As borrowing soars…
Turkish Deputy Prime Minister Mehmet Simsek, who is responsible for the economy, made some important points especially on borrowing during his statement last week. Minister Simsek said the country would lend more than it expected and won’t be able to stay within current borrowing limits.
The 2017 borrowing limit, as determined by the Treasury’s budget law, is TL 47.5 billion and the government will make a law amendment to raise that constraint. Thereby, the debt rollover ratio will surpass 100% for the first time since 2009. The reason behind this increase is obvious: the budget deficit. So to diagnose the problem we should analyze the budget for 2017 and write a prescription for treatment, because borrowing won’t solve the budget deficit issue but can provide sustainability.
Debt stock rose by TL 40B in Q1
A continuous election atmosphere and uncertainty since 2014 has also reflected in the economy. The volatility of growth picked up speed. The budget deficit increased too, which led to an increase in borrowing. By the end of 2014, the EU-defined debt stock was TL 585.7 billion but it rose to TL 732.8 billion by the end of 2016. For the first three months of 2017, debt stock rose by TL 39.9 bil- lion. The most distinctive factor for this rise was the budget deficit mounting to TL 25.2 billion in the first half of 2017. The reason for the deficit is not the decline in tax revenue collection. On the contrary, with the help of tax amnesty regulations, tax collection rose by 13.6% in comparison year-onyear. The crux of the problem is expenditure, especially primary expenditure.
Defense expenditure marches up
Almost every expenditure item increased by a high rate, but two items in Turkey indicate a change in terms of budget management. Firstly, the government once again started to increase defense ex- penditure. That’s a policy change and it shows that the cost of the war in Syria and long-standing terrorism for Turkey has increased even more. Secondly, there are alarms regarding Turkey’s social security system. If public borrowing increases in a country, interest rates increase too because loanable fund volume can’t rise overnight. If you have to resort to foreign borrowing, this time the budget deficit would rise and the foreign exchange risk would increase. Eventually, the country would face a double deficit (budget deficit and current account deficit). Turkey now faces a double deficit risk. Let’s see how it manages that risk.