To start with, the Central Bank of Turkey started an earlier process of interest rate cuts in September (0.25 percent cut) and continued the same process in October (0.50 percent). Starting this process for the first time since mid-2006 is quite significant progress because it shows that contractionary monetary measures that were taken by the Turkish Central Bank in order to keep consumer price inflation (CPI) within in the targeted zone of 5 percent in 2007 have been successful.As mentioned in detail in my previous column, the second important development has been the declaration of the government’s New Action Plan (NAP) in which the government has drawn up a quite well-thought-out road map not only for the last quarter of 2007, but also for the year ahead. We have classified these measures within three categories: Measures for the achievement of possible higher and sustainable growth without jeopardizing basic macroeconomic stability; measures for the continuation of the reform process as well as major big privatization attempts (i.e., energy sector and public banks); and measures prioritizing production-oriented targets by increasing the competitiveness of the private sector.
Finally, the government has already declared the draft budget (DB) measures for the next year. After briefly evaluating the DB (see table below), reasonable predictions of the 2008 economic targets can be made.
My evaluation of the DB’s quality is based on two criteria. These are, first, the quality of the sources of revenue as well as sources of expenditures; second, budget deficit and primary surplus targets. Among these, the most important criteria is the sources of spending, provided that budget revenue is derived from sustainable resources and, in that regard, the share of indirect taxes are not raised significantly, as this category is not fair from the social point of view.
Unfortunately, the bulk of the total expenditures (YTL 222.3 billion in total) will be composed of interest expenses (YTL 56 billion) and social security transfers (YTL 39 billion). The share of these two items in the gross domestic product (GDP) is projected to be around 7.8 and 5.5 percent, respectively. This indicates that there will be a slight increase in these two targets. On the other hand, investment has the lowest share in the budget since the 2001 financial crisis. This might be understandable in the sense that the private sector will be the engine of growth hereafter. On the positive side, the shares of the Ministry of Labor and Social Security and the Ministry of Education increased quite significantly. This underlines that search of employment, improvement in human capital and reform of the social security system will gain new momentum.
The overall assessment of the DB is that there is no significant deviation from the basic macroeconomic targets such as budget deficit, public debt and a disinflation program. Social priorities are given further weight in the budget. After all, higher growth with lower inflation targets are expected to be achieved in 2008, and the rate of unemployment is expected to continue declining toward 7 percent.
