Under a new economic program, Turkey wants to cut its growth sharply and promised to curb public spending, as it seeks to avoid a full-blown economic crisis fueled by massive inflation and a plunging currency.
Turkish finance minister Berat Albayrak unveiled a "new economic program" on Thursday, saying the government was aiming to "write a new success story" for the struggling country.
The plan, to be implemented over the next three years, would be based on "balancing, discipline, and change," Albayrak said during a presentation in Istanbul, and included cutting public spending by $10 billion (€8.5 billion) to bring down the budget deficit as well as rein in runaway inflation.
Albayrak, who was placed in charge of the economy by his father-in-law, President Recep Tayyip Erdogan, admitted though that the program would lower economic growth substantially, which was now expected to be 3.8 percent in 2018 and 2.3 percent in 2019 — both revised down from previous forecasts of 5.5 percent.
"We will see a gradual growth increase from now on. Our main goal is to establish 5 percent growth from 2021 onwards," Albayrak said, adding that measures would be implemented to overcome economic hardships.
Inflation and landmark projects
Greater economic prosperity has been one of the pillars of Erdogan's popularity in his over 15 years in power, with the country seeing impressive growth rates such as 7.4 percent in 2017.
But economists have repeatedly warned that Turkey's debt-fueled growth push will eventually lead to a potentially dangerous overheating of the economy, with inflation rampant, the currency account deficit widening and doubts over the health of the banking system.
Those problems came to light in August when a diplomatic spat with the United States caused a crash in the value of the lira, sparking fears of a full-blown economic crisis. In August, headline inflation surged to 18 percent, while the Turkish currency lost about 14 percent to the US dollar, taking depreciation to a total of 40 percent in 2018.
Now, the government expects inflation to continue to rise to 20.8 percent by the end of the year, before moderating only slightly to 15.9 percent in 2019. For 2020 and 2021, the forecasts were more optimistic, with rates of 9.8 percent in 2020 and 6.0 percent a year later.
One of the measures to achieve this is a reduction in spending on showpiece infrastructure projects that have accounted for a large proportion of government expenditure. Albayrak said that in 2019 projects whose tender had not been carried out would be "suspended" and vowed Turkey would create two million new job opportunities by 2021.
Unemployment is nevertheless projected to rise to 11.3 percent in 2018 and 12.1 percent in 2019 before falling to 11.9 percent in 2020, according to the government's estimate.
The economic plan came a week after Turkey's central bank won praise from some investors for raising interest rates by 6.25 percent to tame inflation and put a floor under the lira. The currency had made moderate gains on the decision climbing to 6.2541 on Wednesday.
On Thursday though, markets only gave a lukewarm welcome to Albayrak's announcements, with the lira trading slightly lower against the dollar at 6.27 percent. Apparently, investors want to see a stronger commitment from the government to move away from credit-fueled growth toward more fiscal discipline.
Nora Neuteboom, economist at ABN Amro, said Albayrak was "still quite ambitious" on growth even with the downscaled targets. "Many banks and rating agencies expect Turkey to face a recession in 2019," she told the news agency AFP, adding that Turkey needed a "broad reform plan" to tackle key challenges like low productivity and a rigid labor market.
David Gardner chief economist for Turkey at the Spanish bank BBVA, noted that Ankara was willing to accept "lower but more sustainable growth." But he added that he would have wished for more details on how the government wants to make up for a $2.6-billion shortfall in revenue due to lower growth.
And economists at QNB Finansbank in Istanbul said that the projections were promising as "they indicate that government recognizes the need to give up on the ambitious growth targets to stabilize the economy". But they said it remains to be seen how resolute the government will be in delivering the rebalancing promised by Albayrak.
"They talked the talk and it remains to be seen whether they will walk the walk."
uhe/tr (Reuters, AFP, dpa)