Turkish Forum

Tag: IMF

  • Erdogan Refuses to Negotiate IMF Deal for Turkey

    Erdogan Refuses to Negotiate IMF Deal for Turkey

    Erdogan Refuses to Negotiate IMF Deal for Turkey

    Publication: Eurasia Daily Monitor Volume: 6 Issue: 63
    April 2, 2009
    By: Saban Kardas

    Official data released after the local elections in Turkey shows that the global financial crisis has affected the economy more severely than the ruling Justice and Development Party (AKP) has acknowledged. Turkey’s economic growth dropped sharply in the last quarter of 2008, and its exports declined by around 35 percent last month. These developments have increased the pressure on the government to conclude a prompt loan deal with the IMF, but Prime Minister Recep Tayyip Erdogan remains unconvinced.

    Many analysts attribute the decline in the AKP’s electoral fortunes in the local elections to the government’s failure to either acknowledge or take action over the economic crisis. Many economic indicators, including unemployment reaching its highest level in recent years, have undermined the government’s claims that the crisis was not affecting Turkey as badly as other developing economies. Indeed, the AKP’s loss of votes within major industrial centers such as Denizli, Kayseri, Bursa and Gaziantep was caused by soaring local unemployment rates, and if the government fails to redress these trends, it could face a rapid collapse in its popular support.

    Turkey’s official statistics agency (TUIK) announced on March 31 that GDP fell by 6.2 percent in the last quarter of 2008, while the annual rate of growth dropped to 1.1 percent (www.tuik.gov.tr, March 31). This sharply contrasts with the Turkish economy’s average 7 percent annual growth rate, and marks the first contraction of the economy since the AKP came to power in 2002. These figures also indicate that private investments shrank significantly, while government spending increased ahead of local elections. Although the government introduced various small-scale stimulus packages to help support public investments and prevent a sharper decline in GDP, this also increased the current account deficit.

    Additional evidence of the impact of the economic crisis on Turkey appeared in the unofficial export figures released by the Association of Turkish Exporters (TIM) on March 30 (Anadolu Ajansi, April 1). According to the TIM, Turkey’s exports fell in March by 34.92 percent to $7.1 billion compared with last year. Official statistics released by TUIK also confirmed that in February, the country’s exports declined by 24.9 percent to $8.3 billion, whereas imports fell by 47.6 percent (www.tuik.gov.tr, March 31). Exports in the automotive industry, Turkey’s flagship export, continued to drop during the past six months, plunging by 53.8 percent in the first quarter of 2009, according to the local exporters association in Bursa (Cihan Haber Ajansi, April 1).

    A comparison of Turkey’s economic downturn with other developing economies reveals it is among the most rapidly shrinking economies in the world. Noting that other countries have managed to grow, or contract at lower rates despite the global crisis, Turkey’s economic slowdown may have started even before the present crisis, and the government should admit its own failures and take urgent measures (www.cnnturk.com, April 1). Indeed, given the shrinking domestic demand and declining exports, some forecast that the annual growth rate will continue to drop, and fall behind the government’s projected growth rate of 4 percent in the 2009 budget. The budget deficit is expected to widen in response to lower industrial output and falling tax revenues. In the first quarter of 2009, the government reached its budget deficit estimates for the entire year (Hurriyet Daily News, April 1).

    Representatives of the working class and the businessmen are now repeating their criticisms of the government’s economic policies. They believe that the election results should be viewed as a warning sign for the AKP, consequently forcing it to prioritize the economy. The government is facing growing pressure to revise its spending plans and modify the 2009 budget in order to resume talks with the IMF, which were suspended over disputes relating to financial regulations and the government’s spending and tax policies. The head of the Turkish Industrialists’ and Businessmen’s Association, Arzuhan Dogan Yalcindag, called on the government to revise the budget so that it realistically reflects the conditions of the Turkish economy (www.haber7.com, April 1). Many observers expected the government to conclude an agreement with the IMF after the elections, because IMF loans might ease Turkey’s fiscal problems and stimulate the economy. Last month, the IMF forwarded revised proposals to Turkey aimed at addressing Erdogan’s concerns about the contents of the standby agreement (EDM, March 16).

    Before his departure for the G20 summit in London, Erdogan said that he objected to an IMF condition that Turkey should adopt strict tax auditing measures requiring a comparison of individuals’ wealth and their spending. These measures were most likely intended to prevent tax evasion and increase state revenues. However, fearing that such measures might reduce cash flows to the markets, Erdogan challenged the IMF by saying “we will not sign such a thing” (www.ntvmsnbc.com.tr, April 1). Erdogan and his economic minister might be meeting IMF officials in London, but there is still no indication as to whether Turkey will resume direct talks. Although the AKP is expected to be more cooperative towards the IMF, especially following the outcome of the local elections, Erdogan appears determined to maintain his populist pre-election rhetoric, adding to the uncertainty about the future of the Turkish economy.

    https://jamestown.org/program/erdogan-refuses-to-negotiate-imf-deal-for-turkey/

  • Turkish Economic Stimulus Package Foresees Temporary Tax Cuts in Automotive and Other Sectors

    Turkish Economic Stimulus Package Foresees Temporary Tax Cuts in Automotive and Other Sectors

    Turkish Economic Stimulus Package Foresees Temporary Tax Cuts in Automotive and Other Sectors

    Publication: Eurasia Daily Monitor Volume: 6 Issue: 50
    March 16, 2009 12:49 PM
    By: Saban Kardas

    The Turkish government announced a comprehensive economic stimulus package on Friday. The decision comes against the background of deteriorating economic indicators that signal a serious recession and mounting pressure from market players for the government to act swiftly to alleviate the crisis. Industrial production showed a record decline in January, falling 21.3 percent from the previous year (www.tuik.gov.tr, March 9). Accompanying drops in capacity utilization and growth figures and the rapid devaluation of the Turkish lira further exacerbated concerns about the economy.

    The International Investors Association of Turkey (YASED) published the results of a recent survey conducted among its members. Investors shared pessimistic expectations for the Turkish economy in 2009 and anticipated a recovery only in 2010. Among the measures they expected to be taken were the introduction of an urgent economic package and the conclusion of a loan agreement with the IMF (www.yased.org.tr, March 11).

    The government previously had maintained that the Turkish economy was better equipped than that of other countries to deal with the global financial crisis and would be able to survive the storm. The government therefore adopted a reluctant attitude toward negotiations with the IMF and sought to address the crisis with its own methods. It previously introduced three smaller packages, which did not satisfy expectations. Until now the most serious measure adopted by Ankara to avoid a recession was the decision made by the Central Bank in February to lower its benchmark interest rates to a record low of 11.5 percent. This move, however, was not sufficient enough to address the mounting economic problems in Turkey (Hurriyet Daily News, March 12).

    The government appears to have acknowledged that irrespective of the Turkish economy’s strengths, shrinking world markets and the resulting contraction in foreign and domestic demand remain the main challenges and that more serious measures are needed to stimulate the economy. On March 13 the government announced a package of economic measures amounting to 5.5 billion Turkish liras ($3.2 billion). The package will introduce temporary tax cuts for three months in the housing, home appliances, and automotive sectors. The new regulations will lower the private consumption tax rates (OTV) on the automotive sector and remove the OTV completely on home appliances, while the value added tax (VAT) on apartments over 150 square meters (1,614 square feet) in size will be lowered from 18 to 8 percent. The package also foresees measures to boost exports by allocating an additional 500 million liras ($296 million) to Eximbank, a state-owned bank geared to supporting exporters (Anadolu Ajansi, March 13). Pending cabinet approval, the package is expected to be put into force within the week (Anadolu Ajansi, March 15).

    The new tax regulations seek to stimulate domestic demand in Turkey’s leading industries. Industry Minister Zafer Caglayan explained the details of the reduction of the OTV on motor vehicles and said that it might be implemented as early as Monday. For automobiles with engines of up to 1,600 cubic centimeters, OTV will be reduced from 37 percent to 18 percent, and for vehicles with engines of between 1,600 and 2,000 cubic centimeters, it will be reduced from 6o percent to 40 percent (Anadolu Ajansi, March 15).

    The representatives of major automobile producers had been expecting the government to make such a decision for some time, and overall they welcomed this development. They noted, however, that although the package might relieve the sector’s problems temporarily by helping reduce the current inventory, it would be insufficient alone to solve the structural demand-side problems of the sector. Representatives from other economic areas also pointed out that given the three-month time limit on the tax cuts, the package would fall short of expectations and fail to stimulate the economy in the long run. Representatives of the housing sector noted that since only 5 percent of Turkey’s total real estate consisted of homes of more than 150 square meters, reducing the VAT on property was not likely to have a major effect. The VAT on houses with fewer than 150 square meters is already 1 percent (www.ntvmsnbc.com, March 13).

    In a related development, Turkey held direct talks with the IMF after a long break. Although the market players believe that an agreement with the IMF is urgently needed to restore confidence in the Turkish economy and reduce the volatility in financial markets, the government balked at such an accord. Turkey maintained that the conditions set forth by the IMF were “unacceptable” and against the country’s national interests, and indefinitely suspended direct talks with the IMF (EDM, January 29; February 18).

    The IMF announced last week that it had forwarded new proposals to Turkey regarding three issues that had caused disagreements, and Economy Minister Mehmet Simsek said that the IMF had acted more flexibly toward Turkish sensitivities. The reports boosted the markets, helping the lira regain its strength after hitting an all-time low against the dollar (www.yurthaber.com, March 12). A Turkish delegation led by Simsek attended the G-20 Summit in London, where they met with IMF Managing Director Dominique Strauss-Kahn and First Deputy Managing Director John Lipsk. Upon his return to Turkey, Simsek told reporters that Turkey and the IMF had agreed on consultations and to exchange opinions on the new offer. Noting that Turkey and the IMF had an agreement of principle, Simsek stated that Turkey had taken the IMF’s benchmarks into account in introducing its own package and would be mindful of the medium-term financial implications of such short-term measures (Cihan Haber Ajansi, March 15).

    It remains unclear how Turkey will finance the stimulus package, especially with further tax cuts; and a growing budget deficit set to increase this year. Nor is it clear at this stage whether incentives on consumption alone can really boost the economy without complementary measures to improve consumers’ income or decrease unemployment. Following local elections at the end of March, Turkey might finally go ahead and conclude the IMF loan agreement. With the IMF concerned about maintaining budgetary discipline and business circles seeking a more comprehensive economic recovery package, it is difficult to see how the government will find a middle road that will satisfy both parties.

    https://jamestown.org/program/turkish-economic-stimulus-package-foresees-temporary-tax-cuts-in-automotive-and-other-sectors/

  • Turkish Government Under Fire

    Turkish Government Under Fire

    Turkish Government Under Fire for Delaying Response to the Global Financial Crisis

    Publication: Eurasia Daily Monitor Volume: 6 Issue: 32
    February 18, 2009
    By: Saban Kardas

    An announcement of recent economic indicators on Monday by the Turkish Statistical Institute (TUIK) has revealed that the number of unemployed people rose by 645,000 over the previous year, reaching 2.99 million in the period from September through November 2008. This represents an increase in the unemployment rate from 10.1 percent during the same period of 2007 to 12.3 percent in 2008. While the unemployment rate in rural areas was only 9.3 percent, it reached 14.2 percent in urban areas, and was 23.9 percent among the youth. The number of employed people reached 21,315,000, marking a 448,000 increase over the previous year. Of the entire pool of unemployed, around 72.6 percent were men, and about 59.4 percent did not have a high school diploma. Some 26.6 percent had been seeking employment for more than a year (Hurriyet Daily News, February 17, www.turksat.gov.tr).

    Rising unemployment, reaching the highest level since 2005, has brought attention to the Justice and Development Party’s (AKP) handling of the Turkish economy and whether it has taken the necessary precautions to weather the global financial crisis. Critics believe that unemployment figures are only one indication of how the government has failed to comprehend the depth of the crisis and formulate prompt responses. Indeed, earlier economic data released by the TUIK appear to lend support to the critics. At the end of last year TUIK announced that the economic growth rate had dropped to 0.5 percent in the third quarter of 2008 and would continue to decline in the last quarter (Sabah, December 16). Similarly, the country’s industrial production output declined in December by 17.6 percent on a year-to-year basis (Cihan Haber Ajansi, February 9). To make matters worse, the industrial capacity utilization rate dropped to 63.9 percent in January, marking its lowest level in the past 18 years (Radikal, February 11). Moreover, according to the Turkish Employment Organization (IS-KUR), the number of people looking for a job rose by 95 percent in January compared with the previous year, reaching 151,530 (Radikal, February 13).

    According to its critics, the government was slow to recognize that the global recession would inevitably result in the contraction of the Turkish industrial sector and result in unemployment. According to Mustafa Boydak, the head of Chamber of Industry in Kayseri, one of Turkey’s industrial centers in Anatolia, there were already signs of the crisis in the first half of 2008 and business circles had clearly explained the situation to the government, providing adequate warning. The lack of communication between Prime Minister Recep Tayyip Erdogan and economic managers, however, prevented a candid assessment of the crisis on the part of politicians, and Turkey fell behind other countries that have taken measures to assuage the economic calamity. Boydak cites three factors bedeviling the industrial sector: an inability to procure loans at reasonable conditions; difficulties with exports; and contraction of the domestic market (Referans, February 16; Hurriyet Daily News, February 17).

    On February 15 major Turkish unions and vocational organizations organized a joint meeting in Istanbul to protest economic policies. In a rally entitled “We Will Not Pay the Price of the Crisis,” workers and public employees called on the government to introduce policies to address the rising unemployment immediately (Anadolu Ajansi, February 15).

    Following the announcement of official unemployment rates, the Turkish Confederation of Employers’ Unions (TISK) issued a statement calling on the government to take preventive measures. TISK claimed that among developing countries Turkey ranked near the top in terms of decline in industrial production and growth rate and in increasing unemployment. Based on the recently released figures, TISK believes that Turkey is one of the hardest hit countries by the economic crisis and that unless the government acts quickly to introduce a package to stimulate demand and solve financing problems, the situation might become even worse (Anadolu Ajansi, February 16).

    For its part, the AKP government does not seem to be alarmed by the recent economic figures. Speaking to the NTV news station, Industry and Trade Minister Zafer Caglayan said that the rise in unemployment had been anticipated and that if the government had not taken precautions in 2008, the numbers would have been even higher. Noting that the government expected the crisis to influence the Turkish economy for the next six to seven months, Caglayan assured the market that the government had a plan of action. Despite the repercussions of the crisis in the real sector, the financial sector was not as badly hit as in other countries, and this was to Turkey’s advantage. He especially rejected calls to introduce an “economic package” simply because other countries were doing so, and added that Turkey would deal with the crisis by taking its own unique conditions into account, echoing Erdogan’s oft-repeated argument that Turkey will handle the crisis according to its national interests. Caglayan also announced forthcoming measures to stimulate the automotive and textile industries (www.ntvmsnbc.com.tr, February 16).

    Indeed, the government has already forwarded the first concrete package to the Turkish parliament. After approval by the Planning and Budgetary Commission, the parliament began debating the package on February 17. The main goal of the package, which includes short- and mid-term measures to address the economic crisis, is to stimulate employment (ANKA, February 17).

    The government is also under pressure for delaying the conclusion of a loan with the International Monetary Fund (IMF), and critics believe that this is mainly because of short-term political considerations in anticipation of forthcoming local elections. The government, on the other hand, argues that the IMF conditions would have limited Turkey’s flexibility in dealing with the crisis, perhaps even exacerbating the problems in unemployment and growth (www.ntvmsnbc.com.tr, February 16). In the meantime, Turkey and the IMF have taken a break from negotiations to clarify their positions on the remaining points of disagreement (EDM, January 29). Despite the Turkish side’s assertion that there has been progress in negotiations, it is still unclear when an agreement might be reached (www.cnnturk.com, February 17).

    Although the AKP government believes that it is doing everything to manage the global crisis on the basis of Turkey’s national interests, the market has grown increasingly anxious about the government’s delay in implementing efficient measures. It is hoped that the economic stimulus package and a deal with the IMF, should there be one, will not be too little, too late.

    https://jamestown.org/program/turkish-government-under-fire-for-delaying-response-to-the-global-financial-crisis/

  • Turkey and the IMF Take a Break to Review Remaining Disagreements

    Turkey and the IMF Take a Break to Review Remaining Disagreements

    Turkey and the IMF Take a Break to Review Remaining Disagreements

    Publication: Eurasia Daily Monitor Volume: 6 Issue: 19
    January 29, 2009
    By: Saban Kardas

    After 18 days of intense negotiations on a new financial package, an International Monetary Fund (IMF) mission failed to reach an agreement with Turkey and left Ankara on Tuesday. Mehmet Simsek, the minister of state responsible for the economy, told reporters on Monday that the talks had briefly been halted and would resume “after the removal of some disagreements on remaining issues.” On Tuesday Prime Minister Recep Tayyip Erdogan said that the talks would continue after a 10-day break (Hurriyet Daily News, January 27).

    Since Turkey’s previous $10 billion standby loan agreement came to an end in May, the Justice and Development Party (AKP) government has resisted pressure from Turkish business circles, investors, and international financial/economic institutions to sign a new accord. Although the global financial crisis further heightened the urgency for an IMF program to inject additional funds and ensure trust in the markets, the government preferred to stall the negotiations, because it was reluctant to accept constraints on public spending before the coming elections. It has remained optimistic that it can weather the global crisis with its own resources (EDM, December 10).

    The decision to put the talks on hold came as a surprise. On January 25 the governor of the Central Bank, Durmus Yilmaz, estimated that Turkey would have a foreign financing gap of around $30 billion this year and called on the government to sign the letter of intention before the local elections slated for March. His remarks about the progress in the negotiations and his emphasis on ensuring fiscal discipline were interpreted as strong signals that an agreement might soon be reached. Markets responded to Yilmaz’s remarks with stock prices increasing the next morning. When the news about halting the talks arrived, however, stocks fell (Anadolu Ajansi, January 25; ANKA, January 26).

    News of an agreement had been expected before Erdogan and Simsek left for Davos to attend the World Economic Forum (WEF). In the meantime, there have been questions about the standing of the Turkish-IMF talks and whether Turkey could postpone an agreement until after the local elections in March.

    Disagreements over fiscal regulations and public-sector reforms were the major cause of the deadlock in the talks. Simsek said that although the government did not want to postpone an agreement until the elections, talks on some mid- and long-term structural reforms would continue. According to experts, differences of opinion persist on several issues: local administrations; reform of state-owned enterprises; and the requirements for “financial rule,” which is the IMF’s new criterion for financial discipline. Although the IMF and the Turkish treasury have held workshops about how to define this concept, it remains a mystery to many. One expert claimed that this new requirement included stringent regulations on the budgetary deficit, the interest-free budget surplus, and the ratio of debt stock to the gross national product. These demands will probably require the introduction of new legislation that might limit political influence on economic decisions and curb government spending (www.haberturk.com, January 28; Sabah, January 28).

    Some observers argue that although Simsek did his part in the negotiations, the talks hit a point at which Erdogan needs to be convinced (Milliyet, January 28). The likely constraints on the government demanded by the IMF appear to irritate Erdogan. Before leaving for Davos, he asked the IMF not to bring in new conditions for Turkey. Erdogan criticized the IMF for introducing new issues into the continuing negotiation process and reopening issues to which Turkey had already responded. Erdogan warned that this attitude increased Turkey’s concerns and sensitivity and asked the IMF to take Turkey’s unique conditions into account and stop treating it like any other country in the world (ANKA, January 28).

    These remarks reflect Erdogan’s belief that Turkey needs to invest to create more jobs in order to cushion the effects of the crisis. He evidently thinks that the IMF’s demands for increasing taxes, tightening the budget, and freezing government spending will limit investments and exacerbate the effects of the crisis on the Turkish people.

    Talks between the IMF and Turkey over the new loan agreement continued in Davos. Parallel to the meetings between the Turkish and the IMF teams, Erdogan met IMF Deputy Managing Director John Lipsky on January 28. Following the meeting, both Erdogan and Lipsky told reporters that they had had a fruitful discussion and would resume the talks after the 10-day break (Anadolu Ajansi, January 29).

    Meanwhile, WEF President Klaus Schwab described Turkey as the top country in its region, noting its strategic location on energy routes and recently heightened diplomatic profile. Schwab said that Turkey’s recent structural reforms would help it emerge from the global crisis much stronger than before (Anadolu Ajansi, January 28).

    Other experts also believe that Turkey is much stronger and better equipped to deal with the global crisis than it was with past economic crises. It was noted at a conference that the AKP government’s previous structural reforms might be paying off, particularly because the banking sector was now in good shape and the government had been relatively successful in reducing public debt, easing the inflation rate, and boosting public and foreign direct investments (Today’s Zaman, January 29).

    Nonetheless, most economists have draw attention to the contraction in the Turkish economy. Since the economy is integrated closely into world markets, it is vulnerable to the adverse effects of the crisis. Stagnation in global markets harms Turkish export industries such as textiles and the automotive industry. Consequent drops in industrial production and the utilization of capacity led to a shrinking of the Turkish economy toward the end of 2008, and the growth rate is likely to drop in 2009. Yilmaz urgently called for an IMF accord to avoid liquidity problems and improve credit conditions (www.ntvmsnbc.com, January 28).

    It will be interesting to see how long Erdogan will resist such pressures and insist on driving “a tough bargain” with the IMF.

    https://jamestown.org/program/turkey-and-the-imf-take-a-break-to-review-remaining-disagreements/