Turkey

   

Economic Policies

#37
Key Findings
With vulnerability to external shocks an increasing concern, Turkey falls into the bottom ranks worldwide (rank 37) with regard to economic policies. Its score on this measure has declined by 0.7 points relative to its 2014 level.

Growth rates have declined precipitously from recent highs, falling from 7.5% in 2017 to 0.5% in 2019. With market concerns rising about the sustainability of the country’s external debt, foreign capital flows have dried up, enhancing vulnerability to currency shocks. Inflation and interests rats are high. The central bank governor was fired after refusing to cut the main interest rate.

The fast-growing population complicates labor policy. The labor-force participation rate is just under 53%, due to low rates among women. Overall unemployment rates climbed following the 2018 currency crises, remaining around 14% through mid-2019, with higher rates in the non-agricultural sector. Informal employment accounts for more than one-third of total employment.

Income taxes account for 35% of government revenue, and taxes on goods and services another 34.3%. The fiscal deficit amounted to 4.6% in 2019, and is expected to climb further. Gross public debt is low by international standards at 30.1% of GDP.

Economy

#39

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. At present, the country’s trade and current account balances, and currency and debt policies are unsustainable. Regarding trade and current account balances during the period under review, Turkey’s performance has been mixed. The current account deficit decreased substantially from $47.3 billion (5.6% of GDP) in 2017 to $27 billion (3.6% of GDP) in 2018. On a monthly basis, the current account averaged a $5.6 billion deficit between January and June 2018, but averaged a $1.9 billion surplus between August and November 2018. Despite the positive development in the current account balance, it is still difficult to argue that Turkey is on a healthy and sustainable economic growth trajectory. The turnaround has been largely due to the decline in imports that accompanied a slowdown in economic growth following the 2018 currency crisis.

As a result of decreasing confidence in the sustainability of Turkey’s external debt, foreign capital flows, which have been crucial to financing the country’s liquidity requirements, have dried up. Consequently, the government has been forced to recognize the country’s vulnerability to economic shocks, especially to currency shocks.

Turkey’s total gross external liabilities amounted to $596.2 billion, of which 75.8% were short-term liabilities, at the end of June 2019. The country’s net international investment position amounted to a net external debt of $351.5 billion. On the other hand, at the end of the second quarter of 2019, Turkey’s external debt amounted to $446.9 billion, with short-term debt accounting for 27.4% of total external debt.

According to Reuters, Turkey had to make $179 billion in external debt repayments over the 12 months to July 2019, with the private sector (especially banks) accounting for most of this debt. Turkey’s financing needs are substantial and access to international markets has become problematic. Subtracting the current account surplus of $4.4 billion over the 12 months to July 2019 from the $179 billion financing requirements leaves $174.6 billion, which is a very large funding gap for Turkey. The scale of this gap indicates that Turkey must make implausibly large policy adjustments in order to achieve a sustainable current account balance. As a result of recent developments, the prospect of an IMF bailout has increased considerably. However, the government has refused to ask for IMF support.

Turkey’s GDP increased by 7.5% in 2017 and 2.8% in 2018. According to the Turkish Ministry of the Treasury and Finance, GDP will grow by 0.5% during 2019. According to the IMF, Turkey’s GDP declined from $852.6 billion in 2017 to $771.3 billion in 2018 and is expected to decline to $743.7 billion during 2019. Though, according to the Ministry of the Treasury and Finance, GDP is expected to decline from $789 billion in 2018 to $749 billion in 2019, before increasing to $812 billion in 2020. In contrast to developments in GDP, Turkey’s inflation rate (CPI), according to the IMF, is expected to decrease from 16.3% in 2018 to 15.7% in 2019. Meanwhile, the Ministry of the Treasury and Finance calculates that inflation will decrease from 16.4% in 2018 to 14.1% in 2019. The country’s annual inflation rate in September 2019 based on CPI was 9.26%, indicating that the headline inflation rate remains well above the central bank target of 5%.

In the case of monetary policy, on 13 September 2018, the central bank announced that bank funding provided through overnight lending will be provided via one-week repo auctions and that the policy rate would be increased from 17.75% to 24%. Thus, the central bank returned to a conventional monetary policy approach. The government was eager to see Turkey’s economy grow quickly following a period of recession in 2018 and wanted to revive the credit fueled expansionary policy seen in previous periods. In July 2019, the central bank governor was sacked after refusing to decrease the policy rate from 24%. The new governor has since slashed the central bank’s benchmark interest rates by 7.5 percentage points from 24% to 16.5%. As a result, the cost of borrowing from commercial banks has decreased significantly. Lending increased largely due to the country’s three state-owned banks, while private lenders have taken a more cautious approach, as the proportion of non-performing loans is increasing, and are advocating for debt restructuring.

On 30 September 2019, the government announced the New Economic Program 2020 – 2022, which aims to achieve a current account surplus of $1 billion (0.1% of GDP) in 2019 and a further $9.6 billion (1.2% of GDP) in 2020.

Citations:
Central Bank of the Republic of Turkey, Balance of Payments and Related Statistics, Ankara.

International Monetary Fund (2019) ‘World Economic Outlook Database,’ Washington D.C.: IMF (October).

Ministry of the Treasury and Finance (2019) ‘New Economy Program 2020-2022,’ Ankara.

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

Turkish Statistical Institute, ‘National Accounts Statistics;’ and ‘Statistics on Inflation and Prices,’ Ankara.

Labor Markets

#38

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
5
Turkey’s population and work force are growing significantly. Between 2016 and 2019, the country’s population increased by an estimated 3.1 million to 82.4 million people in 2019. The working-age population (those aged 15 years old and over) increased from 58.7 million in June 2016 to 61.4 million people in June 2019, while the seasonally adjusted labor-force participation rate rose from 51.8% in June 2016 to 52.9% in June 2019. A total of 27.7 million people were officially registered as employed in June 2016, a figure that rose to 28.5 million in June 2018.

Employment figures in various sectors point to growing dynamism in the Turkish labor market. Sector-specific employment figures indicate an increase of 287,000 jobs in industry and 759,000 jobs in the service sectors between June 2016 and June 2019, and a decrease in employment in agriculture of 185,000 people during the same period.

The seasonally adjusted official number of unemployed increased from 3.3 million in June 2016 to 4.5 million in June 2019. The overall unemployment rate increased from 11% in June 2016 to 13.9% in June 2019. Strikingly, unemployment rose in the non-agricultural sectors from 13% in June 2016 to 16.2% in June 2019.

Between January 2019 and March 2019, an additional 638,000 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 municipal elections, which were held on 31 March 2019. On the other hand, between the last quarter of 2018 and the first quarter of 2019, the number of public employees increased by 165,000 to 4.52 million.

Informal employment increased 0.7% between June 2018 and June 2019, and was estimated to account for 35.2% of total employment in June 2019. Displacement of native workers by refugees (who work without job security and for lower wages) is one of the factors driving this development. A major 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 19.4% in June 2016 to 24.8% in June 2019.

Following the 2018 currency crisis, the unemployment rate increased from 10.8% in July 2018 to 14.7% in January 2019 and remained above 14% during February and March 2019. This was due mainly to the 14.4% decline in quarterly GDP between the last quarter of 2018 and first quarter of 2019.

In order to overcome labor market rigidities and high labor costs, the IMF (2018) recommended 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 rights. The government’s National Employment Strategy of 2017 includes measures to reform the severance payment scheme, unemployment benefits and temporary work contracts. However, the proposed measures have not been introduced, so far.

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).

Turkish Statistical Institute, ‘Statistics on Employment, Unemployment and Wages,’ Ankara.

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

Taxes

#37

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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 85.1% of central government revenue in 2017, this decreased to 82% in 2018. The taxation system can be divided into two categories: direct taxes (e.g., income tax on individuals and corporations) and indirect taxes (e.g., the value added tax, the banking and insurance-transaction tax, the special consumption tax, and the telecommunications tax). In 2018, income tax rates for individuals ranged from 15% to 35%. The standard corporate tax rate was 20%, while capital gains were usually treated as regular income and taxed accordingly. Although the general value added tax rate is 18%, a wide range of products are subject to an 8% and some other products to a 1% tax rate.

Income taxes accounted for 35% of total central government tax revenue, while taxes on property accounted for 2.2%, domestic taxes on goods and services 34.3%, taxes on foreign trade 22.2%, and other taxes 6.3%. 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.

According to the IMF’s October 2019 World Economic Outlook Database, general government revenue as a percentage of GDP is expected to decrease from 31.5% in 2018 to 30.2% in 2019, before increasing slightly to 30.5% in 2020 and 2021. On the other hand, general government expenditure as a percentage of GDP is expected to increase from 34.6% in 2018 to 35.6% in 2020 and 2021. As a result, the fiscal deficit as a percentage of GDP, which was 3.1% in 2018, is expected to increase to 4.6% in 2019, 4.7% in 2020 and 5.1% in 2021. Furthermore, the gross debt-to-GDP ratio is expected to decrease from 30.2% in 2018 to 30.1% in 2019, before increasing to 30.8% in 2020 and 31.7% in 2021. However, the fiscal deficit figures given above do not account for fiscal risks arising from public-private partnership (PPP) projects. PPP projects in the transportation, energy and health sectors involve explicit minimum guarantees and components expressed in foreign exchange terms. Since detailed information on all issued guarantees and associated risks, and on the structure and risk composition of the overall PPP portfolio is not available, it is difficult to estimate the expected increases in the fiscal deficit-to-GDP and gross debt-to-GDP ratios. However, guesstimates suggest that the figures are substantial. This highlights the incompatibility of government tax policies with current economic growth trends and the unsustainability of government finances. Finally, there is no apparent incentive structure to promote ecological sustainability.

Citations:
Ministry of the Treasury and Finance (2019) ‘Economic Indicators Statistics,’ Ankara.EE

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
6
General government revenue, according to the IMF (2019), increased from 31.4% of GDP in 2017 to 31.5% in 2018, but is expected to decrease to 30.2% of GDP in 2019, before increasingly slightly to 30.5% during 2020. On the other hand, general government expenditures increased from 33.6% in 2017 to 34.6% in 2018, and is expected to further increase to 34.8% in 2019 and to 35.2% in 2020. As a result, the general government’s fiscal deficit increased from 2.2% in 2017 to 3.1% of GDP in 2018, and is expected to increase further to 4.6% in 2019 and to 4.7% of GDP in 2020.

To appeal to voters in the run-up to the municipal and parliamentary elections in 2018 and 2019, the government abandoned its earlier focus on budgetary moderation and adopted expansionary fiscal policies. The government increased wages and social transfers, and purchases of goods and services. For example, temporary tax reductions and an employment incentive scheme were introduced, and minimum wage subsidies were increased. According to the IMF (2018), the fiscal impulse is estimated to have been close to 1% of GDP in 2017. Additional incentives were introduced during 2018. Notably, contingent liabilities arising from public-private partnership (PPP) projects were not included in fiscal balance calculations. As a result, the fiscal deficits reported above are underestimates. According to the IMF (2018), investment in PPP projects in the public transport, energy and healthcare sectors amounts to $61 billion. Of these PPP projects, 60% are under construction. Contingent liabilities could arise from demand, exchange rate, investment guarantee and contract termination clauses issued by Turkey’s Ministry of the Treasury and Finance. These developments intensified in the run-up to the 31 March 2019 municipal elections.

As a result of these developments, according to the IMF, gross public debt totaled 28.2% of GDP in 2017 and 30.2% of GDP in 2018. The public debt-to-GDP ratio is expected to decline slightly to 30.1% in 2019 and then increase to 30.8% in 2020.

The armed conflict in north-eastern Syria will affect Turkey’s fiscal balances and debt-to-GDP ratio. If the armed conflict lasts longer than expected then fiscal balances will deteriorate and the debt-to-GDP ratio will increase. However, it is too early at this stage to forecast the extent of these changes.

Citations:
International Monetary Fund (2019) ‘World Economic Outlook Database,’ Washington D.C.: IMF (October).

Research, Innovation and Infrastructure

#35

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 public and private R&D spending as a percentage of GDP was 0.94% in 2016 and increased to 0.96% in 2017. During 2017, commercial enterprises accounted for the largest share of R&D expenditure, at 56.9%. While universities accounted for 33.5% of spending on R&D, public institutions accounted for 9.6%. In terms of full-time employment, 266,478 people worked in the R&D sector during 2017, an increase of 10% compared with the previous year. The universities employed 57.1% of R&D personnel, while 38% of R&D personnel worked in the private sector and public institutions employed 4.8% of R&D personnel.

In 2019, Turkey adopted the Eleventh Development Plan, covering the period 2019 – 2023. The plan aims to improve science, technology and innovation, as one of the building blocks for innovative production and steady economic 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.

According to the European Commission (2018), the participation of Turkish researchers and other Turkish R&D actors in European framework programs, notably in the EU research and innovation program Horizon 2020, has not increased in recent years.

Citations:
European Commission (2018) ‘Turkey 2018 Report,’ SWD(2018) 153 final, Brussel.

Turkish Statistical Institute, ‘Science, Technology and Information Society Statistics,’ Ankara

Global Financial System

#25

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 22.9% in August 2017 and 38.3% in August 2018. These measures have been criticized by the IMF’s latest Financial Sector Assessment Program report, which advised the Turkish government to strengthen banking sector supervision and governance, and enhance the regulatory framework for financial services. Following the currency crisis of 2018, the central bank policy rate was increased to 24% on 13 September 2018 and the policy rate remained at this level until July 2019. As a result of the currency crisis and measures introduced by the central bank, credit growth has slowed. In August 2019, the annual credit growth rate was -6.1%.

According to the New Economic Program 2020 – 2022, which was announced on 30 September 2019, the capital adequacy ratio of the banking sector was 18.2% in July 2019, while the sector’s non-performing loan (NPL) ratio was 4.6%. Recently, the Banking Regulation and Supervision Agency told Turkish banks to write off $8 billion in bad loans. In addition, the banks need to reclassify about TRY 46 billion of their loans as non-performing by the end of 2019 and make provisions to cover the losses. The New Economic Program 2020 – 2022 emphasizes that during 2019 the government aims to provide loans of TRY 46 billion to companies in the construction and energy sector that are facing financial difficulties. As a result, the sector’s NPL ratio will increase to 6.3%, while the capital adequacy ratio will decrease to 17.7%. Turkey applies a 12% minimum capital adequacy ratio, which is above the 8% threshold set by Basel III. The ratio calculated above is well above both levels. However, the combination of low interest rates and credit fueled expansionary policy further exposes the Turkish lira to currency market turbulences and external shocks.

Citations:
Ministry of the Treasury and Finance (2019) ‘New Economy Program 2020-2022,’ Ankara.
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