Psychological or financial: can Turkey’s New Economic Programme end the crisis?
Treasury and Finance Minister Berat Albayrak's New Economic Model, announced with high hopes on Aug. 10, did not affect domestic and foreign markets. As a matter of fact, since it did not include any measures to boost confidence in the economy, markets plummeted; the lira lost value and interest rates, inflation and unemployment rose.
Albayrak then introduced a New Economic Programme last week, but just like its predecessor, it failed to instil confidence in the markets. The objectives and goals of 2018 to 2021 programme are far from convincing; the only distinctive feature of this new programme is its recognition that there is an economic crisis.
The new programme forecasts a U.S. dollar/lira exchange rate of 4.90 in 2018, meaning the plan will soon already have to be revised since the lira is now at 6.19 to the dollar.
It was ironic that one day before his son-in-law Albayrak announced the programme, which accepts the existence of an economic crisis, President Recep Tayyip Erdoğan said, "there is no crisis, it is all manipulation".
Albayrak too, two days before announcing his New Economic Programme, said price inflation would start cooling in October and reach single digits in 2019. A few days later, he said the government expected 20 percent inflation in 2018, 15 percent in 2019. The programme does not forecast single-digit inflation any time before 2020.
The New Economic Programme forecasts growth rates of 2.3 percent in 2019 and 3.5 percent in 2020, signifying a slowdown in the economy and an increase in unemployment. The same day that Albayrak announced the programme, the OECD revised its 2019 growth forecast for Turkey down to 0.5 percent, less than a quarter of that predicted by Albayrak.
The three-year programme acknowledges that unemployment will keep rising in the next couple of years. Even in 2021, according to the plan, Turkey cannot reduce its unemployment rate to June 2018 levels. According to the targets, unemployment is estimated to be 12.1 percent in 2019, 11.9 percent in 2020 and 10.8 percent in 2021.
But the most recent Consumer Confidence Index, announced in September, indicates unemployment could possibly exceed these targets.
Still, according to Justice Minister Abdülhamit Gül, the problem is not financial, it is psychological.
The government's three-year programme forecasts inflation will continue to race up. The administration's forecast for 2018; 20.8 percent is 7.4 percentage points higher than the central bank’s estimate of 13.4 percent. The large discrepancy between the central bank and the Treasury and Finance Ministry testifies to confusion and inconsistency within the administration and is at odds with the economic programme’s main principles; "Change, Equilibrium, and Discipline".
The administration acknowledges that contraction in the economy will accelerate in the coming years since their forecast current account deficit as a percentage of GDP is projected to decrease by 3.3 percent.
Erdogan’s repeated claim that Turkey would join the top 10 biggest economies by 2023 is abandoned along with the goals exporting $500 billion of goods and attaining per capita income of $25,000.
The programme also forecasts a decrease in imports and the ratio of the current account deficit to GDP is revised downwards. Since Turkey's production of industrial and export goods depend on imports, this also means production will also decrease. If this is the case, the exports of companies dependent on intermediate, machinery and raw material imports will inevitably fall as well.
In addition, the programme lacks concrete proposals for the solution of the economic crisis.
The most specific solution in the programme offers the proposal to reduce government spending by 60 billion lira and to increase tax revenues 16 billion lira. However, cutting public expenditure would further slow the economy, and it is not realistic to target a 16-billion lira increase in tax revenues while the economy is forecast to contract. The only way to achieve this goal is by increasing indirect taxes, and such an increase would make it impossible to meet inflation targets.
One proposal is saving 10 billion lira in social security expenditures, which means that in addition to significantly increasing the contributions for medical services, some free health services under social security will be cut as well.
The programme practically announced that the three-year period up to 2021 is going to be Turkey's lost years. But the crisis is already here. The number of start-ups was down 20 percent last month, and the number of companies that closed is up 5 percent.
But interestingly almost all business associations, business people, industrialists, traders, trade organisations and associations had nothing but praise for the New Economic Programme. Maybe Erdoğan's recent words explain their silence. Speaking in Istanbul, he said: “I'm calling out to the mall owners once again, but if you keep on using U.S. dollars instead of the Turkish lira, we're sorry, we're going to have a fallout. This is Turkey, and our money is the Turkish lira". In my opinion, fear explains the silence of the business world.