Turkey moves on own initiative, vows to stick to fiscal discipline

In an exclusive interview at his office in Ankara, Turkish Deputy Prime Minister Ali Babacan, who is responsible for the economy, explained that Turkey has been and will always be in close consultations with the IMF and the EU in mapping out needed reforms in the economy. “The EU is a natural anchor for us, whether the chapters are opened or not. All government agencies carefully consider EU benchmarks when drafting bills that will eventually be submitted to Parliament. As for the IMF, our door is always open, and the consultation mechanism is firmly settled itself, paving the way for close coordination on financial affairs without a stand-by agreement,” he said.

Babacan also underlined that Turkey can take the necessary steps for economic stability on its own and that this in fact helps reduce resistance to reforms and measures on the domestic front. “Sometimes when we take a reform measure to Parliament with the argument that it was requested by the EU or IMF, it backfires and resistance is fierce to overcome,” he remarked. “We can stand on our own two feet in implementing the necessary reforms,” he added.

The Turkish minister also detailed why Turkey and the IMF failed to reach an agreement on a stand-by deal, saying one of the details on which there was disagreement was over the distribution of additional revenue if Turkey surpassed its growth targets in 2010. The government and the IMF agreed to end discussions on a stand-by deal that would renew a previous one that ended in May 2008 after it was deemed unnecessary.

Most of the controversial issues were resolved during the 18-month on-and-off negotiations, Babacan said. For example, as of Dec. 31, Turkey and the IMF had agreed on issues including the position of the Revenues Administration (GİB) and controlling municipal spending. He stressed, however, that one of the main topics that the two parties couldn’t agree on was the spending of extra government revenue stemming from the possibility of higher-than-expected growth in the Turkish economy this year. The budget last year produced a surplus of TL 10 billion. The government, in its Medium-Term Economic Program, expects a gross domestic product (GDP) growth rate of 3.5 percent this year.

Pointing out discrepancies in IMF policies, Babacan argued that the fund was urging governments in the eurozone towards stimulus spending just five months ago despite expanding budget deficits in those countries. “Now in a reversal of previous suggestions, it is advising Greece, Spain and Portugal to stop spending.” “In my opinion each country should watch out for itself” he added. The business world welcomed the Turkish government decision to call off talks, and government bonds the next day attracted good interest from international buyers, confirming the confidence in the Turkish economy.

The Turkish minister also explained why Ankara repeatedly refused to accept any IMF delegation for the fund’s annual Article IV consultations until now. Turkey’s last Article IV consultation, required routinely of all IMF members, was in March 2007, with the publication of the IMF Staff Report in November 2007. “We did not want expectations raised by having a delegation here in Turkey. We were already in close talks with them over the phone,” he said. During the upcoming consultations the two sides will review developments in the Turkish economy, exchanging views on the economic outlook and government policies.

From years of instability to stable growth

Recalling the years of instability, when inflation was rampant and the financial system broke, in 2000-2001, Babacan said international investors are now looking for political stability and closely watch whether the right economic measures are being implemented or not. “We are still servicing TL 20 billion left over from the financial crisis of 2001. The best scenario the business community here and abroad is cheering for is for the reform process to continue and the Justice and Development Party [AK Party] to remain in power,” he said, adding that a possible coalition government gives investors the jitters.

Responding to criticisms that the government has halted EU-driven reforms, Babacan said much of the work is halted in Parliament where the opposition filibusters everything the government brings to the agenda. “For example, the draft laws on obligations and commerce were passed by committees in Parliament with unanimous votes, including opposition deputies. But the opposition took different positions when the bills were submitted to the floor,” he lamented. Babacan criticized the obstructionist policies of the opposition as “short sighted” and said “the thinking is that if more reforms are passed, the government will claim credit. Though it is for the benefit of the country, they remain staunchly opposed to those reform bills.”

Parliament has been slower in passing new legislation this term in comparison with the previous term, but much of that owes to the filibustering opportunities granted to the opposition by parliamentary bylaws. For each article to be adopted on the floor, full one day may be required if the opposition drags its feet. With that pace, it would take over four years to pass just the commercial law, provided that no other item is brought to the agenda. The draft law for new bylaws that would allow Parliament to put legislation on a fast track was halted after the main opposition Republican People’s Party (CHP) took a position against it.

Against this background, Babacan warned that Turkey may fall behind in adopting structural reform that is very much needed for the stability and growth of the economy when compared to other nations that rushed to adopt similar reforms. “There is a cutthroat competition out there to attract foreign investment, and countries sped up reforms to improve the investor-friendly environment at home,” he noted. “While the structural reforms are gaining speed in the world, we are plagued with reform fatigue in Parliament,” Babacan said.

Turkey’s economic czar emphasized that there is no ambiguity about the work that needs to be done in Turkey. “We have an action plans ready for a number of areas including but not limited to tackling the unregistered economy, improving conditions for investors, constitutional changes and steps for democratization.” He noted that most important job for the government at the moment is to secure the ground for a well-functioning democracy. “Otherwise, the building would likely collapse in the event of an earthquake,” Babacan said, stressing the democratic deficit is far worse than the budget deficit.

Fiscal rule is the anchor

The deputy prime minister regrets that his government failed to explain the importance of sound fiscal rule in government finances to the general public. The government announced its Medium-Term Economic Program (2010-2012) last September and pledged that legislation would be enacted in this year’s first quarter to apply the fiscal rule to the 2011 budget.

He revealed that the draft bill for the application of the fiscal rule is ready and that his staff has already opened the bill details for debate within a small circle to start out with. “We are taking input from different circles and evaluating expert opinions,” he said, that adding new legislation will set the annual budget balance and ratio of public debt to GDP targets. Babacan argued that a major consensus was obtained for the fiscal rule and noted that they will announce the 2011 budget on May 31. “We realize that analysts value the fiscal rule more than the IMF. What is more, the sustainability is much more credible because is it is a homegrown formula based on internal dynamics,” Babacan argued.

The January and February budget indicators are promising, as are growth and employment figures for Turkey

The government has also increased taxes on gas and highway tolls to boost revenue while phasing out tax breaks introduced during the economic downturn. Babacan said they are resolute in implementing strict measures despite the fact that it is not popular with the public. “What is important is stability, and we all should bear responsibility in shouldering the burden here,” he noted.

The Turkish minister said his government is keen to drop budget expenses, especially in the social security system. “We slashed the overblown prices on medicine and made a contract with pharmaceutical companies to determine fair prices,” he noted, adding the government’s pharmaceutical cost was TL 11 billion in 2007 and jumped to TL 16 billion in 2009. “We were paying the bill for 420 million doctor visits, which corresponds to six visits per citizen. The drug prices were rising 25 to 30 percent on average each year. Each citizen was getting five prescriptions on average. It was out of control,” he explained. The government secured a written agreement with drug companies on prices through 2012. “If there is any deviation from that pledge, we would apply a discount at the same rate, punishing the drug companies,” Babacan warned.

The minister also praised past reforms in the credit and mortgage systems in Turkey. “If you look at the credit card overhaul in the US, it is very similar to one we had adopted in 2006,” he said, adding that strict measures like 25 percent down payment requirements for home mortgages and no tax breaks helped fortify both the banking system and the housing market in Turkey. Thanks to early reforms, Turkey was the only country in the Organization for Economic Cooperation and Development (OECD) that did not go through the full financial crisis during the global downturn cycle.

Babacan also revealed that the government had silently run a series of stress tests on all banks in Turkey to see how sturdy they were against external shocks such as liquidity and currency fluctuations before the crisis erupted. “We sat down and talked to the banks we thought might experience problems in the future. We urged these banks to infuse more cash to raise capital or look for partnerships with others. Per our recommendations, some banks were either sold or joined to others,” he said.

Some judgments of Turkish courts also draw Babacan’s ire, because, he says, they damage faith in Turkey’s economic system. “Judges sitting on the bench should think of the case in terms of the welfare of the country. They can review the cases on legality, but they should shy away from making laws and limit themselves to just a review of the cases under the law. It is hurting the Turkish economy,” he said.

In terms of further privatization, Deputy Prime Minister Babacan noted that there might be a public offering for Telekom stocks owned by the government in 2010. Public offerings for Halkbank and Ziraat Bank will depend on the market conditions, he said. “A second public offering for Vakıfbank is also on the agenda. We want to minimize government stakes as much as possible,” he added.

Babacan vowed that Turkey would be the fastest growing economy in Europe and would recover from the crisis quickly. But he cautioned that there is no room for mistakes. “We can’t drop our guard in the economy lest something unexpected might happen at any moment. Another world economic crisis will have waves beating Turkey as well,” he said.

The Turkish minister also dismissed rumors that the government will relax fiscal discipline because of the upcoming general elections next year. “We need to implement the economic program to the letter, with no concessions. We cannot give up on fiscal discipline,” he emphasized.

Turkish economy experiencing an upswing since September

Ali Babacan conveyed some important messages concerning the current status and the future of the Turkish economy.

*Vakıfbank, Halkbank and Ziraat Bank might be offered to the public.

*There will be no concessions from rigid fiscal discipline because of the general elections.

*The stimulus for employment will continue. Help-wanted ads in papers are increasing.

*There has been an upturn in the economy since September. The number of bounced checks is on the decline.

*It is regrettable that publicly traded companies in Turkey were just 300 a decade ago and today are about the same. The İstanbul Stock Exchange (İMKB) should work harder to encourage IPOs.

*The closure case brought against the AK Party slowed growth in Turkey, pushing it under 1 percent in 2008. The EU would have reacted very harshly if the AK Party had been shut down by the Constitutional Court.

*There is no guarantee that the money that came from our “wealth amnesty” will stay in the country. We do not consider bonuses like these to be sustainable for economic stability programs.

*We are still working on alternatives on withholding tax deducted from investors in the stock market. We will announce it shortly. But transaction fees will be lifted.

*We are talking to Swiss banking authorities to identify bank accounts belonging to Turkish citizens and negotiating a deal.

*There is no request from the military for paid conscription to raise money. The Court of Audits will review all state expenditures, including the defense budget.