Erdoğan may be selling an economic dream, but then there are facts
President Recep Tayyip Erdoğan said this month that “Turkey has never compromised on free market rules and is now much closer to achieving its goal of becoming one of the 10 largest economies in the world."
But the reality is that, over the past three years, Erdoğan’s government has stepped on the rules of the free market to defend the Turkish lira and spur economic growth. That behaviour was epitomised by a decision by Erdoğan’s son-in-law and former Treasury and Finance Minister Berat Albayrak to stifle the supply of lira in the London swap market just prior to local elections in 2019.
The central bank has sold $128 billion of its foreign currency reserves to help defend the lira and revive the pandemic-struck economy. Details of this huge sale were never officially announced, were performed outside of market mechanisms and mean Turkey’s net foreign exchange reserves are now deeply in negative territory. The central bank also enrolled state-run banks last year to help defend the lira through trades in cross currency swaps that were never fully disclosed. These clandestine policies were a failure.
Erdoğan’s government also issued a directive to state-run banks to distribute loans at below market interest rates during the pandemic. The authorities coerced privately owned banks into joining the lending spree by changing provisioning rules and financially punishing those who did not comply. These policies were also clear violations of free market principles.
By now, it has become very clear how these highly unorthodox policy steps taken by the government to serve short-term economic goals have driven foreign investors out of Turkish markets. Therefore, it is a waste of time discussing Erdoğan's statement that Turkey has adhered to free market principles. Foreign investors clearly do not agree. They are not buying more Turkish assets even in an environment of plentiful, cheap money and their investments in the bond and stock markets are at historical lows.
When talking about the free market, Erdoğan may have been referring to the free movement of capital in Turkey. He does not say, but if he is, then he is perfectly correct. Despite market fears that the government would impose capital controls since a currency crisis in 2018, it correctly chose not to.
Erdoğan has also stated remarkably that he expects Turkey to join the world’s 10 largest economies, or the Group of Ten (G10). Hakan Kara, a former chief economist of the central bank, has said that an annual increase in industrial output of 66 percent in April indicates that Turkey could boost GDP growth this year to 10 percent. Double-digit growth in the country would, of course, be the result of a so-called ‘base effect’ caused by the outbreak of the COVID-19 pandemic last year. That will not stop Erdoğan using such a big growth number in his speeches in the run-up to presidential and parliamentary elections in 2023.
Still, Kara and many other economists are pointing out that industrial output growth turned negative in Turkey during April, on a month-on-month basis. It is this growth, or the lack of it, that is felt by the Turkish electorate. Opinion polls continue to show that Turkey’s economic troubles are resulting in a decline in support for Erdoğan’s government and approval ratings.
Even assuming that the economy grows by 10 percent instead of an expected 6.5-7 percent this year, we can better gauge Turkey’s performance by comparing that with growth expectations for other economies.
In its World Economic Outlook, the International Monetary Fund (IMF) predicts that global growth will be 6 percent in 2021 and that emerging economies will expand by 6.7 percent on average. The IMF's growth forecast stands at 6.4 percent for the U.S. economy, 5.8 percent for France and 6.4 percent for Spain. Its average forecast is 8.6 percent for emerging Asian economies, 12.5 percent for India and 8.4 percent for China.
The pandemic base effect is the main cause of such high growth expectations across the globe. The success or otherwise of governments in fighting the COVID-19 induced contraction will become evident in 2022 and beyond. Growth will slow almost everywhere. Hence decisions by the world’s largest central banks to continue with monetary expansion and bond-buying programmes despite inflationary pressures.
For Erdoğan, 66 percent growth in industrial production during April might make for good sound bites in his public addresses. But the reality is that industrial production fell by around 1 percent compared with March. The downswing is reflected in the results of Turkey’s Purchasing Managers’ Index (PMI), which has fallen to below 50 points, signalling a contraction in activity.
The government also published unemployment figures for April this week. The rate increased by 0.2 percent year-on-year to 13.9 percent, or 4.5 million people.
In years when the base effect creates so much volatility, it is necessary to look at month-on-month comparisons to judge economic performance. Turkey’s labour force, defined as the total number of people in work or looking for a job, increased by 83,000 people in April compared with March, while the number of people employed fell by 193,000, a significant decline. The reason for the overall drop in employment is the performance of the industrial sector, where jobs contracted by 212,000 in a month. In services, employment fell by 52,000. Jobs in services were supposed to increase slightly in April, when the government temporarily relaxed pandemic restrictions.
The level of "alternative unemployment" announced by the government’s statistics institute is also important in determining the health of the job market. Alternative employment means “employees who do not benefit sufficiently from the supply of labour or who have left the workforce but are willing and ready to work”, according to BETAM, an economic research institute at Istanbul’s Bahçeşehir University. The rate increased by 1.7 percentage points in April compared with March to 27.4 percent. This means that more than a quarter of people in Turkey are unemployed. This must be a difficult pill to swallow for Erdoğan, who is promising the electorate that Turkey will soon join the G10.
Erdoğan's promise that Turkey's economy will boom is clearly a message he will repeat many times as elections approach. At the same time, the president is targeting the opposition after they made allegations of rising poverty in Turkey, urging them last week to “find and feed those who claim to be hungry”. Such a startling statement could well be a reflection of Erdoğan's increasing isolation in the presidential palace and his detachment from reality. But he might actually be in denial about the troubles in Turkey’s economy and the consequent decline in public support for his governing party, a state of mind that would probably be of greater concern for all.