Does Erdoğan’s Gov’t have an economic program to tackle the deepening crisis? Is an IMF solution on the horizon? Turkish economist Mahfi Eğilmez answers readers’ questions.
If 50 billion dollars in aid comes, will the Turkish economy recover?
Turkey was implementing a stand-by program with the IMF when it entered the 2001 crisis. Between 2000 and 2008, Turkey used approximately $45 billion in funding from the IMF. This fund had a significant impact. People look at this example and ask whether the 50 billion dollars, which is said to come from the Gulf, will have the same effect and whether Turkey will come out of the crisis it is in today.
Of course, money is very important in the exit of such crises, but it cannot alone provide a solution—and especially not a long-term one. In 2001, for example, in addition to the financial support of the IMF, Turkey made some necessary structural reforms that cemented its recovery.
In addition to the monetary support of the IMF, there was a significant amount of direct foreign capital inflow. In 2006 alone, this amounted to 21 billion dollars. Compare this to the total foreign direct capital inflow between 1923 and 2004—just 15.4 billion dollars.
These high entries continued in the following years. The reason for that foreign capital was both the IMF program and the fact that Turkey had started full membership negotiations with the European Union. Along with monetary support, the positive expectations created by those reforms enabled the economy’s rapid recovery.
We do not know how or when the Gulf’s 50 billion dollars will come in, but according to the media, some of this number is made up of the export forecast coming from foreign trade agreements, some will come as a loan to Eximbank, and some will come in the form of mutual investment amounts.
It does not seem possible for this kind of monetary support, which is not based on a program and does not bring structural reforms with it, to create an exit as in 2001.
What will happen with the budget deficit, which will soon reach a record level?
Many people think that the deficit increase is due to the new expenditures needed to compensate for earthquake-related losses. It’s true that the earthquakes had a great impact on increasing the budget deficit because the state had to spend in order to rebuild demolished houses, workplaces, and infrastructure, as well as re-housing those who were affected.
These are written as expenses to the budget, and therefore the budget deficit increases. Leaving aside the question of why the earthquake tax received for years was not used in the renovation of buildings, the increase in expenses caused by earthquakes is not the only reason for the increase in the budget deficit.
In 2022, the starting budget predicted an expense of 1.7 trillion liras. When this budget became insufficient in the middle of the year, an additional budget of 1.1 trillion liras was issued and the total allowance limit was increased to 2.8 trillion liras.
There is no such additional budget in the history of the Republic, including the war periods. Therefore, it is more correct to call this a second budget, not an additional budget. Why did the budget have to be increased by 65% when there was no earthquake in 2022?
In such cases, the problem arises from developments in one of two places: Either taxes do not increase as much as inflation, or expenses increase faster than incomes and inflation. Last year’s problem was the high and rapid increase in public spending. Public expenses also increased rapidly when control over inflation was lost due to lowered interest rates. The budget was not enough because there were no savings in public expenses on the grounds that there would be no savings from reputation.
It is certain that the earthquake had a negative effect on budget expenses this year. However, the earthquake is not the only reason for the increase. In reality, inflation is still very high, and public expenses are increasing far beyond the announced inflation. It is possible to reduce the effect of the increase in expenses on the budget by saving public expenses.
Simply increasing taxes is not enough to prevent the huge budget deficit that will occur in 2023. Public expenditures must also be cut—beyond making a financial contribution to the budget, cutting public expenditures would also turn expectations in a positive direction.
If we revalue the currency by removing zeroes as in 2005, would our money gain value?
Money does not gain value by removing the zeroes; it can only have a psychological effect. For there to be a psychological impact, this process must be part of a solid economic program.
When the zeroes were removed in 2005, Turkey was implementing a serious IMF program. Banking reform was carried out, weak banks were transferred to the SDIF, the capitals of all banks were strengthened, and various other rules were introduced.
Important steps were taken towards strengthening public financial discipline, budget deficits were reduced, and public sector borrowing decreased accordingly. Public expenditures were also disciplined, and inflation began to decline.
In parallel with these, interest rates were also falling. Turkey was on the verge of starting full membership negotiations with the European Union, and an increase in foreign capital entry directly into the country had begun. In summary, a structural reform package was being carried out.
All these initiatives strengthened the position of the Turkish Lira against foreign currencies, and the exchange rate stabilized without the need to impose a restriction or control on capital movements. In such an environment, removing the zeroes provided psychological support to the economy, which was starting to recover physically, and contributed to turning expectations in a positive direction.
None of these reforms are happening today. Moreover, the structural reforms that need to be made are no longer just economic, but social and political as well. Therefore, removing any more zeroes without taking such stabilizing steps will serve no use other than to confuse people.
The interview was published in Turkish on Mahfi Eğilmez’s blog and translated by FTP.
