Both the rate of inflation (consumer as well as producer) and export have continued their recent upward surge, while the rate of economic growth has slowed down and the rate of unemployment has continued rising over the last six months. Despite the Central Bank of Turkey's 4 percent year-end target for consumer inflation, by the fourth month of this year it had already jumped to double digits. The central bank's estimation of year-end inflation in 2008 rose to 9.3 percent with a 70 percent probability. Global conditions in food and energy prices are the major factors for this deterioration; therefore, one revision in major macroeconomic indicators pertains to the inflation.
The second revision is in current account balances. The current account deficit was realized at almost $38 billion in 2007. The government expects that it will reach somewhere around $50 billion in 2008, a significant rise and departure from the trend in recent years.
The third revision goes to primary surplus and budget deficit targets, as seen in the given figure. Today I want to stress the meaning and long-term implications of this revision.
The government explained Turkey's medium-term financial outlook parallel to the Pre-Accession Economic Program, which was presented to the European Union in December 2007. Both domestic as well as external developments have been effective in this new architecture.
In the domestic market, although there is a significant slowdown in real economic activity, inflation continued rising due to cost-push factors, underlining that contribution to the disinflation process from aggregate demand factors is quite limited, even if there would be a further rise in the central bank's policy rates. Therefore, emphasis must be given to the real side of the economy in fighting inflation and rising economic activity. This suggests that more tightening in the monetary side and more relaxation in the fiscal side would take place.
Moreover, global economic and financial changes at the end of 2007 also force the government to make constructive reforms -- such as an employment package and Southeastern Anatolia Project (GAP) investment -- in the medium term to increase its competitive power.
According to the new program, as prepared under the pressure of both domestic as well as external factors, first, the central administration reduced the rate of budget deficit in gross domestic product (GDP) from 1.9 percent to 1.4 percent in 2008 so more resources could be set aside for investment. The government has decided to allocate an annual YTL 3-4 billon to the GAP project -- to create employment for 4 million people when complete -- starting next year.
The second measure is that the primary surplus target was reduced to 3.5 percent and added the central administration budget's primary surplus target was reduced from 3.4 percent to 2.7 percent. Economy Minister Mehmet Şimşek said some might comment that Turkey's financial discipline had eased after these decisions, but said concessions in terms of fiscal discipline would never be made.
I personally agree with him in the sense that one needs to look at the budget deficit to see whether fiscal discipline has eased or not. In fact, the main criterion of the Maastricht criteria is the budget deficit. As the mid-term economic outlook aimed to decrease public debt stock to 30 percent of GDP at the end of this five-year period and apply a firm primary surplus policy in line with this goal, it would be an exaggeration to argue that government does not support the disinflation program.
Having considered all these developments, it can be forecast that Turkey is going to experience an inflation of around 10 percent and a real economic growth rate at around 4-5 percent for the coming three years, pending a positive improvement in the global conditions. This, in our view, should be seen the best possible and the necessary scenario as we consider Turkey's chances and limitations.
Second, although new measures will continue creating more employment in the less developed part of the country, we will continue with a considerably high level of unemployment under the stress of structural transformation from labor-intensive, low-value-added sectors to the rising, more value-added oriented dynamic sectors. Last, but not least, the IMF-based stabilization program has already ended in practice, and a new momentum from a long-lasting development program needs to be started.
