DSP İzmir Deputy Harun Öztürk: Turkey should focus on surviving without the IMF

The lack of an agreement thus far between the government and the International Monetary Fund (IMF) is a good development, according to Democratic Left Party (DSP) İzmir deputy Professor Harun Öztürk, who says Turkey should focus on surviving without the IMF.

Speaking to Today's Zaman, Professor Öztürk, who is a member of the parliamentary Budget and Planning Commission, indicated that negative economic indicators have made an IMF loan inevitable, but Turkey should undertake radical changes to avoid finding itself in a worse situation in the future.

Arguing that IMF loans will not be of much use despite the recent decisions the IMF made in İstanbul, Öztürk said: "There may be a number of reasons why the government has not made an agreement [with the IMF] until now. Still, I regard the failure to start a new process with the IMF as a positive development. For the future, we should take measures to make sure that we can go on our way relying on our own dynamics and our industry can survive without external help.

This is because if we can make a deal with the IMF, this will be accompanied by lower exchange rates, higher interest rates, greater inflow of cash, imports becoming cheaper and an increase in foreign trade and the current account deficit. And if this continues without change for several years in the future, then we may have to face the same problems which will have accumulated and grown in magnitude in five or 10 years. [Therefore,] we must eliminate the possibility of facing the same problems with increased magnitude in the future."

Let us start with the measures taken against the global crisis, if you like. Were the measures Turkey took sufficient?

In the first place, I must note that we did not experience the crisis the way the world has been experiencing it. This is very important. Whether measures were taken on time or delayed until it was too late is being discussed. More important than this is the timing of eliminating these measures. The whole world is trying to make up their minds about the right time for doing this. Was the timing of ending the practice of value-added tax [KDV] or private consumption tax [ÖTV] cuts correct? This is a bit controversial.

Although the crisis emerged as a financial crisis, the Turkish financial system was not affected. Don't you think this is a positive development?

This is what I want to emphasize. In this crisis, financial behemoths collapsed, and big economies were urged to undertake great expenditure in order to save their financial systems, but we did not experience the crisis in this way.

The fact that our banking system is resistant to [this and other] crises is a major advantage for us. However, this [performance of the banks] is attributable not to the government's transfer of funds to the banking system or implementation of other measures, but to the strengthening of the banks in the post-2001 crisis period. It is for this reason that although the government is authorized to raise the rate of secured deposits as in other countries, this was not needed.

Don't you think there was still great damage done?

Unfortunately, production has been on the decline for 13 months, since August 2008. The rate of unemployment rose to 14.8 percent although it was expected to be 10.4 percent in 2009. Also, the government does not have any hope or expectation that the rate of unemployment will decrease in the near future. Indeed, the government expects the rate of unemployment to be 13.3 percent in 2012.

Why did the crisis mostly affect our trade with the EU? This is a subject that requires attention. Developed countries are saying nations should not introduce measures against foreign trade due to the crisis. But I want to draw attention to Turkey's trade with the EU. According to a comparative assessment of the first eight months of 2008 and 2009, the figures are not in Turkey's favor. Looking at the share of trade with the EU in our total trade, our exports dropped by around 5 points. This may have stemmed from our own troubles and our inability to produce or export goods. Or maybe Europe introduced a set of obstacles for our exports due to the crisis, which has also affected it. We are also looking at our import rates. Looking at the share of EU imports in our total imports, there is a rise in rates as opposed to a decline. The EU has managed to sell us whatever it is they wanted to sell, but we have not been able to sell as we please. Are you saying the crisis has set us back at least four years? That is the government's prediction. I am not saying anything. The current account deficit is close to 2004 figures. Since our economy has become foreign-dependant, we have come to a point where it is impossible to grow without having a foreign trade deficit. Therefore, in a growth model that has become dependant on foreign capital, we constantly opt for foreign opportunities when creating employment as well. One point we always criticize is that the growth in the economy is never reflected in employment. This growth model is not a model that creates employment. If only for this reason there is a need to revise this model.

During the last year, 972,000 people lost their jobs. When the first nine months of 2008 and 2009 are compared, the capacity utilization rate dropped by 12.1 points. Exports have been revised to $98.5 billion, although they were estimated to be $149.2 billion in the government's medium-term program. The private sector's borrowing capabilities have contracted, and no significant progress has been made in boosting tourism revenue, while there have been problems in capital output and in the financing of the current account deficit due to a decrease in direct investments, and all these have negatively affected the growth of our economy, which has become considerably dependent on external resources.

Isn't there any item that is on the right track?

Yes, there is a single index that is making good progress: inflation. However, the fact that we have attained our targets with respect to inflation should not mislead us to conclude the implemented macroeconomic policies are positive. The decrease in the rate of inflation should be attributed both to a decrease in the internal purchasing power and to a decline in external demand. If you decrease production, unemployment rears its ugly head. If trade has virtually stopped in domestic or international markets, then an overall decrease in prices is expected. Moreover, the drop in energy prices further influences this decrease.

However, a general rise in prices can be expected from now on because of the packages implemented and increasing public deficits due to the crisis.

Doesn't a decrease in the rate of inflation give the government relief?

True, this is a big opportunity. Also, if inflation had not been kept at this rate, budget deficits and increases in borrowing would have been much greater. That the interest rates for borrowing could be lowered at a time when the Treasury was going through troubled times is a great opportunity for the Treasury.

Yet, I also want to stress that the country should be very careful in the coming days. Borrowing may snowball into big sums, not only exceeding 49 percent of the national income as estimated by the government, but also the rates set forth in the Maastricht criteria.

Meanwhile, the Central Bank of Turkey is getting appreciative reports from international circles.

The government acted unfairly against the central bank by forcing it to lower interest rates in the post-2001 crisis period. But the central bank was right about the timing of lowering interest rates.

The bank should not lose control in ensuring price stability. In doing so, it should also work on measures that will help the government attain its targets for ensuring the macroeconomic balance for economic development. Otherwise, we may end up trying to assign such duties to the bank after it is too late, as we try to do with the IMF today. The important thing is to take the necessary measures before it is too late.

Banks are criticized for limiting their loans. How do you see this?

Although I share the government's complaints in this regard, I suggest that the government should put itself in the shoes of banks. Indeed, having suffered considerably from troubles in the past, banks are acting more cautiously today.

For this reason, as long as there are risks in the markets and as long as the government does not minimize these risks, we should expect a decrease in loans provided to the non-financial sector.

Instead of refraining from providing loans to the non-financial sector in order to avoid risks, banks opt for lending to the Treasury, which is a less risky method, in order to finance the public deficit. This is because Turkey has to obtain loans in order repay debts amounting to $150-200 billion every year. Banks choose the easier method. However, it is important that loans should be provided to the non-financial sector and consumers in order to boost demand and consumption during the crisis.

Actually, is the basic problem the necessity for borrowing?

This is a problem that must be discussed with involvement from the government and the opposition. Together, we need to develop measures for eliminating resource deficits and the Treasury's need for borrowing. Then, banks will choose to transfer their funds to the markets instead of the Treasury.

If I am not wrong, the Treasury took on a debt amounting to TL 19.1 billion during the last two tenders. Banks had offered to lend TL 89 billion in total. Thus, as long as there is still a need for borrowing, inflation may climb, increasing interest rates. We must be on the alert.

Banks may borrow funds at competitive terms from the international markets before lending them to the Treasury. Therefore, we should not regard all the loans provided by banks to the Treasury as coming from domestic savings.

Given all this, is the government forced to make a deal with the IMF?

Negative indicators and resource deficits can be said to be forcing the government to make an agreement with the IMF.

How will this affect the economy?

In case of an agreement with the IMF, we will revert to the growth model that caused our economy to be dependent on external resources.

An instance of déjà vu?

Yes, truly. With the monies the IMF will provide, exchange rates will decrease and the rate of cash inflow will be boosted. Even the mention of an agreement was enough to foster capital inflow. Indeed, the rate of cash inflow decreased to $43.5 billion in February 2009, but rose back to $79.2 billion in September 2009. This figure roughly corresponds to the $79.7 billion in September 2008.

In other words, with the IMF loans, we will try to solve the problem with palliative measures.

Given this, we certainly run the risk of déjà vu.

With the İstanbul decisions, the cost of borrowing from the IMF has decreased considerably. Isn't this a good development?

Even if this is a positive development, the IMF loans still contain the abovementioned risks.

Turkey is obliged to take on debt in some way or other, and if the IMF loans are more competitive, why shouldn't they be preferred?

Turkey needs to make a radical change in its industrialization policy. In other words, it should make the transition from an industry that is dependent on external resources to an industry with a higher added value. We need to protect our industry. At first glance, IMF loans may seem more favorable than other borrowing options. Yet, this should not mislead us. We need to check and see if the IMF continues to impose the same framework it intended to impose on us in the previous agreements.

Our imports will start to increase more quickly than our exports. Our industry will collapse although it has managed to survive the crisis. Although it may seem that the borrowing burden for the Treasury will decrease initially, our current account deficit and debts will increase in the medium term, which will be translated into an increased borrowing burden for the Treasury, and domestic resources will continue to create jobs for the unemployed abroad, not at home.

In other words, we will see a return to an economy dependent on external resources. We should not be misled by the fact that it will provide temporary relief, creating provisional growth figures. We need a radical change.

Can you elaborate on that?

You should check the rate of imports in the items you export. You will have to rebuild a collapsed supplier industry. There is more, you need to introduce competition conditions at international standards.

You will focus on efficiency. Radical change is not easy. Examining the foreign trade figures, you realize that it is about $4 billion in the textile sector alone. Machinery imports are noted to have high figures.