Mark Bentley
Jun 02 2018

Erdoğan should drop impossible growth goals to stabilise economy

Turkish President Recep Tayyip Erdoğan should abandon a key goal for economic growth that threatens to send the lira currency into another tail-spin.

The target, to make Turkey one of the world’s 10 largest economies by its centenary in 2023, is now unachievable and should be dropped as a realistic proposition, IMF data shows.

Erdoğan’s growth-focused policies almost led to a currency crisis in May as he resisted rate increases ahead of elections this month, claiming that they would stoke inflation. Investors have been selling the lira on concern that Turkey’s $851 billion economy is overheating dangerously. The central bank eventually increased interest rates by 300 basis points to 16.5 percent on May 23, as the lira slumped over 5 percent in a single trading day to 4.92 per dollar. 

Now with June 24 presidential elections fast-approaching, investors are turning their attention to the post-election scenario – should he win, will Erdoğan, in power since 2003, re-commence economic stimulus to keep the economy in overdrive, or relent and pursue more prudent policies that tackle Turkey’s growing fragilities – double-digit inflation and a current account deficit, which now exceeds 6 percent of GDP. The jury is still out.

Data provided by institutions such as the International Monetary Fund show that Turkey is now slipping down the league table of the world’s major economies. The cause – government policies such as recent fiscal stimulus that have made the economy smaller in dollar terms despite high growth rates in local currency terms.

Turkey will be ranked 18th globally in 2018 compared with 17th last year, losing its place to the Netherlands, according to IMF data published in the IMF’s World Economic Outlook. 

Looking further ahead, the fund says the economy is expected to expand from $910 billion in 2018 to $1.22 trillion by 2023, by which time it would have regained the 17th-placed ranking it had held five years previously.

These predictions are far flung from Erdoğan’s goal, which his government confidently repeats almost daily in its election campaigning. 

In fact, Turkey’s GDP would need to exactly double in size to $2.44 trillion in order to overtake Canada, which the IMF predicts will be the world’s 10th largest economy worth $2.43 billion in five years.

Economy Minister Nihat Zeybekçi, an long-time friend and close political ally of Erdogan, repeated the president’s 2023 goal in a statement on May 29.

But Erdoğan would be better advised to steady the lira and reduce inflation to attract much-needed investment back to Turkey, steady the ship, then aim for slower, more sustainable growth rates that may see Turkey climb up the global rankings, but not to the heady heights that he wrongly foresees.

Ratings agencies including Moody’s and Standard & Poor’s, along with the IMF and scores of analysts and investors, have been warning Erdoğan’s government to slow the import-reliant economy down or risk possible financial ruin. The current account deficit has widened to more than 6 percent of GDP as government policy helped suck in more and more imports

The lira’s slide has not only crimped the economy’s size and stoked inflation, which is expected to accelerate from April’s 10.9 percent in the month of May, it has made it much harder for companies to finance their burgeoning foreign debt load, which has reached $226 billion, or about 30 percent of the nation’s GDP, far greater than other troubled economies such as Argentina and Ukraine.

Further rate increases and measures to reduce government spending may slow economic growth from current levels, but they would also bolster the lira and allow firms to focus on growing their businesses rather than paying off their increasingly expensive foreign loans.

The banking industry, which is reporting a surge in restructured lending as companies struggle to repay loans, would also be in a stronger position to lend more money to the economy, helping growth. Growth in lending by Turkey’s banks has averaged more than 10 percent over the past decade, helping to spur an expansion in industry and services.

Lifting the country’s state of emergency, in place since a failed military coup in July 2016, and reversing other autocratic measures such as presidential decrees and human rights infringements would also draw in much-needed FDI, which could be used to grow the economy further over the medium to long term.

Evidence of how Erdoğan’s growth-driven policies have actually shrunk Turkey’s economy can be seen in past data. 

The economy was worth $851 billion in 2017, shrinking from $863 billion in 2016 and $950 billion in 2013. Mr. Erdoğan, please take note.