When the global financial crisis intensified during the last quarter of 2008, Turkish policymakers thought its impacts on the Turkish economy would be fairly limited. Their optimism stemmed from a number of factors, including the country’s healthy banking sector, the prudent fiscal and monetary policies followed during the last few years, the floating exchange rate regime and strong levels of international reserves.
To strengthen the real economy, the government took many measures. But the measures introduced by the government were largely considered to be a meager policy response to the crisis. It seems that until the summer of 2009, the government was too optimistic. However, the sharp contraction in global economic activity, weak domestic demand conditions and the sudden cessation in external capital flows ultimately impacted the Turkish economy negatively, and the disinflation process accelerated in 2009. As a result, policymakers had to act. The dramatically negative performance of the Turkish economy in the first half of 2009 seems to have lessened the government’s optimism. Starting from early summer 2009, the government signaled that it was working on a comprehensive program, and would also introduce concrete measures to deal with the effects of the global crisis on the economy. As a result of these efforts, it announced a medium-term program in September 2009 which covers the 2010 – 2012 period. The program outlines the country’s fiscal targets for the next three years, proposes an exit strategy from the crisis and provides forecasts for major macroeconomic variables. The main purposes of the program are to establish a framework that will enable Turkey to achieve a sustainable growth rate in the aftermath of the crisis, and to raise society’s welfare.
Regarding the budget composition, we note that Turkey has raised the share dedicated to social security spending, taking serious steps in the direction of more social equality as well as sustainability. The incumbent government, for the first time in the republic’s history, raised health and education spending at the cost of military expenditure. Education spending, which was below defense expenditure in 2002, was raised to double the military’s budget share. Health expenditures, which were one-third of military costs in 2002, today are only 10% lower than defense expenditures.
For 2007, the budget deficit represented just 1.6% of GDP. During 2008, the deficit/GDP ratio increased to 1.8% of GDP, rising during 2009 to 5.5% of GDP. As of the end of 2009, public debt amounted to 46.3% of GDP. All these indicators point to a worsening situation as compared to the pre-crisis period, but on the other hand, these indicators hint at a better absolute situation for Turkey than for Ireland, Italy or Greece. Turkey is in comparatively better shape than Portugal or Spain, and the country has managed the financial crisis without help from the IMF. However, data on unemployment indicate that as of March 2010, this rate stood at 13.7%. Thus, Turkey has not solved its internal balance problem, and further measures are necessary to achieve internal balance.
According to the State Planning Organization (2009), the stimulus package amounted to 0.8% of GDP during 2008, 2.1% of GDP during 2009, and 1.6% of GDP during 2010. Turkey realized that policies associated with increasing public consumption, public investment and transfer payments and reducing taxes have to take into consideration constraints on fiscal sustainability.
State Planning Organization (2009)“Medium Term Economic Program (2010-2012),” September http://www.dpt.gov.tr/DPT.portal
Togan, S. (2010) Managing the Crisis: Turkey Country Report, Gütersloh: Bertelsmann Stiftung,