Price hikes and new taxes likely as Turkey adopts New Economic Programme

Turkish Treasury and Finance Minister Berat Albayrak announced his New Economic Programme for 2020 to 2022 on Monday under the slogan “change is beginning”.

The 14.9 percent hikes to electricity prices announced on the same day showed just the kind of shape that change will take – price hikes and new taxes all around. The government may also make creative use of new cash sources, such as a recently announced new pensions system, to fund its plan.

There is large overlap between the 13 recommendations made in the highly critical International Monetary Fund report released last month and the vows and targets in Albayrak’s programme.

But the contradictory nature of some of the programme’s targets has raised eyebrows. On the one hand, it aims to reduce inflation, on the other, it has promised to end 2019 with growth of 0.5 percent and each of the following three years with 5 percent growth.

And in spite of that ambitious goal for growth, the programme promises to reduce the GDP-current account balance ratio to 0.8 percent in 2020 and to zero by 2022.

President Recep Tayyip Erdoğan’s government has promised growth of 5 percent, but it also aims to balance the current account within years, even though the country’s industry largely depends on imported intermediate goods and raw materials.

Besides this, New Economic Programme has forecast a reduction of the deficit-GDP ratio to 2.9 percent in 2020, then 2.5 percent in 2021 and 1.5 percent, the amount advised by the IMF, in 2022. Following this recommendation from the IMF will mean cutting public spending in half.

Up to now, the greatest contributor to growth in successive Justice and Development Party (AKP) governments has been public spending. Now, the ruling party is aiming to simultaneously cut public spending and achieve 5 percent growth.

Another apparent contradiction in the plan is in unemployment forecasts, which are projected to remain in double figures until 2022, when they fall to 9 percent. The government aims not only to grow the economy, but to do so with high unemployment.

The IMF report said Turkey could achieve growth of 2.5 percent in 2020 if it followed the stringent guidelines it laid out. Erdoğan’s government has said it will achieve double that growth, while also bringing inflation below 5 percent, bringing the current account deficit to zero, decreasing interest rates, lowering the trade deficit by decreasing imports, and cutting public spending.

This would require a sudden injection of between $100 billion and $150 billion of cash into the economy, or for shrinking investment in each of Turkey’s struggling sectors to suddenly reverse. But there is no sign of where the money would come from.

The IMF recommendations advised the government to index public workers’ wage increases to future inflation, rather than the high inflation experienced last year, and the government has already complied with this in its deal with civil servants and other workers this year, keeping their wage increases pegged below the 8.5 percent inflation targeted in the New Economic Programme.

With two 15 percent hikes to electricity prices since July and recent rises ranging between 15 percent and 25 percent in everything from gas to tea prices, working people are bound to become poorer.

Just as the government makes serious cuts to its spending, millions of workers will quickly lose their purchasing power. Yet the New Economic Programme targets a fivefold increase in household spending and domestic consumption and demand. Under the current conditions, only credit can fuel that kind of growth.

But the IMF has made it clear in its report that it does not trust the statements made by Turkey’s banking authority on bad debt, which it says likely far exceed government figures. The fund has called for independent auditors to closely inspect the banking sector and ascertain the true level of risky and bad debt.

While announcing the programme, Albayrak promised that Turkey’s banking sector would start 2020 “with a clean slate”, referring to a proposed fund to take over banks’ risky and bad debt. By doing so, the government hopes it can clear the way for banks to begin extending credit again. Yet who will pick up the tab for the billions of lira of bad debt?

The IMF asked for new tax regulations and an increase to VAT. Albayrak has promised tax reform to implement a progressive system. This is likely to translate to large tax hikes for a broad section of society.

Another initiative that the government hopes can raise between 60 billion and 100 billion liras is the creation of what it calls the Subsidiary Pension System.

This means an additional wage deduction to fund the pension system with the promise of higher pension payments. Albayrak said social partners would be consulted in the creation of the pension system, and it is likely that employers would be asked to make a contribution. This could be offset by the promise to transfer the burden of severance payments from employers to the pensions system.

But Turkey has seen the danger of schemes like this several times in the past, with government “super pension” schemes that have raised vast sums with obligatory contributions, only for the money to evaporate.

The IMF has already advised the government to move to a flexible workforce market and find a way to cut severance pay and insurance for millions of workers. The Unemployment Insurance Fund has been in deficit for two years in a row for the first time since it was founded in 2000.

Besides the 12 billion liras ($2.1 billion) transferred to public banks, the government has been dipping into the insurance fund’s coffers every year since 2017 to finance electoral incentives. A government that is using the country’s unemployment benefits fund for its own purposes is likely to do the same with the 100-billion-lira pension fund it is setting up.

In short, every sign points to this year’s economic programme failing, just as the last year’s did. The government may insist otherwise, but its only way out is to implement the IMF’s demands, and then to present it with a letter of intent with a view to securing foreign credit sources.

Since elections are due in 2023, the ruling party must secure this funding by 2022 if it can hope to amass a war chest to beat its rivals.

Until then, we can expect to see large price hikes and higher taxes in what will be an IMF programme in all but name.