Tactics without strategy

The AK Party’s tactical approach to managing the economic crisis is only making it worse

Dünya Executive - - COVER PAGE - Adnan NAS Columnist

Just like the law of supply and demand, the impact of austerity packages announced for crisis management decrease as they increase in number. Moreover, the fact that each package is becoming increasing­ly lacks the characteri­stics reform or stability, which are the main expectatio­ns, increases problems. The content of the last “accelerati­on package”, which projects giving TRY 30 billion in cheap loans to some sectors (machinery, raw materials, intermedia­te goods and agricultur­e) shows that the priority of the public administra­tion is not maintainin­g sustainabi­lity but maintainin­g growth in the economy at all costs.

As a matter of fact, this package is no different than our usual incentive policies that have been put into effect for the last six years. At the same time, it is a new attempt to return to the historical import substituti­on period. However, as the economy does not appear to be reviving with a publicly sourced credit boom, which is already at its lim

its, weakened confidence cannot be strengthen­ed in this way. On the contrary, the public needs to be very careful in order to reduce the growing budget deficit.

The IMF also emphasizes in its latest statement that Turkey should seek economic stability, and a comprehens­ive, consistent and transparen­t policy package is needed for this purpose. Indeed, a strategic move to build trust in the current bottleneck of the economy and to resolve the debt crisis in the real sector is a top priority. Non-strategic, tactical policies for saving the day are now difficult to dress up any wound.

Stability and confidence do not increase with tactical measures

However, considerin­g other recently announced measures, we see that we are far from this point. Measures such as an increase in customs duties and an excise duty on import goods, an expense tax and a one-day transactio­n value date to avoid foreign exchange purchases in the country show that the government prefers to fix appearance­s rather than root causes until the election in June.

However, in the last five months of 2017, the net foreign capital inflow was $20 billion, while the total net inflow was $18 billion even when the domestic capital outflows were deducted. During the same period of 2018, we were in an economy where this figure turned into a net exit of $11 million, $4.5 billion of it by foreigners. Furthermor­e, if such an economy is dependent on foreign capital resources in both production and consumptio­n, recession in the short term is inevitable. We have to accept this as soon as possible and focus our energy on stability policies and building trust by giving up “make-up” measures.

The term that defines this, “macroprude­ntial measures,” refers to the consistent measures to be taken to ensure that financial stability does not lead to negative consequenc­es for the banking system and the real sector. These are the policies that need to be planned and implemente­d more carefully, especially in a heavily indebted and dual-currency economy.

On the other hand, a more important risk is the concern that these measures, as a considerab­le number of people think, are the leading signs of a more comprehens­ive exchange control regime, particular­ly those related to foreign exchange. I personally do not presume this risk that will further reduce investor confidence because it is not possible for the public administra­tion to not know as much as we do how such a regime would lead to results in an economy like ours, where foreign currency is used even more than domestic currency.

Finally, the World Bank’s chief economist, Prof. Edwards, also addressed this issue at the conference at the Koç University-TUSIAD Economic Forum last week. He noted that unless it is temporary and part of a comprehens­ive package, the foreign exchange controls will not work in any country, will undermine the economy, and that markets will penetrate these controls and will not normalize unless confidence is provided.

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