Turkey

   

Economic Policies

#33
Key Findings
With uncertainty heightened by regional and internal events, Turkey scores relatively poorly (rank 33) with regard to economic policies. Its score on this measure has declined by 0.2 points relative to its 2014 level.

The failed July 2016 coup increased political and economic uncertainty. Under the state of emergency, many public employees were suspended or dismissed, and many companies taken over by the state. Households subsequently delayed spending, and corporations postponed key investment decisions.

Despite these challenges, growth has been moderate to strong, at 3.2% of GDP in 2015 and around 5% in 2017. Inflation has been above targets. Overall unemployment is nearly 11%, with informal employment accounting for more than a third of total employment. The labor-force participation rate has risen slightly, but remains only a few points above 50%.

Nearly 70% of total tax revenues come from indirect taxes. After a period of declines, the budget deficit jumped to 2.3% of GDP in 2016, following post-coup stimulus measures. Debt is growing but remains moderate by international standards, at 28.1% of GDP.

Economy

#35

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
4
The July 2016 failed coup increased political and economic uncertainty within the country. Since July 2016, a state of emergency has been imposed. A very substantial number of public employees have been suspended or dismissed, while many people have been detained and many companies have been taken over by the state. The government alleges that these extreme measures are necessary, because these people and companies have links to terrorist organizations. Consequently, households delayed spending especially on durable goods and corporations postponed key investment decisions, resulting in lower consumption and investment. State takeovers of private companies has had particularly adverse effects on private investment and foreign direct investment. Furthermore, a series of terrorist attacks have weakened tourism and foreign investment. Finally, domestic economic actors expect a tightening of global liquidity to constrain foreign borrowing and in the medium term increase Turkey’s external requirements. In turn, this will pose downside risks to economic growth and employment.

Turkish GDP expanded by 3.2% in 2016. According to the IMF, the GDP growth rate during 2017 will be around 5.1% due to fiscal stimulus and credit expansion. GDP declined from $934.1 billion in 2014 to $859 billion in 2015, and increased slightly to $863.4 billion in 2016. On the other hand, Turkey’s inflation rate, based on the consumer price index, increased slightly from 7.7% in 2015 to 7.8% in 2016. The country’s annual inflation rate in September 2017 was 11.2%. Thus, the headline inflation rate remains well above the central bank target of 5%. However, according to Turkey’s hourly labor-cost index, the total hourly cost of an employee increased by 13.3% in 2015 and 20.1% in 2016. According to the most recent figures, hourly labor costs increased by 13.7% on a year-on-year basis during the second quarter of 2017.

The banking sector has proved resilient to global financial crisis due to robust capital buffers and a healthy loan portfolio. After the failed coup attempt in July 2016, the government’s overarching goal has been to avoid a substantial economic slowdown. As a result, the government decided to relax prudential norms in the banking sector, reduce provisioning requirements for restructured loans in the tourism and energy sectors, and lower regulatory risk weights on consumer loans and credit cards. As a result, credit growth has been substantial and the annual credit growth rate was 23.5% in June 2017. But these measures have been criticized by the IMF’s latest Financial Sector Assessment Program (FSAP) report, which advises the Turkish government to strengthen banking sector supervision and governance, and enhance the regulatory framework for financial services.

In the field of monetary policy, after the failed coup attempt the central bank lowered reserve requirements, allowed greater use of gold and foreign currency, and offered unlimited lira liquidity against foreign exchange collateral. Between March and September 2016, the central bank gradually lowered the overnight lending rate by 250 basis points to 8.25%, leading to a substantial decline in the interbank overnight lending rate. Yet, at the end of November 2016, the central bank had to raise the one-week repo and overnight lending rates after a steep depreciation in the lira. Simultaneously, the central bank reversed the process of simplifying the monetary framework, which was based on the use of policy rate as the main monetary policy transmission tool. The central bank returned to its unconventional monetary policy, emphasizing the use of Late Liquidity Window rather than the use of policy rate.

Turkey’s most significant economic problems continue to be related to external imbalances. While the current account deficit decreased from $43.6 billion (4.7% of GDP) in 2014 to $32.1 billion (3.7% of GDP) in 2015, and increased slightly to $32.6 billion (3.8% of GDP) in 2016, the current account deficit is still considerable. According to the IMF, the current account deficit is expected to increase to $39 billion (4.6% of GDP) in 2017.

Turkey’s net international-investment position (NIIP) is defined as the value of total external assets owned by Turkish residents in the rest of the world minus the value of total external liabilities of Turkish residents to the rest of the world. Turkey’s NIIP deficit increased from $395 billion at the end of 2013 to $443 billion in 2014, but declined to $383.6 billion in 2015 and to $363 billion at the end of 2016. The country’s net foreign debt at the end of August 2017 amounted to $462.4 billion. Considering Turkey’s net foreign debt and the IMF’s GDP estimate for 2017, the net-foreign-debt-to-GDP ratio for 2017 is approximately 55%.

The change in a country’s NIIP over time is determined largely by its current account balance as a share of GDP. Thus, if Turkey’s current-account deficit-to-GDP ratio were to remain at 4.17% of GDP and real GDP were to increase at its projected average annual growth rate of 3.54%, as predicted by the IMF for the period 2018 – 2022, then the country’s net-foreign debt-to-GDP ratio would increase over the long term to an unsustainable 122.1%. Turkey must therefore reduce its current account deficit. A sustainable current account deficit-to-GDP ratio is likely around 2% of GDP. Since one of the main determinants of the current-account-deficit-to-GDP ratio is the real exchange rate, achieving a sustainable current account deficit will require a depreciation in the real exchange rate.

Citations:
World Bank (2017) World Bank in Turkey – Country Snapshot: The World Bank (October).

Labor Markets

#29

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
Turkey’s population and work force are growing significantly. From 2014 to 2017, the country’s population increased by an estimated 2.4 million to 79.8 million people in 2017. The working-age population (those 15 years old and older) grew from 56.6 million in January 2014 to 59.9 million people in July 2017, while the labor-force participation rate rose from 48.2% in January 2014 to 53.7% in July 2017. A total of 24.5 million people were officially registered as employed in January 2014, rising to 28.8 million in July 2017.

Employment figures in various sectors point to growing dynamism in Turkey’s economy and labor market. Recent employment figures for the industrial and services sectors indicate an increase of 71,000 jobs in industry and 2.4 million jobs in the services sector between 2014 and July 2017. On the other hand, agricultural employment increased by 107,000 jobs between 2014 and July 2017.

The official number of unemployed increased from 2.8 million in January 2014 to 3.4 million in July 2017. The increase in unemployment shows that the number of new entrants to the labor force outnumbered the number of jobs created, reflecting demographic factors as well as the slowdown of the Turkish economy. The overall unemployment rate increased slightly from 10.3% in January 2014 to 10.7% in July 2017. Strikingly, unemployment rose in the non-agricultural sectors from 12.1% in January 2014 to 13% in July 2017. Between January and July 2017, an additional two million people were employed due to several governmental incentives. On the other hand, the number of public employees between 2016 and the second quarter of 2007 remained stable at 3.5 million.

Informal employment increased 6.8% between July 2016 and July 2017 and was estimated to account for 35.2% of total employment in July 2017. Displacement of native workers by refugees who agree to work without job security and for lower wages is the one of the factors driving this development. On the other hand, Turkey adopted the International Labor Force Law in July 2016, which aims to attract high-skilled workers to protect and increase productivity. The requirement of a “professional competence certificate” is expected to increase the qualified domestic labor force and increase competition in the job market.

A major medium-term challenge facing the government is the need to create more and better paying jobs for Turkey’s young and growing population, since many young people (15 to 24 years old) are not in employment, education or training. The unemployment rate of young people increased from 17.7% in January 2014 to 21.1% in July 2017. Another major medium-term challenge for Turkey is to boost women’s participation rate in the labor force. Despite notable job-creation successes in recent years, almost half of Turkey’s working-age population fails to enter the labor market, a problem largely attributable to women’s low participation rates.

The World Bank (2016) pointed to labor market rigidity and high labor costs as important constraints to job creation in Turkey. Minimum wages are high and Turkey has a very generous severance payment system. The government’s recently approved National Employment Strategy includes measures to reform the severance payment scheme, unemployment benefits and temporary work contracts. On the other side, recent research indicates that firms participating in international markets through exports or multinationals are in general larger, more productive, more capital intensive, more skill intensive and pay higher wages than domestic firms within the same industry. Thus, the country by promoting exports through alternative means (e.g., real exchange rate devaluations) can create higher paying jobs in export sectors than domestically oriented firms, which will drive productivity increases in the economy.

Citations:
World Bank (2016) World Bank Group – Turkey Partnership: Country Program Snapshot, Washington D.C.: The World Bank (April).

World Economic Forum (2017) Global Gender Gap Report 2017, Geneva.

Taxes

#38

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
General government revenue increased from 31.9% of GDP in 2014 to 32.6% in 2016. While taxes accounted for 82.9% of central-government revenue in 2014, the share declined slightly to 82.7% in 2016. As a result, tax revenue totaled 17.7% of GDP in 2016.

The taxation system can be divided into three categories: direct taxes such as the individual-income tax and corporate-income tax; indirect taxes such as the value added tax (VAT), the banking and insurance-transaction tax, the special consumption tax, and the telecommunications tax; and other government revenues drawn from factor incomes, social funds and privatization revenues. In 2016, individual-income tax rates varied from 15% to 35%. The standard corporate tax rate is 20%, while capital gains are usually treated as regular income and taxed accordingly.

Biased toward indirect taxes, Turkey’s taxation system does not take into consideration horizontal or vertical equity. This gives the government more flexibility to react to changes in Turkey’s highly dynamic and volatile economy, but at the same time decreases fiscal stability and political credibility, particularly concerning the special consumption tax. In 2016, 69.6% of total tax revenues were derived from indirect taxes.

Budgets

#19

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
8
General government revenue increased from 31.9% of GDP in 2014 to 32.2% of GDP in 2015 and to 32.6% of GDP in 2016. Total general government expenditures as a share of GDP increased from 33.3% in 2014 to 33.4% in 2015 and to 34.9% in 2016. After the failed coup attempt the government adopted an expansionary fiscal policy approach. During 2016 central government expenditures grew by 15.4% due to increases in wages, transfers, and purchases of goods and services. Though a fall in capital spending and interest expenditures as a share of GDP helped to contain the increase in total expenditures.

During the first three months of 2017, the discretionary funds available to the prime minister and the president almost doubled. In 2016, the IMF had emphasized the need to enhance fiscal risk management. Due to the fragmentation of the legal and oversight framework for public-private partnerships (PPP), contingent liabilities have increased due to the government’s continued reliance on PPPs for infrastructure investments.

In August 2016, the Turkey Wealth Fund (Türkiye Varlık Fonu), a sovereign wealth fund owned by the government, was established by Law 6741. The fund is operated under the Strategic Investment Plan, which is approved by the cabinet. The fund was initially allocated TRY 50 million from the reserves of the Privatization Fund and the Directorate of the Privatization Administration (Özelleştirme İdaresi Başkanlığı). In February 2017, the fund also received all the state-owned shares of T.C. Ziraat Bankası A.Ş., Boru Hatları ile Petrol Taşıma A.Ş. (BOTAŞ), Türkiye Petrolleri A.O. (TPAO), Posta ve Telgraf Teşkilatı A.Ş. (PTT), Borsa Istanbul A.Ş. (BIST) and Türksat Uydu Haberleşme Kablo TV ve İşletme A.Ş., as well as the state’s 49.12% share in Türk Hava Yolları A.O. (Turkish Airlines), 51.11% share in Türkiye Halk Bankası A.Ş., 49% share in Türkiye Denizcilik işletmeleri A.Ş. and 6.68% share in Türk Telekomünikasyon A.Ş. In addition, the fund received the licensing rights of Milli Piyango Genel Müdürlüğü for games of chance and the licensing rights for horse races (for 49 years each, starting from 1 January 2018). The fund received ownership of land in Antalya, Aydın, İstanbul, Isparta, İzmir, Kayseri and Muğla, which were previously owned by the Treasury of Turkey. By the end of 2017, the fund managed approximately $40 billion in assets.


So far, the transfer of discretionary funds to the presidency and the Turkey Wealth Fund has not affected the government’s budget. Furthermore, given that the presidency and Turkey Wealth Fund – despite concerns over nontransparency and misuse of funds – can contribute to Turkey’s economy by enhancing budgetary flexibility, the impact of both moves on the economy’s sustainability remains to be seen.

Nevertheless, as a result of the above developments, the budget-deficit-to-GDP ratio declined from 1.4% in 2014 to 1.3% in 2015, but jumped to 2.3% in 2016 as a result of fiscal stimulus measures introduced after the failed coup attempt. At the end of 2014, gross public debt totaled 28.7% of GDP, while the gross public-debt-to-GDP ratio amounted to 27.5% in 2015 and increased to 28.1% in 2016.

Citations:
International Monetary Fund (2016) ‘Staff Report for the 2017 Article IV Consultation,’ Washington D.C.: IMF.

Yegin Çiftçi Attorney Partnership (2017) ‘Turkey Joins The Rest Of G20 By Establishing Its Sovereign Wealth Fund,’ Briefing Note, Istanbul, http://www.yeginciftci.av.tr/content/site-ycap/en/publications/Turkey-Joins-The-Rest-Of-G20-by-establishing-its-sovereing-wealth-fund/_jcr_content/parsys_article/download/file.res/TURKEY%20JOINS%20THE%20REST%20OF%20G20%20BY%20ESTABLISHING%20ITS%20SOVEREIGN%20WEALTH%20FUND.pdf

Research and Innovation

#34

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
4
During the review period, the government continued to strengthen the country’s research and innovation capacity. The Scientific and Technological Research Council of Turkey (TUBITAK) is the leading agency for management, funding and conduct of research in Turkey. Yet, within university and private sector-led R&D, human resources, capacities and qualifications lack the necessary incentives to grow and develop.

According to the Turkish Statistical Institute, total R&D spending by the public and private sectors as a fraction of GDP in 2014 was 1.01% and in 2015 the share was 1.06%. Commercial enterprises account for the largest share of R&D expenditures, at 50%. While universities accounted for 39.7% of spending on R&D, public institutions’ share was 10.3%. In terms of financial contributions to R&D projects, commercial enterprises have the largest share with 50.6%, followed by public institutions with 27.9%, universities with 18.3% and other sources 3.2% of R&D. In terms of full-time employment, 190,784 people worked in the R&D sector in 2015, an increase of 5.1% compared with the previous year. The private sector employed 26.8% of R&D personnel, while 69.5% worked at universities and public institutions employed 3.7% of R&D personnel.

In 2013, Turkey adopted the Tenth Development Plan, covering the period 2014-18, aiming to improve science, technology and innovation, as one of the building blocks for innovative production and steady growth. In Turkey, the Supreme Council for Science and Technology (SCST) is the highest-ranking science and technology policymaking body in Turkey. In the last few SCST meetings, emphasis was placed on intensifying R&D efforts in the energy, health and biotechnology sectors, providing subsidies to R&D laboratories of multinational enterprises.

Global Financial System

#22

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
7
Turkey has actively contributed to the work of the Group of Twenty (G-20), the international forum comprising the world’s 20 leading industrialized and emerging economies. One of Turkey’s key priorities for its presidency of the G-20 in 2015 had been to promote inclusive economic growth globally. During Turkey’s presidency, the G-20 agreed to reduce youth unemployment by 15% by 2025, adopted a set of policy recommendations to reduce inequality and established Women-20 (W20) as a stand-alone engagement group to promote gender-inclusive economic growth. In addition, the G-20 adopted a framework at the G-20 leaders’ summit in Antalya to strengthen dialogue between the G-20 and low-income developing countries. Turkey’s G-20 presidency also brought global peace and security issues to the agenda, as these issues are closely related to sustainable and inclusive economic growth.

Citations:
G20 country report, Turkey 2017, http://www.bundesfinanzministerium.de/Content/DE/Downloads/G20-Dokumente/Hamburg _Wachstumsstrategien/TUR-Growth-Strategy.pdf?__blob=publicationFile&v=3
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