Turkey’s economy similar to before 2001 financial crash – ex-central bank governor

When the International Monetary Fund published a critical annual report on Turkey on Monday, the ruling Justice and Development Party (AKP) government reacted angrily and said it was part of a conspiracy cooked up with opposition parties.

Recommendations in the report were strikingly similar to the conditions set by the IMF for its stand-by agreement after a economic crisis hit Turkey in 2001, said former central bank governor and opposition nationalist member of parliament Durmuş Yılmaz, who spoke to the fund’s delegation.

AKP spokesman Ömer Çelik led a campaign enthusiastically taken up by pro-government media to paint the IMF meeting with Yılmaz and Faik Öztrak, a member of parliament for the secular main opposition Republican People’s Party (CHP), as clandestine talks to plot against President Recep Tayyip Erdoğan’s government.

But the IMF delegation met the two opposition politicians openly at the Hilton hotel in central Ankara and both politicians have served in key positions overseeing Turkey’s economy.

Öztrak was at the Treasury when Turkey agreed terms with the IMF for a sweeping economic reform programme after a severe economic crisis brought the economy to the verge of collapse in 2001. He went on to work with the AKP deputy prime minister credited with helping rebuild the economy, Ali Babacan, after the AKP came to power in 2002. 

Yılmaz, a deputy for the Good Party, was brought in as the central bank governor in 2006, and served a full term ending in 2011.

The meeting with the IMF delegation lasted just 30 minutes, Yılmaz told Ahval. But the presence of the director of the IMF’s European Department, Poul Thomsen, showed that it viewed this year’s report as extraordinarily significant, he said.

“In routine consultations the IMF sends its Turkey chief, Turkey representatives and experts. That the Europe director came to Ankara was striking,” said Yılmaz. “Looking at the IMF committee’s preliminary report and what recommendations it makes to the government, there are some serious and heavy demands.”

The IMF committee asked Yılmaz and Öztrak for a general economic overview, asked their opinions on why the lira had remained stable despite interest rate cuts, and asked for recommendations on how to solve current problems facing Turkey.

“I told them the country is currently dealing with the results of several problems stemming from the public and the administration. Firstly we’ve lost transparency. Secondly, the data (published by official institutions) can’t be trusted. We can’t be sure of whether the economic data is true and correct, so it’s difficult to make evaluations,” Yılmaz said.

Recent data from public institutions has shown significant improvement in Turkey’s economic situation since a currency crisis struck last year, knocking nearly 30 percent off the lira’s value by the year’s end and sparking a recession in the final quarter.

But observers have questioned the reliability of the state institutions that provide data as they are viewed as being closely tied to the government. The IMF report warned that, despite positive indicators this year, growth was being driven by short-sighted policies that threatened stability.

“Thirdly, there’s no accountability. We’ve seen a large number of mistakes, but the government isn’t taking responsibility for its actions. It immediately invents excuses about foreign powers to pass the blame,” Yılmaz said.

Turkey’s current economic situation bears similarities to periods before previous crises, including the 2001 crash that preceded the IMF bailout, he said.

That year, foreign investors pulled $70 billion of capital out of Turkey in months due to political instability, leaving the government unable to pay its debts.

A new agreement with the IMF would be seen as a serious blow to Erdoğan’s prestige. Since Turkey paid off its debt to the fund in 2008, the president has repeatedly pledged never to go back cap in hand to ask for more.

But the IMF’s latest report showed that Turkey’s government has a long way to go to rebuild confidence in its economy after a brutal year in 2018.

The report’s long list of vulnerabilities included low foreign currency reserves, high foreign exchange debts, stressed company balance sheets, high dollarisation, a widening budget deficit and weaker domestic sentiment.

It also warned that Turkey’s economic growth had largely been driven by expansionary fiscal policy and rapid state bank credit provision, and criticised what it called the aggressive easing cycle by the central bank, which has cut benchmark interest rates by 750 basis points since July.

Despite the weaknesses described by the former central bank governor and the IMF report, Turkey’s lira has proved relatively stable this year, against the expectations of economists who had warned that the government’s determination to cut interest rates would trigger a new slide.

“Yes, interest rates have fallen ... We’re sure to hear a lot about this from the AKP and the president once parliament reopens in October,” Yılmaz said. “But the real reason is that the economy is not growing. The wheels have stopped turning.”

It is this drop-off in demand for imports, particularly for intermediate goods and raw materials used in manufacturing, that has kept the lira stable, he said.

“When there are no imports, there is lower demand for foreign currencies. When imports stop, you get a current account surplus,” said Yılmaz.

This, together with mechanisms to convert foreign currencies to lira through the central bank, had kept the lira from falling, he said.
Meanwhile, the majority of Turks continue to feel the economic squeeze, with a relatively high cost of living brought to nearly unsustainable levels by high inflation in prices of household goods this year, while wage increases have rarely matched inflation. 

This has led to a steep decline in consumption and investment in Turkey, Yılmaz said.

The former central bank governor told the IMF delegation that an expansionary economic policy aimed at spurring private consumption and investment could bring Turkey out of the doldrums.

But, he said, despite Turkey’s relatively positive 32 percent debt to GDP ratio, the government has held back from such a policy, granting public workers an 8 percent total wage increase this year, while inflation in August topped 15 percent.

The government transferred some 80 billion liras ($14.1 billion) from the central bank’s profits and reserves to its budget this year, but Yılmaz said this has been used to cover expenses for public projects rather than improving citizens’ income to boost the economy.

Public-private partnerships (PPP) have been a hallmark of the AKP’s policies since it came to power in 2002, with private companies granted tenders to complete vast infrastructure initiatives and often to operate the airports, ports, hospitals, bridges and other projects for decades after their completion.

Critics say the projects have been used to funnel money to companies linked to the AKP. Guarantees by the government to provide an income to those companies if the projects fail to make an agreed level of revenue – often in foreign currencies – have stoked the dispute, since they pass potentially huge expenses to the public purse.

“The government has used the 80 billion liras from the central bank to pay its guarantees for PPP projects and to help friendly businesses pay their debts,” said Yılmaz.

However, the lack of transparency means the opposition has no way of telling the full extent of those projects’ burden on the budget, he said. “I told the IMF delegation … we’re making some of our calculations in the dark.”

Yılmaz said the warning had been taken on board by the IMF, which called for a law to improve transparency of the PPP expenses and advised Turkey to immediately bring in independent auditors to conduct stress tests on Turkish banks.

“In short, the IMF is stipulating that uncontrolled and arbitrary extra-budgetary spending should be audited and made transparent. There are many such demands, warnings and conditions (in the report),” said Yılmaz.

“What’s striking is that most of these demands mirror those placed on Turkey by the IMF in its stand-by agreement in 2001,” he said.