The unspoken cost of Turkey’s ever-escalating military spending

The Turkish Treasury opted for a last-minute change in its August-October three-month borrowing plan, selling foreign currency debt through two separate auctions of $3 billion each on Aug. 11 and Aug. 26.

The decision has illuminated a factor affecting the country’s economy that remains undiscussed by the government and media: Turkey’s sharply escalating defence spending.

Turkey maintains a military presence in several countries in the region, including Syria and Iraq, and is involved in conflicts and standoffs in war-torn Libya and the Mediterranean. The cost of financing these wars and disputes is wreaking havoc on the country’s ailing economy.

Turkey’s defence budget – which is increasing more than any other budgetary item - totalled 145 billion liras ($19.7 billion) in the 2020 budget, making up about 13 percent of total spending. When you add allowances granted to publicly funded defence companies, such as Aselsan, Roketsan, TUSAŞ, Havelsan and TAİ, and funds granted to Turkey's Presidency of Defence Industries (SSB), the spending rises to 273 billion liras, equivalent to more than 25 percent of the national budget.

An unplanned increase in public spending in the 2020 budget, of which defence expenditure represents the lion’s share, meant that the 138.9 billion lira budget deficit target for the end of the year was exceeded in the first seven months, pushing the January-July deficit to 139.2 billion liras.

Budgetary discipline in Turkey has been abandoned entirely. Tax income and other state revenue have slid due to the coronavirus pandemic and the government’s ensuing tax payment deadline extensions. The shutdown of the Turkish economy between March and June, the suspension of business activities and other related factors meant growth in income and corporate taxes fell below zero.

The only increase in tax revenue was registered in sales tax and special consumption tax (ÖTV). But when this income proved insufficient, budgetary expenses were met directly through borrowing.

A soaring budget deficit, the slide in the lira’s value and an increase in interest rates into double digits by the central bank last month have suffocated the finances of the country’s public banks. Low interest rate loan campaigns have come to a grinding halt.

The Treasury has sold debt and transferred the securities to public banks in a bid to do away with the risk created by the banks’ support for the lira. Public banks’ exposure to foreign currency liabilities now exceed legal limits set out by the Turkish banking regulator (BDDK).

The total domestic debt sold by the Treasury in the first seven months of the year has risen to 216 billion liras. Domestic foreign currency debt sales, paused in 2011 and conducted in small amounts over the past two years, have risen sharply.

Defence spending is the key catalyst behind the incredible increase in budgetary expenditure and for the budget deficit soaring beyond the annual goal within seven months. While thousands of members of the Turkish Armed Forces (TSK) are deployed on battlefields in Syria, Iraq and Libya, the conflict with Greece in the Aegean and the Mediterranean necessitates that many warships need to be deployed to these waters.

Selling Treasury debt remains the only option to finance these military expenditures, which are exempted from parliamentary and Court of Accounts inspections and are not publicised for national security reasons.

Sales of foreign currency debt in the domestic market, including the sales of $3 billion each on Aug. 11 and Aug. 26, have increased foreign currency liabilities by $9 billion in the past month alone.

The Treasury has now borrowed 2.9 billion euros and $13.9 billion dollars over the past eight months. This is the most extra debt the country has incurred in foreign currency to date.

The Treasury said in August that it would conduct domestic debt tenders totalling 19 billion liras during the month to help service 28.1 billion liras in borrowing. But with the budget deficit reaching 139 billion liras, the withering away of the lira and foreign currency resources of the public banks, the depletion of the central bank’s foreign currency reserves and the sharp depreciation of the lira, there was a change of plans.

The Treasury took on debt worth 13.9 billion liras through six auctions in August, increasing total issuance to 57.7 billion liras due to the additional foreign currency debt sales.

Meanwhile, the proportion of foreign currency debt to Turkey’s total debt is increasing rapidly due to the slump in the value of the lira.

The central government’s total public debt stock neared 1.72 trillion liras at the end of July, with 892 billion liras, or 52 percent of this total, comprised of foreign currency debt.

The currency crisis of the summer of 2018, which erupted when President Recep Tayyip Erdogan refused to release from custody a U.S. pastor accused of links to terrorism, has resurfaced this year.

At the end of 2017, the public sector debt stock stood at 876 billion liras, including the lira equivalent in foreign currency debt of 341 billion liras. Debt denominated in foreign exchange was equivalent to 39 percent of total debt.

But over the last 2.5 years, Turkey has conducted military offensives in Syria, including operation Olive Branch in Syria’s Afrin in January 2018 followed by Operation Peace Spring in October 2019, deploying thousands of soldiers, tanks and armoured vehicles. It has also supplied the Free Syrian Army and the so-called Syrian National Army with weapons, salaries and equipment. Meanwhile, Turkey has persisted with air and land offensives in the north of Iraq.

Turkey has also increased its military activities in war-torn Libya, providing drones, armoured vehicles, weapons, ammunition and monthly salaries to thousands of Syrian mercenaries. Over the past 1.5 months, Turkey has increased its military activities in the Aegean and the Mediterranean, by way of military exercises and deploying warships to accompany seismic vessels searching for hydrocarbons, all of which are increasing the country’s military spending by billions of liras a month.

This has led to a catapulting of debt obligations as the government looks to finance the military operations by any means necessary. Therefore, Turkey’s borrowing plans are left in tatters.

Turkish lira and foreign currency debt sales, which reached 216 billion liras at the end of July and have now surpassed 50 billion liras a month, mean the total could reach 400-500 billion liras by the end of the year. This will mean a large proportion of next year’s budget will need to be allocated for debt and interest repayments.

(The views of the author are his/her own and do not necessarily reflect those of Ahval)

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.