Turkey

   

Economic Policies

#36
Key Findings
With its economy hobbled by uncertainty, Turkey falls into the bottom ranks worldwide (rank 36) with regard to economic policies. Its score on this measure has declined by 0.4 points relative to its 2014 level.

Turkey has been struggling to manage a currency crisis triggered, but not ultimately caused by, U.S. sanctions. This led to a devaluation in the lira, which put pressure on entities with foreign-currency debt, at a point where government spending has led to increased deficits and growing public debt. The crisis was caused in part by investors’ uncertainty regarding the country’s ability to service its debt.

The 7.4% GDP growth rate of 2017 fell sharply to a still-robust 3.8% in 2018. Inflation has risen to an annualized rate of nearly 25%. The budget deficit rose to 4% in 2019, and is expected to exceed 5% in 2019. Gross public debt is low by international standards, at 28.3% of GDP in 2017 and an expected 32.3% in 2018, but is rising steadily.

The fast-growing population complicates labor policy. The labor-force participation rate is just under 54%, due to low rates among women. The overall unemployment rate rose to 10.2% in mid-2018, with higher rates in the non-agricultural sector. Informal employment accounts for about one-third of total employment.

Economy

#37

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
Turkey’s most significant economic problems are related to external imbalances. While the current account deficit increased from $33.1 billion (3.8% of GDP) in 2016 to $47.4 billion (5.6% of GDP) in 2017, total external debt increased from $440.3 billion (51.7% of GDP) at the end of second quarter of 2017 to $457 billion (about 60% of GDP) at the end of second quarter of 2018. The plunge in the Turkish lira during August 2018, following economic sanctions imposed by the United States on Turkey due to severe bilateral political disputes, has increased pressure on Turkish corporations burdened with foreign currency debts and the banks that lent the corporations money.

The main factor causing the 2018 currency crisis has been foreign investors’ increasing uncertainty regarding the sustainability of Turkey’s external debt. Though external debt is said to be sustainable as long as the country does not need to default, renegotiate or restructure its external debt, or make implausibly large policy adjustments. As a result, foreign capital flows financing the liquidity requirements of the country have dried up. The U.S. administration’s decision to inflict economic pain on Turkey has triggered the currency crisis, but it has not been a major factor causing the currency crisis.

On 20 September 2018, the government announced the “New Economic Program 2019 – 2021.” Accordingly, the current account deficit in 2019 is expected to decline to $36 billion (4.7% of GDP) in 2018 and to $26 billion (2.7% of GDP) in 2019. Whether or not expectations will be met remains to be seen.

According to net international-investment position (NIIP) statistics published by the Central Bank of Turkey, Turkey’s total gross external liabilities at the end of the second quarter of 2018 amounted to $633 billion, 76% of these liabilities were short term. On the other hand, according to external debt data published by the Ministry of the Treasury and Finance, Turkey’s external debt at the end of the second quarter of 2018 amounted to $457 billion and the share of short-term debt in total external debt amounted to 26.2%.

According to Reuters, Turkey has to make $179 billion in external debt repayments over 12 months to July 2019, with most of this debt is owed by the private sector, especially banks. It has been emphasized that Turkey’s financing needs are large and access to international markets has become problematic. Combining the expected current account deficit of about $40 billion and the $179 billion financing requirements totals approximately $220 billion, which is very large for a country like Turkey. The above considerations reveal that Turkey has to make implausibly large policy adjustments and that prospects of an IMF bailout have increased considerably.

Turning to considerations of recent developments in the Turkish economy, Turkey’s GDP expanded by 7.4% in 2017. According to the Turkish Ministry of Treasury and Finance, the GDP growth rate during 2018 will be 3.8%. GDP has declined from $863.4 billion in 2016 to $851 billion in 2017, and is expected to decline further to $763 billion during 2019. In contrast, Turkey’s inflation rate, based on the consumer price index (CPI), is expected to increase from 11.9% in 2017 to 20.8% in 2018. The country’s annual inflation rate in September 2018 based on CPI was 24.5%. Thus, the headline inflation rate remains well above the central bank target of 5%. On the other hand, the producer price index has increased by 46.2% on a year-on-year basis in September 2018, indicating that the consumer price index will be increasing at more than 24.5% on a year-on-year basis over the next few months.

In the case of monetary policy, on 13 September 2018, the central bank announced that the bank funding provided through overnight lending will be provided via one-week repo auctions and that the policy rate has been increased from 17.75% to 24%. Thus, the central bank has returned to a conventional monetary policy approach.

Citations:
Hazine ve Maliye Bakanlığı (2018) ‘Yeni Ekonomi Programı: Dengelenme-Disiplin-Değişim 2019-2021’, Ankara

International Monetary Fund (2018) ‘Turkey 2018 Article IV Consultation-Press Release: Staff Report; and Statement by the Executive Director for Turkey’, Washington D.C.: IMF (April)

Reuters (2018) ‘Turkey faces $179 billion External Debt Repayments until July 2019, JPMorgan says’ (August 29, 2018)

World Bank (2018) ‘Turkey Economic Monitor 2018’ Washington D.C.: The World Bank (May).




Sazak, S. (2018) ‘The US-Turkey Relationship is Worse Off Than You Think’, Foreign Policy

Labor Markets

#31

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 2015 to 2018, the country’s population increased by an estimated 3.2 million to 81.9 million people in 2018. The working-age population (those 15 years old and older) grew from 57.8 million in June 2015 to 60.6 million people in June 2018, while the labor-force participation rate rose from 52.1% in June 2015 to 53.8% in June 2018. A total of 27.3 million people were officially registered as employed in June 2015, rising to 29.3 million in June 2018.

Employment figures in various sectors point to growing dynamism in the Turkish labor market. Recent employment figures for the industrial and service sectors indicate an increase of 356,000 jobs in industry and 2.1 million jobs in the service sectors between June 2015 and June 2018, and to a decrease in employment in industry by 83,000 people between June 2015 and June 2018. On the other hand, agricultural employment decreased by 374,000 people during the same period.

The official number of unemployed increased from 2.9 million in June 2015 to 3.3 million in June 2018. 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 9.6% in June 2015 to 10.2% in June 2018. Strikingly, unemployment rose in the non-agricultural sectors from 11.7% in June 2015 to 12.1% in June 2018.

Between January 2018 and June 2018, an additional 1.3 million people were employed due to several governmental measures that were introduced. The reason for the increase was the desire to affect the distribution of votes in parliamentary snap elections, which were scheduled for 24 June 2018. On the other hand, the number of public employees between the last quarter of 2017 and the second quarter of 2018 increased by 528,000 to 4.1 million.

Informal employment increased 5.7% between June 2017 and June 2018, and was estimated to account for 34% of total employment in June 2018. Displacement of native workers by refugees (who work without job security and for lower wages) is 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 June 2015 to 19.4% in June 2018. Another major medium-term challenge for Turkey involves boosting 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 significant constraints on job creation in Turkey. Minimum wages are high and Turkey has a very generous severance payment system. The IMF (2018) maintains that the formal labor market could be made more flexible by reforming the severance pay system, which is overly burdensome for employers in the formal sector and discourages labor mobility due to non-transferable built-up rights. 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, by promoting exports through alternative means (e.g., real exchange rate devaluations), the country can create higher paying jobs in export sectors than domestically oriented firms, which will drive productivity increases in the economy.

Citations:
International Monetary Fund (2018) ‘Turkey 2018 Article IV Consultation-Press Release: Staff Report; and Statement by the Executive Director for Turkey’, Washington D.C.: IMF (April)

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



Taxes

#39

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
While taxes accounted for 52.6% of general government revenue in 2016, the share increased to 53.2% in 2017. The taxation system can be divided into three categories: direct taxes (e.g., the individual-income tax and corporate-income tax); indirect taxes (e.g., 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 2017, individual-income tax rates varied from 15% to 35%. The standard corporate tax rate was 20%, while capital gains were 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. While indirect taxes formed 67% of total tax revenue during 2016, the share declined to 66.4% in 2017.

Budgets

#28

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
7
General government revenue, according to the IMF (2018), decreased from 32.8% of GDP in 2016 to 31.2% in 2017, and is expected to decrease to 30.3% of GDP in 2018 and further to 29.9% during 2019. On the other hand, general government expenditures decreased from 35.1% in 2016 to 33.4% during 2017, and is expected to increase to 34.4% in 2018 and further to 35% in 2019. As a result, the fiscal deficit of the general government – after declining from 2.33% in 2016 to 2.27% of GDP in 2017 – is expected to increase to 4% of GDP in 2018 and further to 5.1% of GDP in 2019.

During the period 2012 – 2015, the government maintained fiscal discipline by keeping the general government deficit at 1.5% of GDP. But after the failed coup attempt of 15 July 2016, the government adopted an expansionary fiscal policy approach and government deficit as a percentage of GDP increased to 2.3%. Constitutional referendum was held on 16 April 2017 and general elections on 24 June 2018. To please voters during the parliamentary elections in particular, the government adopted an expansionary fiscal policy approach, increasing wages and social transfers, and purchases of goods and services. In addition, temporary tax reductions, continued minimum wage subsidies and an employment incentive scheme were provided. According to the IMF (2018), the fiscal impulse is estimated at close to 1% of GDP in 2017. Additional incentives were introduced during 2018. Furthermore, contingent liabilities arising from public-private partnership (PPP) projects are not included in the fiscal balances. As a result, the fiscal deficits reported above are underestimates. According to the IMF (2018), the investment size of PPP projects concentrated in the public transport, energy and health care sectors amount to $61 billion, and 60% of these PPP projects are under construction. Contingent liabilities could arise from demand, exchange rate, investment guarantee and contract termination clauses mainly issued by Turkey’s Ministry of Treasury and Finance.

As a result of the above developments, gross public debt totaled 28.3% of GDP in 2016, 28.3% of GDP in 2017, and the ratio is expected to increase to 32.3% in 2018 and 33.6 in 2019.

Citations:
International Monetary Fund (2018a) ‘World Economic Outlook Database’, Washington D.C.: IMF (October)

International Monetary Fund (2018b) ‘Turkey 2018 Article IV Consultation-Press Release: Staff Report; and Statement by the Executive Director for Turkey’, Washington D.C.: IMF (April)

Research, Innovation and Infrastructure

#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.

According to the Turkish Statistical Institute, total R&D spending by the public and private sectors as a fraction of GDP in 2015 was 0.88% and in 2016 the share increased to 0.94%. During 2016, commercial enterprises accounted for the largest share of R&D expenditures, at 54.2%. While universities accounted for 36.3% of spending on R&D, public institutions’ share was 9.5%. In terms of financial contributions to R&D projects, commercial enterprises have the largest share with 46.7%, followed by public institutions with 35.1%, universities with 14.4% and other sources 3.8% of R&D. In terms of full-time employment, 136,953 people worked in the R&D sector during 2016, an increase of 12% compared with the previous year. The private sector employed 53% of R&D personnel, while 38.4% worked at universities and public institutions employed 8.6% 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.

Global Financial System

#33

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 System
6
After 2016, the government’s overarching banking and finance 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. Credit growth has been substantial and the annual credit growth rate was 23.5% in September 2017 and 28.1% in September 2018. These measures have been criticized by the IMF’s latest Financial Sector Assessment Program (FSAP) report, which advised the Turkish government to strengthen banking sector supervision and governance, and enhance the regulatory framework for financial services. According to the “New Economic Program 2019 –2021” announced in September 2018, the banking sector will be considered sound if it achieves a capital adequacy ratio of 16.2% and non-performing loan ratio of 3%. But the program emphasized the need for a “health assessment” in the banking sector to identify the financial structure and asset quality.

The combination of trade deficits, renewed budgetary deficits, low interest rates and inflation pressures have exposed Turkey’s currency, and made it extremely vulnerable to currency market turbulences. The very belated decision of the Turkish authorities to strengthen the Turkish lira by adopting a high-interest rate policy on 13 September 2018 underlines the ongoing unwillingness of President Erdoğan to truly accept central bank independence.

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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