soaring budget deficit due to the economic crisis has been a growing concern among economists (EDM, August 11).

Therefore, economists expected the government to focus on taking precautions to address the budget deficit in 2010-2012. In contrast to initial speculation that the government might have set unrealistic targets in terms of growth and fiscal balances, experts evaluating the middle term economic plan argued that it is based on a realistic prognosis of the economic conditions and a pragmatic outlook to address the problems. Rather than expecting an ambitious short term recovery, the government prefers a gradual approach aimed at improving economic conditions (Anadolu Ajansi, Today’s Zaman, September 17).

Following the announcement of the plan, international credit rating agencies also responded positively. Standard & Poor raised Turkey’s credit rating outlook from negative to stable, while Moody’s upgraded the outlook on Turkey’s Ba3 bond rating from stable to positive (www.ntvmsnbc.com, September 18).

On the implementation side, one factor that makes economists believe that the plan is realistic is the decision to introduce a "fiscal rule" into public administration starting from 2011. Once it is in place, it is expected to contribute to long term fiscal stability, by setting limitations on public spending. This rule was required by the IMF as part of the loan negotiations with Ankara (EDM, January 29).

However, the role of the IMF in the implementation of the plan has proven controversial. Ankara was engaged in protracted negotiations for over a year with the IMF in order to secure a loan. Despite the recent announcement of progress in these talks, it remains unclear whether Turkey will eventually sign a stand-by deal. The critics of the AKP’s economic policies argue that an agreement with the IMF is necessary to inject credibility into its economic policies and boost confidence in the market, contributing to a more sustainable recovery.

However, some analysts believe that the medium term plan indicates that the government might implement the precautions without the IMF, while others speculate that the IMF could remain an option. Babacan also added to the sense of confusion. On the one hand, he said that Turkey will discuss the new medium term plan with the IMF. If both sides achieve consensus, Ankara will prefer to sign a stand-by deal. On the other hand, he maintained that although an IMF loan would help the Turkish economy, the IMF financing was not necessary for the implementation of the plan. He added that the plan was prepared on the assumption that in case an agreement was reached with the IMF, the extra resources would be channeled into the domestic market directly, in order that the banking sector could distribute money for private consumption and investment (www.cnnturk.com, September 16).

The IMF welcomed the plan and found it realistic, reflecting the impact of the global financial crisis on Turkey. In addition to the fiscal rule, the announcement supported Ankara’s plan to cut the ratio of public debt to GDP. It called on Turkey to adopt supporting policies and structural reforms, including measures to address areas that create spending pressures, so that Ankara might achieve its goal of controlling public debt (www.cnnturk.com, September 17).

Prime Minister Recep Tayyip Erdogan announced that Turkey had survived the crisis without IMF loans. It could continue its path without IMF assistance and would not accept IMF requirements concerning taxes and spending. Therefore, the future of an IMF deal remains uncertain (Hurriyet Daily News, September 18).

Another major aspect of the plan is that it does not foresee any major hikes in corporate, income and value-added taxes, which equally motivates the government to restrict IMF involvement. Although there were widespread expectations that the government might opt for tax increases to reduce the budget deficit burden, it refrained from pursuing this policy. This decision partly reflects the government’s desire to limit the effect of the economic recovery plan on consumers and the markets, by avoiding policies that might curb economic activity. The government believes that the Turkish economy could recover quickly based on its own dynamics, as long as it is kept vibrant, once the global economic environment starts to improve.

One factor that boosts the government’s self-confidence is the condition of the Turkish banking sector. Babacan, therefore, argued that unlike other Western economies where the collapse of the financial institutions triggered the economic crisis, the Turkish banking system remained intact and was in good condition. Consequently, he expects a rather smooth economic recovery, centered on the private sector (www.cnnturk.com, September 16).

Despite the government’s positive outlook on the Turkish economy’s vibrancy, the implementation of the plan and a sustainable economic recovery will also depend upon developments in the global economy. Moreover, the government’s ability to withstand the spending pressures to be generated by the next general election slated for 2011 will be a major test of its determination to reduce public debt, a core element of Turkey’s medium-term economic plan.