Inflation and GDP in Turkey (% change)

The liberalisation process of the 1980s was in fact not sufficiently supported by sound macroeconomic policies and reforms: at the beginning of 2000, publicly owned banks still held almost 40% of total assets in the banking sector; State enterprises, operating at low efficiency and representing a burden on Government budget, still dominated several economic sectors. Turkey’s uncertain economic development in the 1990s confirms the theories for which the financial liberalisation needs to be implemented in a strong institutional and regulatory environment (sound bank regulation and supervision, effective law enforcement, good governance in the private and public sectors, etc.), which was not the case. 

Men withdraw money at automatic teller machines (ATM) in Istanbul. REUTERS/Murad Sezer
Men withdraw money at automatic teller machines (ATM) in Istanbul. REUTERS/Murad Sezer

Source: International Monetary Fund

The Turkish economy, in fact, succeeded in recovering from the 2001 crisis, thanks to a clear medium-term reforms roadmap, strongly anchored to IMF programs and to EU accession. The outcome of the consequent reforms in the areas of enterprise restructuring and privatization, business environment, trade liberalisation, labour market and banking sector has been a significant increase in foreign and domestic investments. 

In the decade 2007-2017, the international US subprime bubble originated crisis and the severe present political uncertainty (after the July 2016 attempted coup) are shaking the country, which is though showing a great resilience in the economic fundamentals: Turkey’s growth rate decreased in the biennium 2015-2016, from 6.1% to 2.9%. The last term of 2016, GDP started to recover, thanks to the upturn of private consumption and net exports, after the second half of 2016 had registered a multiplied (by ten) current account deficit (mainly due to the decreased number of tourists) and a weakening of the financial inflows. The great increase of transport and food prices has made inflation jump to 10.1% in February 2017. The consequent fast depreciation of the Turkish lira has forced the Central Bank to further increase interest rates.  

Notwithstanding this, poverty and extreme poverty keep decreasing, even though at a slower pace (the population with per capita expenditure below the poverty line - 5 $ per day in 2005 purchasing power - reached the low level of 18.3%, from 24.1% a decade earlier); unemployment is increasing to 12.1%, but growth should be gradually strengthened throughout 2017, 3.5% for the whole year, even if the lira depreciation may further reduce the purchasing power of households.  

The Government has then planned several measures to contrast the present critical cycle: a fiscal stimulus to support private consumption, investments and job creation; the restructuring of tax and social security contribution; VAT cuts for purchases of new housing, furniture and white goods; prudential rules for consumer loans and credit cards. Large firms may use bank loans with Government credit guarantees covering up to 100%; zero interest loans are offered to SMEs; employment costs of newly hired workers are being heavily subsidised. Monetary policy was tightened after the putsch attempt, in response to a significant exchange rate depreciation, which raised also inflation expectations.  

These exceptional incentives should impact private consumption and investments in the short term. Regional geo-political tensions and next key general elections in 2019 will contribute to keep growth around 3 ½ per cent also in 2018, unless long-delayed economic reforms will be finally implemented. If instead political tensions should worsen or if the renegotiation of the Turkey-EU Customs Union Agreement should not develop as expected, business confidence, and then growth, would be weaker, with consequent problems in securing the large external funding needs (including the roll-over of the significant external corporate debt stock).

@manu_scogna10

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