ECONOMY MARKS TIME PENDING ELECTIONS

There are some promising signs in the economy such as steadily declining inflation, but the key to success

-Reducing interest rates proportionally- is still unsettled. PM Ecevit says everything will be all right after the elections if they can prevent the economy from going haywire during the campaign. Deputy PM Ulugbay goes to Washington for talks with the IMF to work out details of economic stability program with external financial support after the elections.

Everybody is curious, and political party leaders are nervous, about if PM Bulent Ecevit will, at the forthcoming election campaign, cash in on his remarkable success of arresting Abdullah Ocalan. Ecevit himself wisely says that the success is not his, but that of the Turkish State. He only stresses what marvels the Turkish nation can achieve when the ruling political power does not upset the harmonious work of various State organs. (The word "State" is the equivalent of "federal" in the American system, but because Turkey is a unitary State we cannot use that term.)

These words by the Prime Minister are an indirect reference to the Erbakan-Ciller period when the police, under the DYP’s female Minister of the Interior, were using spies in the Navy’s intelligence service to counter a possible military takeover which Erbakan and Ciller were suspecting. And what is more, the Deputy PM, Tansu Ciller, was dropping indirect and unrealistic hints about the police resisting such a possibility.

Now that these days of "stupidity in power" are over (hopefully, once and for all) within parliamentary democracy, thanks to President Demirel’s skilful handling of his constitutional powers, the Turkish State and nation have begun to give examples of successful performance in the State Administration.

Last week saw several fresh examples of this in the political, economic and especially foreign policy fields.

Economic achievements are steady, but precarious

To start with the relatively small achievements, the inflation rate was pulled down to the lowest point for the last eight years. Since February 1991 wholesale prices had never been below 50%. With 3.4% inflation rate in wholesales prices in February the Government has managed to bring it down to 48.3% for the year up to the end of February 1999. With a 3.2 % increase in February, consumer prices became 63.9% for the year.

These achievements were thanks to the fact that the Ecevit Government is the first Turkish Government that does not follow a populist policy in the pre-election period. The Prime Minister is resisting the labour’s pressure at the current collective bargaining talks concerning nearly half a million workers employed by the public sector. The Labour Confederation, Turk-Is, has gone down from its initial claim of TL50 million outright bonus and 50% wage increase in six months to TL20 million bonus and 30% wage increase in the first half of the year. The Government is still not according it, on the grounds that the average inflation rate will be 44% for the whole of 1999 (to be reduced to 35% at the end of the year) and 30% wage increase in six months is too much.

As for how a left-of-centre government like Ecevit’s can afford such realism especially in a pre-election period, the answer is that he follows the wise policy of passing these resolutions through the Economic and Social Council. At this tripartite summit, four labour, four employer and four government representatives meet and discuss economic and industrial problems. In answer to possible exploitations of the labour and especially CHP Chairman Deniz Baykal that the Ecevit Government is selling off workers’ interests to capitalists, the Prime Minister will point out that in the last five months 46,688 workers were laid off due to the global crisis. Since January, it has been taken under control thanks to joint committees set up in provinces to monitor redundancies.

In agricultural prices too there is a similar firm stance against populist policies. Next week, the Trade and Industry Minister, Metin Sahin, will announce the tobacco prices in the Aegean region. As against the farmers’ demand of between TL1.7 million and TL2.1 million per kg of tobacco, the Government is expected to announce TL1.4 million with a 45% increase on a year before and it is hardly more than the inflation rate.

PM Ecevit is also refraining from filling the State cadres with his sympathisers with partisan influences. "The wisest partisanship is not resorting to partisanship," said Ecevit to a journalist last week, pointing out that populist policies and especially partisanship may please the benefiting people and gain a few votes to a politician, but they hurt the rest of the people and become counterproductive in the end.

Asked about his main message in the election campaign, PM Ecevit told Bilal Cetin of Radikal (February 28^th): "Above all, we have high hopes and ambitions for the economy. Despite a serious problem we are facing in procuring financial resources, we aim at transcending the recent recession in the economy. Turkey is a country rapidly growing out of its shell. We managed to forestall the current global financial crisis from dangerously influencing us by slowing down the economic growth. And despite this crisis, the macro balances were not upset. But now we have to find more resources, make correct preferences about the utilisation of these resources and regain momentum to the economy. In doing this, the most difficult thing is to pull down the inflation in a country that has been pestered by it for years. We are doing this step by step. And in doing so we must ensure social justice. In the East and Southeast, we must definitely achieve development by giving an impetus to labour intensive investments. We have to accelerate privatisation. But Turkey’s constitution is an étatist (State ownership minded) constitution. That is why the Judiciary quashes several decisions for privatisation. Furthermore, there have been wrong practices in the past to the effect that privatisation is equal to unemployment. We have exerted efforts to undo it. But the relevant legislation has to be amended. Certain bureaucratic hindrances in the way of foreign capital must be removed. In this context, we should get rid of the conventional leftist complexes. Also, certain erroneous practices, charges of irregularities and corruption concerning privatisation are upsetting the public.

"While we have been in power there has been no corruption. But there are many legal and constitutional barriers (for privatisation). We must induce the people, especially workers, to view privatisation with a more sympathetic eye and to be part of it.

"According to the information we receive from abroad, foreign financial quarters have, in recent weeks, come to regard Turkey’s post-election period with more confidence. And now the Treasury can get loans from abroad very easily by issuing securities (bonds). These are signs of credibility. We will have secured the IMF’s support if the economy does not go haywire during the elections. The IMF has already announced its confidence in us and it provides a trump card to us for our credibility."

Ecevit believes that in the coalition after the elections his party will be in charge of the economy. "We had responsibilities (in the Yilmaz Government) where there could be corruption. For instance, we were in charge of the management of the FFF (Fakir Fukara Fon) for assistance to the needy, but no one could say that we resorted to partisanship in handling these funds," he said.

Real interest rates are still the biggest problem

Despite the optimism stemming from steadily declining inflation rates, the Turkish economy continues to be pestered by too high real interest rates. Everyone is unanimous that there should not be over 100% interest rates when the inflation rate has been reduced to 50-60%. It means over 50% real interest rates (after inflation rate is deducted) and it is too high by any standards.

The Central Bank Governor, Gazi Ercel, said last week that the Brazilian crisis cost Turkey TL149 billion. He said, "The Brazilian crisis erupted on January 12^th. The interest rates had gone as low as 119% by then. During that crisis they suddenly jumped up to 149%. We again managed to pull it down to the January 12^th level by January 28^th-29^th, but it cost the Treasury TL149 trillion," he said.

In a way, these high real interest rates are proof that most people are not sure that the decline in inflation rates is sustainable. There are claims that the uptrend may reappear in inflation if the government takes a single false step. Domestic debts were equal to $9 billion in 1994 and they have since quadrupled. In 1995 they became $12 billion, in 1996 $18 billion, in 1997 $26 billion, in 1998 $32 billion and now $36 billion. The Ecevit Government is determined to come to grips with this problem and reverse the trend after the elections within a program that Deputy PM Ulugbay is going to negotiate with the IMF next week.

Meanwhile, the interest rates of Treasury bonds kept declining in recent weeks. These rates were 121.3% on February 23^rd and became 103.4% on March 4^th. They may go down below 100% before long, but the Government prefers to be cautious about such unsustainable, transitional achievements and maintains, instead, the existing delicate macro economic balances until the elections.

That is why the Central Bank is not pumping liquidity into the market. On the contrary, it prefers raising the dollar value through daily parity adjustments with an eye to giving a boost to exports. In the first two months, exports ($4,010.5 million) declined by 6% on a year before.

Due to this policy, the Turkish Lira has been losing in value in real terms for the last four months. On a yearly basis, the devaluation rate was 55.46%, while the wholesale price index went down by 48.3% in this period. Especially since the IMF team’s last visit to Turkey in February the devaluation of the dollar/TL parity has been accelerated and become TL360,000 to the dollar.

Anti-inflationary policy with IMF support after the elections

Deputy PM Hikmet Ulugbay is leaving for Washington on March 6^th for talks with the IMF to work out the details of the "Fund-supported anti-inflationary policy" to be implemented by the new government after the elections.

He told a press conference in Ankara on Thursday (4^th) that there were signs of enlivenment in the economy. "There are also signs of a healthy development in world markets," he stressed. He said that the aim of the joint program with the IMF was to reduce the inflation rate to one digit in the following years. "Turkey needs external financing for the success of its anti-inflationary policy after the elections. For that reason we will continue with our activities and preparations without waiting for the elections and pave the way for the necessary infrastructure needed in the post-election period. We have to make the most of the time available until the elections," he said.

Asked what would be the highlights of the new programme with the IMF, Ulugbay said, "There is nothing new in Turkey’s objectives. It would be rather hypothetical to talk about it before the talks with the IMF. Even though our previous program with the IMF was for a year and a half we had quarterly targets for three years such as reducing the inflation rate to one digit and achieving economic growth in stability."

Finance Minister Nami Cagan said that Ulugbay was going to the talks with the IMF with trump cards up his sleeve. With the continuation of its economic stability program despite the elections the Government had reduced the inflation rate and gained the confidence of economic circles at home and abroad, he noted.

The trump cards the Finance Minister is talking about concerns the $1.3 trillion funds that left three regions (the Far East, Latin America and Russia) during the current global financial crisis. At the GRI (Global Real Estate Institution) summit held in Paris between January 26^th-28^th, the consensus of 450 participants throughout the world was that Eurobond investments should be preferred in channelling these funds and that Turkey would be a good market for them.

The setbacks of the Turkish economy

As against the above advantages and trump cards of the Turkish economy, its setbacks and challenges are not missing either.

Above all, the difficulties of the public finance system are continuing despite the recent reform in the fiscal system. In the first two months of this year the Treasury’s cash flow gap reached TL1.8 quadrillion, indicating nearly TL1 quadrillion gap a month.

Indeed, the Budget deficit in January was TL902 trillion, with TL1,018 trillion revenue and TL1,920 trillion expenditure. The biggest item in the expenditure column was TL790 trillion debt interest payment, TL770 trillion being domestic debt interest and TL20 trillion external.

In the January-February period, the consolidated budget deficit excluding debt servicing was TL210 trillion. This shows that even if the debt interest payment is reduced after the election by lowering interest rates through external financing, there are still serious problems in the public finances of Turkey, requiring reforms in especially the social security system.

A centre right and centre left coalition by the Ecevit-Yilmaz team after the elections is ideal for carrying out these reforms and that is exactly what Turkey is heading for. uras@ada.net.tr,   March 6^th, 1999