Turkey’s economic measures against coronavirus worth a fraction of what is claimed
Turkish President Recep Tayyip Erdoğan has unveiled a package of economic steps against the deadly coronavirus outbreak called “Stability Shield,” whose name evokes Turkish military campaigns carried out across the border in Syria.
However, the small size of the package, which could in reality, could be equivalent to about 15 billion liras ($2.3 billion), or 0.35 percent of the GDP, not 100 billion liras as claimed by the government, and the ambiguity of the measures undermines its credibility among businessmen and ordinary Turks.
Turkey has already spent extra-budgetary resources and so-called “rainy day” funds, such as cash from the Unemployment Insurance Fund and the reserve funds of the central bank in an attempt to boost economic growth following a currency crisis in 2016. The central bank has decreased interest rates aggressively since the middle of last year amid immense political pressure. Now the country is left with limited fiscal and monetary options to fight an impending recession.
The only measure contained within the package that directly addresses unemployment, the most significant problem for the Turkish economy, was a pledge to provide financial support to companies to meet the costs of a recent increase in the minimum wage, a step that was already in force. Apart from that, there are some structural measures, tax credits, steps easing access to finance and deferral of existing loans.
Among structural measures, efforts to create alternative channels for production and retail and to introduce flexible, remote working days have been discussed for many years and are remarkable. Of the remaining 16 steps, 12 target companies and four are designed to help ordinary citizens.
The most significant measure to aid citizens is allocating an additional 2 billion liras ($310 million) from the budget for social transfers. This measure may provide temporary relief if correctly applied. But size of the fund, amounting to 0.05 percent of GDP, could well prove insufficient given the magnitude of the problem.
Another crucial step by the government was to increase the lowest monthly pension payment to 1,500 liras ($ 228). Approximately 200,000 self-employed pensioners from the agricultural sector and 5.2 million pensioners who retired after the year 2000 will benefit from the announcement. The latter group is paid 40 percent less than those who retired earlier and the courts have rejected their demands for parity. If this measure is implemented immediately, it would cost approximately 1.4 billion liras this year.
The rest of the package is aimed at the business world and is mainly focused on delaying public receivables and payments to the state, and facilitating access to finance. Corporate loans awarded by banks will be restructured, new credit lines for exporters will be provided and rules governing collateral will be eased.
For the tourism sector, which is expected to be severely affected by the outbreak, the introduction of a recently announced accommodation tax will be postponed and rental payments for use of Treasury property will be delayed. In aviation, the government reduced sales taxes to 1 percent from 18 percent for domestic flights.
The government has delayed employers’ tax and social security payments for six months for a number of service sectors. "Force Major" status was declared to prevent the deterioration of credit ratings. However, a measure for banks, which have been unable to collect receivables, is not included in the package.
For the construction sector, the government plans to increase mortgage loans for house purchases to 90 percent of the sale price for properties costing less than 500,000 liras. This measure has triggered an outcry among some citizens because the government has often been accused of prioritising the demands of the construction sector, which shrank by 8.6 percent in 2019, ahead of other parts of society. The effect of the measure on purchasing decisions and the benefit it will bring to the sector will be negligible.
Some measures appear vague because details have not been provided, including for example, the introduction of a social loans package. TOKI, the housing administration that currently runs some extra-budgetary credit programmes for several disadvantaged groups of citizens. It is not clear what kind of social loans will be given to which groups under the scope of the government’s plan. It is also unclear whether the loans will be financed from the budget, or whether public banks will offer subsidies on interest payments.
Economic commentators had expected that the government would take some concrete steps to facilitate flexible employment and to cover losses in income for workers put on unpaid leave. The economic package states that the government will "facilitate and speed up the processes needed to benefit from partial working allowance", but it is not clear how many people will benefit. Current requirements and conditions are quite severe. We do not have accurate information on how the government would either ease the rules or provide any additional finance.
Financing the partial working allowance by using the Unemployment Insurance Fund’s financial resources would make sense given the unusual circumstances. However, the government has provided employers with twice as much money as unemployed workers in the past two years, especially during election periods. In 2019 in particular, instead of pressuring the budget, the government has preferred to reduce the financial surplus of the Unemployment Insurance Fund.
The main reason why the new economic package did not have the expected positive impact on opinion leaders is that the government did not elaborate on how and to what extent this resource would be used at a time when employees need it, and perhaps it has not yet made a decision. The ambiguity and delay also undermines the positive impact of the package on the financial markets.
Commentators on the economy expected stronger steps from the government on employment that would in turn help stimulate private consumption.
The government also needs to focus on sustaining economic activity and trying to address concerns about the rollover of foreign debts of Turkish firms, given the weakening lira and low capital inflows.
The total size of the economic package, including floating loans, shifting taxes, pushing payments into the future and additional social transfers comes to approximately 15 billion liras ($2.3 billion). The amount to be allocated for partial work allowances will depend on the conditions enforced. However, the total package will not, under any circumstances, total 100 billion liras, as the government purports.
In Eurozone countries, finance ministers have pledged to unveil financial measures equating to a minimum of 1 percent of the GDP and liquidity measures amounting to 10 percent of GDP. The fiscal measures total 6 percent of the GDP. The fiscal package announced by the Turkish government amounts to a very small fraction of this, approximately 0.35 percent of GDP, and is clearly insufficient if it wants to deal with the adverse effects of the corona outbreak, given the magnitude of its global impact.
© Ahval English
The views expressed in this column are the author’s and do not necessarily reflect those of Ahval.