Ankara's new economic program and efforts to trivialize problems

The effort of “trivializing the issues” demonstrates the stance of Turkey's economy administration of “intervening on the symptoms and not on the issues.” It is the effort to sooth the society, to narcotize them by saying, “If you do not know, have not heard of it, if you do not care, then you are happy.”

A three-year economy program for 2021-2023 was unveiled by Treasury and Finance Minister Berat Albayrak on Tuesday, Sept. 29. The name of the program is “New Economic Program” but every year, a new “new” is added to it. The program invented this year is based on themes of “New Stabilization, New Normal, and the New Economy.”

Our economy administration’s adopted stance is “veiling” the symptoms and indications that emerge due to several issues, rather than focusing on economy’s structural problems. It is not possible to make this program have a new character by repeating “new” a hundred times during the presentation. It is “the same old thing” and a new economy cannot come out of it. 

Journalist Hakan Güldağ asked Albayrak after the presentation, what the foreign exchange rates would be. Minister Berat Albayrak’s answer was surprising: “The exchange rates are not important for me at all. I do not look into that aspect. The industry is strong; the production side is strong. We will be the ones who will profit the most in this foreign exchange rate process because we now have the control of the exchange rate.”    

Our economy’s main problems and how it is managed are, ultimately, reflected on the exchange rate, meaning the value of the Turkish Lira. This economy management has wasted the country’s foreign currency reserves with their failed policy of trying to control the forex rate by selling foreign currency. If this was to happen in another country, it would have been called a scandal. The foreign exchange rate, in fact, means the value of the Turkish Lira. The loss of interest in this is not comprehensible.

Besides, what was is called in psychology to say that “we have the control” after losing control of the foreign exchange rate by depleting all the reserves? This effort of “trivializing the issues” demonstrates the stance of the current economy administration of “intervening on the symptoms and not on the issues.” It is the effort to sooth the society, to narcotize them by saying, “If you do not know, have not heard of it, if you do not care, then you are happy.”

On the other hand, the Finance Minister is quite right in his slogan of “If I don’t see it, then I am happy” because after spending more than 100 billion dollars’ worth of the reserves of the country with the thought that he would be able to control the exchange rate, it would be very annoying to be asked this question. Especially on the day he took the stage to make a presentation when the Turkish lira hit it lowest. 

Assumptions according to targets

The economy program summarized by Albayrak, holds an assumption as such: In 2021, there will be a 5.8 percent growth, in following years, there will be 5 percent growths.

Well, how will this happen? It will happen with the assumption that in 2021, exports will contribute 2 points and total domestic demand will contribute 3.8 points to national income.

What about the pandemic assumptions? There is no assumption or estimate regarding this. In the main text of the program, there is no scenario on this. Apparently, the need for such a scenario was thought of afterwards and this was included in the text of the verbal presentation.

Finance Minister Albayrak projected a “bad scenario” of low growth only for 2021, where in 2020 instead of 0.3 growth, a 1.5 percent contraction is estimated, and in 2021 instead of 5.8 percent growth, 3.7 percent growth is estimated.

Without knowing what the program is and without knowing the details, certain analysts, seeing such a growth scenario, said, “Wow, this has been very realistic,” providing the “showcase” the Finance Minister was wishing to see.

The issue is that, in one hand, it is true that there is an uncertainty due to the pandemic, however, apart from the pandemic, on the other hand, there is a distinct inconsistency in main assumptions.

For instance, the end of year inflation rate of 2020, which is an upcoming indicator, is estimated at 10.5 percent. This means that a total of 3 points of
inflation is estimated during the remaining four months of the year.

During the past three months, the foreign exchange rate has increased 14 percent; in the past month this figure was 7 percent. A nonsense called “active ratio” is still in effect which keeps the banks away from collecting Turkish lira deposits. There have been questionable policies to control the exchange rate. There was a monetary policy that created a giant credit expansion and a negative real interest rate environment. This monetary policy is still in effect and the interest rate hikes are only “pretending” to be they are interest rate hikes. Under these circumstances, this prediction is far from reality.

Alice predictions 

Besides, as well as national income and inflation estimates, foreign exchange rate assumptions are also done with a mood similar to “Alice in Wonderland.” Given that today's rates are at 7.85, an average rate forecast of 7.67 in 2021 and 8 in 2023 for is not to be taken seriously. For this to happen, Turkey has to lower its inflation dramatically and the confidence of households should increase remarkably. A political environment
that generates confidence to Turkey’s entire population is required for this.

These estimates are also problematic in terms of economic signals. A small investor or saver who sees that today the dollar is climbing close to 8 liras would not be able to believe that this forex level is estimated to be reached three years later.

This economic scenario aiming to increase the value of the lira is not realistic in the hands of a government which, on one hand, has shattered the confidence of resident investors and savers, and, on the other hand, by naming foreign investors “foreign powers attacking our money,” has caused them to exit the country.

Also, the scenario which predicts a minimal deficit in the balance of payments (which is the main indicator for forex rates) in 2021 and later on is imaginary. This can only be possible with a closed economy, with restricted capital movements and zero growth.

Within the current economy policy and management, keeping the current account deficit below 2 percent and at the same time maintaining a growth of 5 percent can only be called “exploitation of dreams.”

In the 5.8 growth scenario, it is assumed that in 2021, exports will contribute 2 points and total domestic demand will contribute 3.8 points as the sources of economic growth. It is also assumed that public consumption will shrink by 2.2 percent while private consumption will increase 5.7 percent. Now, 5 million people rely on unemployment benefits and short-time working allowances. They are trying to keep going with very low incomes. Those who were able to keep their jobs are also aware of the economic situation. It is quite a mystery that under these uncertain circumstances, these people will boost their consumptions. Moreover, it is unknown how a new credit expansion is estimated following the giant credit expansion in 2020.

Also, in investments that make up nearly 30 percent of national income, the public is expected to have 14.2 percent growth while the private sector is expected to have 5.1 percent growth. Leaving aside the public, the private sector cannot possibly make investments before the pandemic comes to an end and before the damage of the pandemic is calculated.

Fixed capital investments including the public sector has shrunk an average of 8.9 percent in the past eight quarters. There is no reason for fixed capital investments to suddenly grow in this environment.

In the presented new economic program, there is no section regarding the damages of companies due to closures during the pandemic, the collapse in economic demand and the hike in forex. The problems of companies are constantly growing and potential bankruptcies are at sight.

The fact that there is no perspective for any pre-emptive measures in the
economic program only reinforces the belief that the economy management of Turkey is lagging behind actual developments.

Let us assume Turkey grew 5.8 percent in 2021 as foreseen in the new economic program. Let us also assume that the deflator is 9.7 percent as assumed. According to the assumption that the average forex rate in 2021 will stay fixed all year long at today’s level of 7.85, there will be 719 billion dollars of national income. In 2020, the estimated national income is 702 billion dollars.

This amount of national income takes Turkey back to its 2009 level. It is 250 billion dollars short of the peak income level of 950 billion dollars in 2013. Moreover, let us assume that Turkey grew 5 percent each in 2022 and 2023 according to the estimates in the economic program. Let the deflators be also as predicted in the program. Let us also assume that the annual forex rate increases as much as the deflator each year after the 7.85 we assumed for 2021; then our national income will be 755 billion dollars in 2022 and 793 billion dollars in 2023. We cannot even reach 800 billion dollars.

The forex rate estimates in the new economic program are obviously aimed to inflate the national income. The bottom line is that a program that has not been able to justify why the Medium-Term Program and the New Economic Program estimates and targets have not been met is starting all
over again with unrealistic assumptions.

September 10, 2021 Central Bank's Beştepe problem