On Top of Priorities

Turkey’s economic history is full of periods of rapid growth and long stagnations. What is different about the latest period of growth?

During the last nine years Turkey has gone through a period of strong political stability, and we benefited from this. The AK Party (Justice and Development Party) government has successfully implemented political and economic reforms in a timely manner. Turkey has been continuously upgrading itself when it comes to democratic standards. This is really an important source of strength for us, as we base our policies on the aspirations and will of the people. Putting individuals’ and citizens’ welfare at the core of our policies has paved the way to strong growth and employment generation. When the AK Party came to power, Turkey’s budget deficit was 12% of GDP, and its debt-to-GDP ratio was 74% at the end of 2002. Looking at the latest fiscal figures, we expect our budget deficit to decelerate to 1.7% of GDP in 2011. In parallel with this decline, our debt-to-GDP ratio will be below 40%. The fiscal adjustment process was very important for Turkey. On the monetary policy side, our Central Bank has been very successful in fighting the chronic problem of inflation. For 34 years in Turkey, the inflation rate has been in double-digit territory. However, during our term, it has dropped to single-digit levels. We are targeting even lower single-digit figures for the following years. Coming to structural reforms, we were able to make comprehensive social security reforms, including pension reforms. We were able to perform healthcare reform with a wide coverage. Furthermore, our banking system went through a significant reform process, enabling our banks to be quite strong compared to most other countries. Turkey has undergone timely reforms in all of the areas that developed economies are now struggling with. The structural change that Turkey has gone through is now a very important source of strength for us, and one that we will have on our agenda for the years to come. In this regard, attaining sustainable growth, enhancing the investment environment, labor market reforms, tax reform, and dealing with the informal economy, and reforms in the finance sector are aimed at making Istanbul one of the top 10 financial centers globally; these are some of the key agenda items for us.

Turkey’s current account deficit is a noted concern. What sort of measures may be necessary to keep the deficit under control?

Strong economic performance, on the one hand, and high dependency on oil and natural gas imports, on the other, have brought about a relatively high current account deficit. Bearing this problem in mind, we are designing and implementing fiscal and monetary policies so as to gradually bring down the current account deficit. Furthermore, we are aware of the importance of targeted structural reforms to fight this problem. This may require more R&D spending, more innovation, more high-tech production, and higher value-added production in Turkey, and even better education policies, which will ultimately help generate higher value-added production. On the fiscal policy side, we are determined to maintain our tight policy stance. Generating a primary surplus is not an easy thing to do during turbulent times, but we were able to do this in 2011 and will continue to do so until 2014. A tight fiscal policy stance is going to be one of our most important policy tools. Another important tool is going to be proactive measures by the Central Bank to maintain financial stability. Regarding the balance of payments, and with necessary measures not being taken, some negative consequences for financial stability might occur. Our Central Bank is also looking from that perspective. Furthermore, increasing R&D spending in Turkey, and moving to higher value-added production is going to be important. In 2010 our R&D spending was 0.8% of GDP. For the year 2023, our target is to reach an R&D spending level of 3% of GDP, where 1% comes from public sector and 2% comes from the private sector.

After expected GDP growth of 7% in 2011, what are some of the key measures that the government’s medium-term economic program is looking to bring regarding growth?

The Medium Term Program covers the period between 2012 and 2014. The next three years, as signaled by the global economic outlook or the European economic outlook, are not going to be easy. Our Medium Term Program is in line with a mediocre medium-term outlook for the global economy. We are targeting growth rates like 4% for 2012, and 5% for 2013 and 2014. Compared with many countries it is probably still a relatively high rate of growth, though below our potential. Turkey’s growth potential is much higher. Although a better outcome than projected is much appreciated, we do also need to be prepared for the worst global scenario. This was our motivation when preparing our Medium Term Program. In the area of fiscal policies, the target deficit for 2014 is 1%, and now we are at 1.7%. Thus, we will gradually go down from 1.7% to 1%. On the monetary policy side, we have a similar picture. The Central Bank is independent and its first priority is price stability. As long as it does not conflict with that priority, the Central Bank will also take into account the government’s growth targets. However, let me underscore one more time that the number one priority for the Central Bank is price stability. The Central Bank is also going to contribute to financial stability. It will cooperate with other government units for particular measures on financial stability. Regarding the banking system, we are several steps ahead of Europe. However, we want to be ready. Macroeconomic issues such as production or other financial aspects regarding our banking system are essential parts of our macroeconomic approach. Further reform areas for the medium term include the labor market, an improved investment environment, financial sector, and taxation policies.

What measures are being taken to reduce Turkey’s reliance on imports and improve its export performance?

We are looking at schemes to produce imported products in which we have a sustainable competitive advantage in Turkey. It is very important to exclude those products or sectors in which we don’t have a sustainable competitive advantage. Therefore, we are going to be very picky in that respect. Furthermore, we are moving into alternative energy resources. Currently, Turkey is highly dependent on fossil fuels. However, we are putting more emphasis on renewable energy sources. In this regard, literally speaking, hundreds of licenses have been issued for wind power and hydro energy, which have significant amounts of investment. Additionally, solar energy is just starting up. Despite the ongoing debates started after the Fukushima incident, we still think that nuclear energy is crucial for Turkey, as we are not sure whether renewables will be sufficient for our future energy needs. We need at least three nuclear plants in Turkey by the year 2023, so that nuclear energy would constitute a major part of our energy resources. In addition to our energy policy, Turkey also needs to be more competitive in the labor market and have better labor-market strategies. In addition, judicial reform to make our courts more efficient, more predictable, and more reliable is going to be very important to make Turkey an easy environment for investors, so that we will have more and more international investments, especially in terms of FDI to Turkey. Compared with previous times, FDI is quite high, but we think that we can do better.

How would you describe the changing relationship between Turkey and the IMF?

Turkey has been a shareholder of the IMF since its very early days. We have had different phases in our relationship. During the first six years of our government, we were in two different standby arrangements; the 18th and 19th standby arrangements. These were actually the only two standby arrangements completed successfully. The previous 17 standby arrangements were agreed before our government came into power, and they failed. The important issue for us at that time was ownership. The IMF provided funding and technical expertise, but the program details and reforms were ours. We shaped and finalized the program. That is why these programs were successful. Since 2008, we have not been in standby arrangements with the Fund. We went through a post-program monitoring phase, and that phase is also now over, because our debts to the IMF are now quite low—$3.6 billion. It was once up to $30 billion. On the other hand, we are still working closely with the technical team. We have just been through an Article IV Review, like every country does. Regarding the results of this review, the policy management implemented during the crisis was praised by the Fund. I can say that we have learned from each other. While we gained a lot from international experience, I think that the IMF technical team has learned a lot from the successful Turkish experience as well. Thus, IMF representatives for Turkey are now in high-ranking positions, very close to the top management in the Fund. In any relationship there are ups and downs, but this is the nature of it, and we are still benefiting from their technical work.

© The Business Year – December 2011