Lack of transparency killing Turkish economy, says former central bank governor
Turkey’s economy has been a source of grave concern since at least the beginning of 2018 – not least for the millions of citizens faced with high inflation, rising unemployment and skyrocketing food prices over the past year alone.
The economy went through a technical recession over the final quarter of 2018, and inflation figures have gradually slowed down since, reaching a peak last October. President Recep Tayyip Erdoğan and his ministers say the worst economic problems are behind Turkey.
Yet those numbers require closer investigation, according to centre-right opposition Good (İYİ) Party deputy Durmuş Yılmaz.
A governor of the Central Bank of Turkey for five years under the ruling Justice and Development Party (AKP), Yılmaz has a special insight into the country’s economic direction. That direction, he told Ahval, is heading ever deeper into murky waters due to the government’s aversion to transparency and attempts to spin a narrative around the recent setbacks.
Ahval: Erdoğan said before setting off for the G-20 summit that all economic indicators for June were positive, and that he’d have good news for the economy on his return. Is it true that all is going well for the economy?
Durmuş Yılmaz: Firstly, those words don’t reflect the truth. Our economy is rapidly contracting. The government is insisting on a story, and it keeps repeating its statements. In fact, it’s been in denial about what’s happening since the beginning.
Governments generally see economic problems as temporary when they break out, and deny the problem. Then when the crisis deepens and problems grow, fear and panic take over. The denials become more frequent. This is exactly the psychology currently prevailing in Erdoğan and his staff at the helm of the economy.
Domestic demand has collapsed. Foreign demand continues, but the external terms of trade have fallen. Our export products have gotten cheaper, but the price we’re paying for imports to produce the same goods has gone up. This means that in actual fact, our income from exports isn’t increasing.
Ahval: Treasury and Finance Minister Berat Albayrak has played down Turkey’s inflation problem and said inflation can be reduced to single digits. Yet many say the official inflation figures, which have shown a considerable drop since last year, don’t reflect the market reality.
Yılmaz: Last August there was a huge slide in the lira (after the United States imposed sanctions on Turkey for imprisoning American pastor Andrew Brunson). Then in September, this led to a rise in inflation, and the central bank responded by raising interest rates by over 6 points. By October, annual inflation rates had reached 24 percent.
Now Albayrak is starting from here and saying, in a technical sense, the base effect starting last autumn means, corresponding to rates in September and October 2018, we will see inflation at single digits this autumn.
They’re trying to use some technical methods of calculation on the interest rate. In this sense, the rate may be low, but does that really give a true picture? Is it convincing?
Ahval: Albayrak and Erdoğan are painting a rosy picture on the economy. But this jars with figures from the past five months showing that the budget is far behind its annual targets. Tax income is falling, and criticism about financial discipline is on the rise.
Do the signs point to a positive period for the economy as the government says, or will Turkey be forced to go to the International Monetary Fund (IMF) for an agreement?
Yılmaz: We’re experiencing a crisis. The government says it’s been caused by foreign powers. But we caused the 1994 economic crisis ourselves, and the 2001 crisis as well. The IMF taught us fiscal discipline the hard way in both, but especially after 2001.
For a long time, this government went along with the IMF’s fiscal discipline principles and audits. The central administration now has debt at around 32 to 33 percent of the national product. There appears to be quite a broad fiscal space. For a very developed country without economic problems, this is a low ratio. It’s a positive ratio.
The question is whether we really know the central government’s debts and liabilities. We don’t, because there’s no transparency. The government’s infrastructure projects, airports, hospitals (built under a public private partnership model that guarantees contractors an income backed by the treasury) – we don’t know the true scale of the liabilities to come from these projects or how they’ll impact the budget.
In 2019 during budget discussions we asked the transport and health ministers how much of a burden these projects’ guarantees would place on the budget and for how long. We’ve still not received an answer. We can’t see it in the budget since it’s not transparent. For example, the cost of guaranteed income and rent for city hospitals in 2020-2021 is 21 billion lira ($3.64 billion). That’s a third of the health ministry’s budget.
There are many more areas like this that we don’t see in the budget. That’s why it isn’t clear whether the total debt is 32-33 percent of the national product or higher. If we go to the IMF, they’ll demand transparency and fiscal discipline.
After the IMF’s fiscal discipline programme in 2001, Turkey became a net debt re-payer. That was the case up until one or two years ago, but it became a net borrower in the second half of 2018.
The Treasury and Finance Ministry will definitely bring a draft law to parliament this autumn to raise the treasury’s debt limit. It’ll be impossible to handle matters without finding and taking out more loans.
Ahval: Can Turkey solve its funding problem through an IMF agreement of a new short-term wave of hot money?
Yılmaz: The greatest problem is the loss of transparency. The public has no confidence in the figures produced by public institutions.
Abroad, the figures presented by Turkish institutions are greeted with suspicion and found unconvincing. Delegations came to Turkey recently from two of the world’s leading investment banks. They asked me whether, as a former central bank governor, I believed the bank’s inflation calculations and its process for gathering data from prices.
These are investment banks that influence global markets, and it means they don’t believe (the central bank’s figures). Because nothing is transparent. They’ve heard that the calculations for food inflation and so on have been based on prices for goods in discount campaigns run by companies close to the government.
Then there are statements and rulings from the Banking Regulation and Supervision Agency (BDDK). This is a very sensitive topic for banking, and we need to be careful. But last September the BDDK announced that all Turkish banks had passed a stress test, and that there was no problem in the sector.
The proportion of bad and at risk credit is said to be 4 percent. But is this true? We don’t know, because there’s no transparency. But if it is true, why did the BDDK send a memo to all banks in January asking for a restructuring to 36 months of 220 billion lira ($38.1 billion) of debt that had been distributed with Credit Guarantee Fund guarantees?
There’s no trust left in data from the state and its institutions, and no one believes them any more.
Ahval: Albayrak and Erdoğan say that the economy is moving towards a current account surplus for the first time in Turkish history and this is a vital sign of the economy’s recovery. Is this so?
Yılmaz: We need to ask ourselves whether Turkey can give a surplus, and if it should. To be able to manufacture and invest, as well as for exports, we must import intermediate goods and invest. The reduction in the foreign trade and current account deficits stems from a fall in imports, including imports of intermediate and investment goods.
New investment is not being made, so demand and manufacturing are contracting. Just to be able to protect employment in Turkey at its current levels, we need a minimum of 4 percent growth per year. This results in a current account deficit.
So, the reduction in the current account deficit isn’t an achievement of the government’s, it’s a consequence of the economic downturn. We’re heading towards a current account surplus whether the government wants it or not. That the government is happy about something we really need to worry about is nothing more than the denial and panic that we’ve already discussed.
Ahval: This year news reports raised fears that the central bank has been quietly selling its foreign currency reserves to buoy the lira. There is still disagreement on the amount left in the bank’s reserves.
Erdoğan said in his last speech that the reserves were at around $90 billion and rising. Are the central bank’s reserves really a source of concern for Turkey?
Yılmaz: The cause for concern around the central bank reserves is visible in Turkey’s risk assurance premiums. There’s no transparency here, either. The more this obscurity increases, the more risk also increases.
We don’t know the scale of our cash deficit. Just like with foreign funding sources, hot money, foreign currency inflow, and foreign investment. The migrant issue is among the biggest of these. They say we’ve spent $30 billion or $35 billion on migrants (who have arrived in Turkey in millions from the war in neighbouring Syria), but we don’t know where this money came from, how it was found or how it’s been spent. It’s not in the budget.
When we ask them to explain the sources, one day they (the government) say the money came from the European Union or international institutions. Neither the source of funds already spent or of incoming funds is clear.
Turkey has a need for foreign funding sources for capital input from the IMF or short-term hot money. But we don’t know how much we actually need. We don’t know how large the central bank’s reserves are, either.
To undertake structural reforms, the government needs a team that can stick to a tight schedule, take control and push reforms through. Turkey has qualified, respected individuals who can achieve this.
To achieve this, it is necessary for all the obscurity around the economy to be lifted, for a clear and transparent list of liabilities and guaranteed projects must be produced, for data from state institutions to be correct, and above all for investors and creditors to be given legal guarantees.
But for this government and its personnel, given its history and its current management of the economy, this would be unthinkable.
© Ahval English
The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.