EU says Turkish economy successful during global crisis

The European Union will declare that Turkey’s economic policies have proven successful during the crisis in her annual report, to be released on Oct. 12. The economic part of the progress report, seen by Today’s Zaman, will praise the performance of the Turkish economy while the EU, the world’s largest economy, is still struggling to contain the Greek crisis in a bid to save her ailing economies.

With a swift recovery from 2009 global crisis, Turkish economy grew by 8.9 percent last year and another 10.2 percent in the first half of this year.

With a swift recovery from 2009 global crisis, Turkish economy grew by 8.9 percent last year and another 10.2 percent in the first half of this year.

“Overall, the economy expanded rapidly in 2010 and in the first quarter of 2011, mainly driven by strong domestic demand,” said the draft. Despite the strong showings of the Turkish economy, the draft says Turkey’s gross domestic product (GDP) per inhabitant stands at 48 percent of the EU average in 2010.

While the EU will declare that the fiscal and monetary policy mix has been successful in tackling the crisis, it will caution against the current account deficit and inflation volatility. The draft report finds the budget and taxation policies successful, also stressing that employment policies have yielded positive results.

Despite the fact that Turkey was hard hit by the global financial crisis, the draft says regulatory and supervisory reforms have paid off and strong growth returned. “Turkey’s fiscal and monetary policy mix proved successful during the crisis. Although the Turkish economy was hit hard by the financial crisis, the earlier regulatory and supervisory reforms have paid off and growth resumed rapidly and strongly,” said the draft. The EU highlights the record growth by pointing at the economic expansion of 11 percent in the first quarter of 2011.

Just after underlining the brighter side, the draft report goes on to warn about the macroeconomic stability by drawing attention to a “boom-bust scenario.” The report hints towards the possible steps that should be taken. “However, Turkey did not fully benefit from the recovery due to insufficient adjustments. Making more progress with fiscal transparency, adjusting the fiscal and monetary policy mix, strengthening the inflation targeting and preserving financial stability will be important to minimize the risks of a boom-bust scenario.”

Despite the good performance of the Turkish economy in times of global crisis, the draft, nevertheless, advises prudence. “Overall, macroeconomic stability remains vulnerable and could benefit more from a better coordinated tightening of the policy mix,” said the draft.

The draft elaborates on both the strong and weak sides of the Turkish economy. The strong sides are as follows:

Turkish economy’s strengths

– The consensus on the fundamental goals of economic policy remains firm.

– Economic activity rebounded strongly, which reflected some base effects but also a strong growth of domestic demand driven by low interest rates, strong capital inflows and a rapid acceleration in bank credit growth.

– All major sectors of the economy contributed to growth in 2010. The largest increases in gross value added came from the most cyclical sectors, construction and manufacturing.

– All exports (with the exception of North Africa) recorded strong growth.

– Official gross foreign-exchange reserves have remained on an upward trend in 2011 and amounted to 68 billion euros by mid-2011.

– In 2010, the unemployment rate amounted to 11.9 percent, down significantly from 14 percent in 2009. The youth unemployment rate dropped faster, most likely due to the priority given by the government to this segment in the employment package. Employment data showed a marked improvement as the number of employed increased by over 6 percent compared with 2009. Overall, robust economic development allowed for strong employment growth and a sizeable decrease in unemployment.

– The budget performed much better than expected in 2010 and early 2011, especially due to the robust recovery in domestic demand, which supported indirect tax revenues significantly. Overall real tax revenues rose by 35 percent year-on-year in 2010 and real expenditure grew by 15 percent. Consequently, the primary surplus almost tripled and the overall central government budget deficit fell by about half from 5.7 percent of GDP in 2009 to 3.6 percent of GDP in 2010, much better than the originally budgeted level of 4.7 percent of GDP. In the first half of 2011, strong demand continued to support the budget performance, as revenues increased by double-digit rates. According to the medium-term fiscal plan, the government expects a 2.8 percent of GDP budget deficit in 2011. Extra revenues collected from a tax amnesty program, if saved, would bring the 2011 deficit even lower. Overall, consolidation of public finances is on track.

Weaknesses

– The sharp increase in domestic demand was accompanied by a further deterioration in the trade and current account balances. The current account deficit, which tripled to a record of 6.6 percent of GDP in 2010, continued to widen in early 2011. The increase was entirely attributable to the deterioration of the merchandise trade deficit, which in the first four months of 2011 more than doubled compared with a year earlier.

– Exports to some countries in political crisis started to fall and according to customs-based data, exports to North Africa declined by 10 percent year-on-year in the first quarter of 2011. Overall, imports have been rising due to strong domestic demand, thus increasing trade and current account deficits considerably. External imbalances have become significant.

– The labor markets need to absorb the unemployed and 1 million new entrants each year. Overly strict employment protection discourages employers from hiring new people. The prevalence of undeclared work remains an important challenge.

– The combination of strong domestic demand, high world fuel and food prices and a weaker currency can be expected to push inflation up further. Overall, inflation has been in a volatile, and recently, upward trend, in large part due to pressures stemming from energy and food inputs and buoyant economic activity.

– Monetary policy has been only partially successful as it could not sufficiently curb credit growth, which along with high commodity prices continues to feed Turkey’s growing current account deficit.

– The lack of measures to enhance the accountability, efficiency and transparency of the budgeting process makes it challenging for citizens to hold the government accountable for its management of public money. The unification of all tax administration functions under the Revenue Administration announced earlier has not been implemented in full. Overall, modest efforts were made to increase fiscal transparency.

 

30 September 2011, Friday / SELÇUK GÜLTAŞLI , BRUSSELS