Turkey's ruling party takes its eye off the economy

By bne IntelliNews May 27, 2008

Bernard Kennedy in Ankara -

Faced with a slowing economy, the threat of closure by the Constitutional Court and the approach of the March 2009 local government elections, Turkey's ruling Justıce and Development Party (AKP) is seizing the opportunity offered by the expiry of the three-year International Monetary Fund standby accord on May 10 to relax fiscal discipline in a bid to boost investment and employment.

On May 3, Finance and Treasury ministers Kemal Unakitan and Mehmet Simsek unveiled a new "medium-term fiscal framework" that effectively loosened the public purse strings for 2008 by 0.7% of GDP. Then on May 15, parliament voted for an "employment package" that showed how the extra money would be spent. The package reduces employers' social security contributions, especially for newly recruited women and young people, and commits billions of dollars from the Unemployment Fund and privatisation revenues to accelerate long-delayed infrastructure works in the mainly Kurdish-speaking southeast over the next five years.

A last-minute addition to the Employment Package offered easy payment terms for employers (including municipalities) in arrears with social security payments. "A totally populist decision," declared leading economic columnist Erdal Saglam in the best-selling daily Hurriyet. "Regrettable," IMF Turkey mission chief Lorenzo Giorgianni told Bloomberg.

Less than a week earlier, parliament had legislated to permit the government to enter into generous public-private partnerships schemes to complete large-scale road and irrigation works across the country. And in April, the government reduced the rate at which it claws back municipalities' debts by docking their share of national tax revenues.

Risky or reasoned?

All this comes at a time when investor and business confidence in the prudence and predictability of government policy is at a premium. Frail global financial markets are threatening the financing of a current account deficit of around 6% of GDP, and soaring energy and food prices look set to push consumer price inflation (CPI) into double digits. With CPI at 9.66%, the central bank has postponed its 4% inflation target until 2011. On May 15, it raised the key overnight borrowing rate by 0.5% to 15.75% and threatened further hikes.

Ministers justify the extra spending on what they call "costly reforms" on the grounds that tight fiscal policy, falling borrowing costs and an upward revision of GDP figures reduced the government debt to 38.8% of GDP as of the end of 2007. They say that their fiscal framework remains tight enough to pull this figure down to 30% by the end of 2012.

Critics, however, believe that having clinched a final $3.6bn tranche of IMF credit with an unpopular social security reform in mid-April, the AKP is reshuffling its priorities. If the party with Islamist roots is closed down by the Constitutional Court in late 2008 or early 2009 - as seems probable - Prime Minister Recep Tayyip Erdogan and many of his colleagues in parliament are likely to lose their seats. An AKP successor party would retain a parliamentary majority, but by-elections might be required and its members could well plump for an early general election - perhaps on the same day as the local government elections.

What is missing is the feel-good factor. Even the government now admits that GDP growth will be no higher than the 4.5% recorded in 2007 and most observers expect it to be considerably lower. The official consumer confidence index recorded its largest-ever fall in April, slumping to an all-time low of 76.2 points.

"A relaxation of 1% of GDP over five years would not be very much," comments former Treasury undersecretary Ferhat Emil, with reference to the new fiscal framework. "But what I am really concerned about is that the government may not stop at this point - that they will try to relax fiscal discipline by more than the framework says."

Until May, Turkey had been under almost unbroken IMF tutelage since mid-1998. The financial markets would like to see a further preliminary standby arrangement, which Simsek has not ruled out. However, Emil, who now works with the private sector Stability Institute, sees little prospect of this in the near future. "They seem quite committed to relaxing fiscal discipline," he told bne. "They would rather have their hands free before the elections... I think the only factor which might restrain the government is if the global environment gets worse."

Once the political dust settles, the outlook could be different. In a cartoon in this week's Ekonomist magazine, IMF officials are portrayed telling their fleeing Turkish counterparts, "We will meet again". And for top columnist Saglam, "the economic management needs an anchor. Call it what you will - an anchor or a stick."

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