Intent is not enough, a program is essential
It has been two weeks since the elections but the agenda is still not dominated by the economy. The Treasury and the Finance Minister’s eagerly awaited critical reform package presentation and the statements made in U.S. meetings do not include detailed answers that investors, the real sector and the financial institutions expect about hot issues. It is limited to some approach principles and strategic plan commitment on a sectoral basis.
It is understood that this critical decision has been postponed while the government is in the process of a restoration program, either with or without the IMF. The fact that the title of the presentation is ‘structural transformation steps’ and contains only the regulations that will be adopted in 2019, with an emphasis on the implementation of the reforms starting from 2020, bears this out. The statements, in a sense, imply that the New Economy Program, which was announced six months ago and is promising because of its realistic determinations, would be
implemented in time rather than immediately, thus suggesting a repair process rather than a sharp structural transformation. Therefore, there is no clear indication that a change in the production structure and growth model is in the cards.
The most concrete and quantitative steps included in the statements are the strengthening of the capitals of state banks by issuing government bonds of TRY 28 billion. Thus in particular foreign financing circles are being given the message that the need to improve the banking sector’s increasing fragility and deteriorating ratios is being prioritized. In general, the banking sector is expected to increase its capital and to stop or limit dividend payments and bonus payments to managers throughout the balancing process. The creation of a new legal framework for the restructuring of debts and the acceleration of execution-bankruptcy processes, the transfer of some of the non-performing loans to the funds to be established with the participation of banks and international investors look like commitments which need to be voiced to compensate for risks accumulated in the construction and energy sectors but need details.
In the area of social security, the severance pay fund is similarly vague. It also mentions the preparation of a comprehensive reform in the field of law and jurisdiction. Under the title of Tax Transformation, the government appears content to mention the efforts to expand the tax base, fight against the grey economy, reduce exemptions, all things that have been on the agenda for 15 years at the Tax Council but never implemented. In sectors such as agriculture, tourism and logistics, exportation and industrialization, reference is made to master plans to be announced during the year. Of course, these are far from meeting the expectations of international observers and investors for concrete stabilization measures such as tax increases. As a matter of fact, the reaction of the markets is obviously not positive as we can see from the rise in the exchange rate.
We’re behind the
New Economy Program targets
In short, we have fallen behind the New Economy Program which was announced six months ago. At least the expectation of a stabilization program with an IMF-like content has not been met. The approach looks like building confidence on the future potential instead of bearing the cost today, although it is not that clear. The search for a solution to funds with gross funding for hot issues is indicative of this. It is hoped that investor confidence will probably increase and external flows will be achieved. In this context, the only guarantee is that the tight monetary policy of the CBRT continues.
We have to accept that it will not be possible to provide the expected foreign resource inflow, increase confidence, and more importantly to convince the IMF, which we take for granted unless we do not clarify the road map in the economy in the direction of a real transformation without losing much time, and act accordingly.