The budget nightmare
Turkey is among the most vulnerable countries to external imbalances due to its high current account deficit and excessive foreign debt. This exposure can be felt in many areas in the economy, from foreign exchange rates to inflation, investments to production, hanging over us like the sword of Damocles. Under these circumstances, the only internal balance that Turkey could boast was on the fiscal front.
But that seems to be a thing of the past now, because there was a radical deterioration in the budget balance last year. The budget deficit of TRY 29.93 billion increased by 58.27 percent, or TRY 17.44 billion, reaching TRY 47.37 billion and the Treasury had to borrow to finance it. This policy was one of the main elements supporting high interest rates. More importantly, however, the primary surplus of TRY 20.32 billion declined by 54.03 percent down to TRY 9.34 billion.
The increase in the budget deficit was significantly higher than the 13.75 percent inflation rate. Budget receipts stagnating in real terms in a time where growth is expected to reach 7 percent is definitely not a good sign for the current economy and its future.
Under these circumstances, maintaining fiscal balance is not sustainable. A prolonged deterioration on this front means the strengthening of a second source feeding high interest rates – apart from foreign exchange rates. It means that the inflation flame is being fanned by this second source. The combination of vulnerability in fiscal balance on top of an external vulnerability means alarm bells for a looming crisis. All crises in history are related to these two imbalances.
If we look for the worst offenders contributing to the deterioration in the budget, we find the political choices made in the lead up to the constitutional referendum. But Turkey will remain in a critical and unpredictable election atmosphere for two more years. It can turn into a nightmare scenario if this negative trend on the fiscal front in 2017 repeats in 2018 and 2019.