An OECD survey published on 16 September says the economy is once again at a cross-roads. With its backdrop of political uncertainty. 1996 may well prove to be one of the most difficult, but critical years in contemporary Turkish history.
However, growth in gross domestic product (GDP) is expected to slow to 6 per cent in 1996, and further to about 5 per cent in 1997, the survey says Recent official government figures revealed GDP growth to be on a declining trend from 10.3 per cent in first-half 1996 to 8.2 per cent in the second-half.
Inflation will average about 80 per cent in 1996, but moderate to 65 per cent in 1997. It suggests the upward trend for inflation in the first half was due to the large financing needs of the public sector The current account deficit could rise to more than 3 per cent of GDP in 1997.
However, there is a wide margin of error for these projects, the survey advises. It says that the major uncertainty is not external financing,but financial market reactions to fiscal performance, spiralling debt servicing and continuing governmental instability.
The survey calls for a coherent, medium-term programme backed by credible annual budgets with primary surpluses to cure the economy’s pressing ills of high inflation and interest rates It urges a widening in the tax base, austere budgetary curbs on State Economic Enterprises coupled with accelerated privatisation, and fundamental reform of a deficit-ridden social security and pension system.
Further delays will worsen instability in the financial markets, and will provoke ever higher risk premiums, thereby endangering economic growth, the survey warns.
Lenders demanded substantial risk premiums on domestic debt to guard against inflation surprises. As a result, the OECD expected domestic debt servicing to account for more than 10 per cent of GDP in 1996, draining more than one-third of total budget spending.
However, revenues notably from a narrow tax base may not be sufficient to generate primary budget surpluses needed to offset very high real interest rates.
If clear and credible commitments to primary budget surpluses could be made by the Turkish government, it might be possible to issue medium and long-term maturity Turkish lira bonds indexed to inflation or foreign exchange rates The treasury on 16 September accepted $1120 million worth of bank bids for bonds denominated in foreign exchange (see above).
Determined efforts to meet 1996 budget targets and accelerate structural reform would relieve Turkey’s extremely dynamic private sector, and help the economy achieve its undoubtedly bright, mediumterm potential, the survey concludes.