The budget nightmare

Dünya Executive - - COMMENTARY - Ismet OZKUL Columnist

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.

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