ECONOMY: Hard going in a political minefield

01 August 1997
SPECIAL REPORT TURKEY

TURKEY'S economic prospects this year and next depend on whether it has a government in anything more than name. Another general election is imminent and the main question is whether the new government will be in office long enough to make any impression on the country's chaotic state finances. Prime Minister Mesut Yilmaz insists he will be around for a while but the government's revised economic targets are seen as paving the way for elections in 1998, economists say.

The government's new economic supremo, State Minister Gunes Taner, has promised there will be no economic shock measures. 'There are big economic problems, and we don't have a magic wand,' Taner warned in early July. 'But we can solve them, there is no need to lose hope.'

Taner also said there is no plan, and no need for, a new standby-agreement with the IMF. 'We will work with them, and try to build confidence for Turkey,' the minister said.

Predictably enough, Taner blamed the outgoing government for the sorry state of the national finances. For good measure he also accused the government led by Islamist premier Necmettin Erbakan of looting the state Ziraat Bankasi (Agricultural Bank) for funds. However, not to be outdone, the new government awarded 35 per cent wage rises for civil servants within weeks of taking office.

Economists at least credit the incoming government with greater realism. They say the revised economic targets for 1997 seem more achievable and they reflect reality better than the figures published by the Erbakan coalition. The main features of the new figures are:

Wholesale inflation. Forecast to rise to 75-80 per cent from previous predictions of 65 per cent. Inflation has recently been rising faster than is normal at this time of year.

Economic growth should reach 5.5-6 per cent compared with the 4.5 per cent expected previously, on the basis of trends indicated by a 5.7 per cent expansion in gross national product during the first quarter.

The current account deficit should narrow to $4,000-4,500 million, as against about $6,800 million projected earlier. An imports surge driven partly by the EU Customs Union now seems to be slowing according to first quarter balance of payments statistics. Export growth of 6.5 per cent is running faster than the expansion of imports, at 6.2 per cent. The trade deficit in 1996 surged by 38 per cent to $19,382 million, due mostly to a 19 per cent increase in imports.

The central bank is getting a tighter grip in its economic reporting and has started to include informal trade in balance of payments figures. The inclusion of estimates for the thriving 'suitcase' trade with east European and former Soviet Union countries, particularly Russia, would reduce the first quarter current account deficit to $713 million from $1,323 million, the central bank claims.

Economists attach far less credibility to the government's budget deficit figures. They particularly question the budget deficit target of TL 2,400 million million, which will include a TL 2,000 million million additional budget. The end-1996 budget deficit came in at TL 1,217 million million.

At the same time, economists now consider the previous administration's pledge to balance the budget for the first time in 50 years to be completely fanciful. Erbakan himself in April admitted the budget had swung back into deficit by about $1,000 million in March after achieving equilibrium in January and February.

Keeping to the budget targets is likely to prove difficult as an election approaches if, as can be expected, the government seeks to seduce voters with conspicuous spending on projects and pay rises all round.

The main issue will be how the new government intends to raise revenues and make savings to bring the deficit down. Reducing the deficit and the cost of funding it is a matter of some urgency. According to US ratings agency Standard & Poor's the cost of servicing foreign and domestic debt amounted to 67 per cent of all tax receipts in 1996.

Despite this, Turkey's ability to borrow has not been impaired by a succession of profligate governments, thanks to the judicious management of the treasury and the central bank.

The central bank had foreign exchange reserves of $16,524 million on 4 July and is in a good position to meet a foreign debt servicing peak in July and August. Its resources will be bolstered by the traditional high inflows from tourism and expatriate workers' remittances at this time of year.

Two-year, inflation-linked bonds introduced by the previous administration were poorly received so the Yilmaz government has returned to conventional bonds and bills for its domestic borrowing.

The government aims to generate about $4,000 million in revenues from privatisation, although it must first face down left-wing opposition from within its own ranks.

It has also promised to streamline the bloated social security system. This would produce long-term savings through raising retirement ages, which are among the earliest available anywhere in the world. Privatisation and social security reform have been repeatedly advocated by the IMF and the World Bank.

Finally, the government will seek to increase taxes by broadening the tax base rather than introducing new levies. A key aim will be to bring the vast, informal economy into the tax net. According to a recent report published by the powerful Turkish Metal Industrialists' Union (MESS) the black economy is doubling in value every year.

The report says the Treasury effectively lost TL 1,420 million million in taxes and other levies from such economic activity in the last tax year. The report estimates the value of activity in the informal economy in 1995 at TL 4,289 million million - in 1996 prices. Gross domestic product in 1995 - also in 1996 prices - was about TL 13,600 million million, according to figures from the State Planning Organisation.

The report adds that the main reason for the scale of the black economy is high inflation and the high government taxation of gross wages in the formal sector.

Yet, economists doubt whether this government, with the imperative of winning the next election uppermost in its mind, will have the stomach to impose any of the unpopular measures that its many predecessors have flunked.

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