Tactics without strategy
The AK Party’s tactical approach to managing the economic crisis is only making it worse
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.