Zülfikar Doğan
Nov 08 2019

Turkey sets impossible targets in 2020 economic programme

Turkey this month officially published the New Economic Programme designed to reinvigorate the country’s stalled economy.

President Recep Tayyip Erdoğan signed his name to a programme that is supposed to set the economy back on track after two years of difficulties, but close examination of the plan reveals internal contradictions, inconsistent targets and superficial solutions to severe problems.

Treasury and Finance Minister Berat Albayrak, the president’s son-in-law, announced the programme and its 2020-2022 targets on Sept. 30, laying out a goal of 5 percent growth for each of those years.

But with domestic demand, consumption and investment all decreasing for the past three quarters, there are questions about how Albayrak hopes to suddenly turn the economy around.

For Erdoğan, none of these issues appear to matter at all. The president’s comments on the economy this week painted a rosy picture, focusing on the falling inflation rates and current account surplus, and saying these have been thanks to his policy of reducing interest rates.

This, Erdoğan said, is why it was necessary to sack the former central bank governor, Murat Çetinkaya, in July. “He just wouldn’t listen,” Erdoğan said of Çetinkaya, who had resisted the government’s demands to cut interest rates by 300 basis points.

With Çetinkaya replaced by a more pliable successor, Erdoğan’s well-known antipathy for interest holds sway at the central bank, which cut rates from 24 percent to 14 percent in three months. The government also reported impressive figures for inflation, which fell to 8.5 percent in two months.

But credit figures have lagged behind, according to figures from Turkey’s banking regulator showing a decrease of 2.1 percent in credit since last year. The amount taken out by small and medium-sized enterprises, which drive production in Turkey, fell by 8.5 percent.

At the same time, non-performing loans have soared - the banking authority reported these loans at 3.2 percent of total loans at the end of September; at the same time this year they have reached 5 percent, with non-performing loans from SMEs reaching 9.2 percent. Some of the country’s most venerable companies are going broke or seeking bankruptcy protection.

Large companies that are unable to repay their loans are lining up to seek debt restructuring deals from banks. Now joining the queue is Istanbul Grand Airport, a consortium of five construction companies with close links to Erdoğan that is responsible for the city’s massive new airport project. The consortium has hired the London-based Dome Group to help it restructure 5 billion euros of debt.

In other words, interest rates have fallen, but there is still nobody prepared to take out a loan and grow their business, nor are there banks willing to offer loans.

Moreover, the government itself accepts that inflation rates will not remain in the single figures, and it has set a target of 12.6 percent by the year’s end. The International Monetary Fund and World Bank have forecast the year-end rate at 15 percent.

But Erdoğan’s government has taken the decision to base its wage increases not on the actual inflation rate, but on its targets. Thus, in 2020 millions of civil servants will receive a 4-percent pay rise, with other government employees receiving 8 percent.

Meanwhile, the New Economic Programme has tied taxes and fees to inflation, and it has set a minimum increase for public receivables at 22.58 percent.

But the real inconsistency in the programme comes in its explanation that 5 percent GDP growth can be spurred in 2020 by the return of “delayed consumption and investment, particularly from domestic demand”.

In other words, it expects millions of workers whose wages have fallen behind inflation, not to mention millions of people in precarious employment or who are unemployed, to suddenly start spending money in 2020, having had to penny-pinch this year.

The same workers, while increasing their consumption, are also expected to increase their savings by 0.6 percent. While the private sector is still unable to repay its debts, it is also expected to increase investment by 25.3 percent.

Meanwhile, public consumption and investment expenditure – always the most significant part of growth in any period – is forecast to shrink. Public institutions will only be able to invest using funds from external sources.

So, to lay out the government’s plan: First, low-income families whose real wages have stayed stable or decreased will begin saving, creating a giant cash source that will be used as cheap credit. This will cause an investment boom in the private sector, and finally Turkey will have achieved 5 percent growth.

This is the programme that Erdoğan signed off and promulgated in the Official Gazette.

But the figures in the annual programme for the private sector’s assets and liabilities are in themselves a rebuttal of the programme.

The programme places non-finance sector firms’ assets at $120.4 billion, and their liabilities at $304.4 billion.

In other words, the sector that is expected to increase its investment by a quarter would need to first find new credit sources to close a $184 billion deficit.

One question remains: In three months, when this latest economic model collapses, what excuses will those who convinced Erdoğan to sign his name to it find for their failure?