PULSE of TURKEY No:86 ............................ JANUARY 30th, 1999
ENHANCEMENT OF BANKING SYSTEM IS A MUST FOR ECONOMIC RECOVERY
The Ecevit Government is not following populist economic policies and it is an assurance for the continuation of the economic stability program of the previous (55th) Government – a righteous demand of the IMF for cooperation with Turkey. Consequently, the downtrend in inflation will continue in the pre-election period and thereafter. The IMF team will see proof of this before leaving Turkey on February 8th. The appreciation of these facts and Turkey’s political realities may eliminate the Fund’s concern about the Ecevit Government being a caretaker one. But it must show the IMF that it is capable of passing the Bank Bill. “The basic spirit of our current activities concerning the economy,” said Hikmet Uluđbay, Deputy PM for the Economy, “is to pave the way for a healthy infrastructure for the Turkish economy in the aftermath of the elections.” This statement made two days before the talks started in Ankara with the IMF team on January 27th is the best definition of the Government’s expectations of the economy until the April elections. It is also a very good indicator of the Government’s economic policy until then.The Ecevit Government will not follow a populist economic policy in the first and the second quarters of this year. The third and fourth quarters are for the new Government to decide, but in all realism one can confidently say that the 57th Government after the elections will be a continuation of today’s 56th Government which is in fact the continuation of the 55th headed by Mesut Yýlmaz and Bülent Ecevit.
Turkey’s political instability is on path of recovery
In other words, a chronic disease of Turkish politics - the frequent change of governments which, for its part, causes instability for the economy, is now on the path to a healthy recovery. The current Ecevit Government’s 5-6 months of lifespan means in practice a steady government policy for at least two years between June 1997 when it came to power under Mesut Yýlmaz’s premiership and June 1999 when the victors of the forthcoming elections will replace Ecevit. These victors may well be Ecevit himself and his partner Mesut Yýlmaz in whatever form of a coalition the polls ahead will dictate.
President Demirel stressed in a televised interview on the TRT on January 24th the importance of political stability for the future of Turkey in the new century. He said that 10 governments had come into office in Turkey since 1990. This means 10 governments in eight years, ie an outright lack of stability in politics causing disorders in the economy. Despite that Turkey averaged 5% economic growth a year, increased its exports from $16 billion to $28 billion and its electricity generation from 56 billion kWh to 110 kWh in this period. It is a great achievement, but Turkey’s achievements could have been more stunning if there had been more political stability and less strain of early elections at all times, he stressed.
Indeed, the worst impact of this “early election” atmosphere in Turkey was chronic inflation for the last 20 years. It was because the election atmosphere induced the previous Turkish Governments to follow populist economic policies just before the elections at the expense of the preceeding stability efforts exerted at great sacrifices. This was the case in the December 1995 elections and before. For instance, the Turkish nation put up with great sacrifices over the April 5th, 1994 economic stability parcel when the TL was devalued from TL16,000 to the dollar, to TL35,000-40,000, but just as it was about to reap the fruits of this austerity program the December 1995 early elections came and along with it populist policies which destroyed all the stability efforts.
This high inflation rate in Turkey has reached such dimensions of a chronic economic illness that the OECD has begun to single out Turkey in its inflation statistics. In a recent survey it published on its members’ inflation rates the OECD has declared Turkey the champion of inflation in the last 20 years. What is more this illness is deteriorating instead of recovering. According to this survey, Turkey’s average yearly inflation rate was 47.3% in the 1976-1985 period and it became 62.65% in the following decade, 1985-1994. The OECD’s averages in these periods were 10.1% and 6.1% with Turkey and 9.4% and 5.1% excluding Turkey, respectively. In a year up to November 1998 Turkey’s inflation rate was 72.8% as against 3.4% and 2% of the OECD’s with or without Turkey. These are consumer rates and the wholesale inflation rates of Turkey are somewhat better, but nowhere near OECD standards.
These figures, in themselves, are enough to explain the reasons for the IMF’s, the World Bank’s and the OECD’s insistence on Turkey to keep away from populist policies in pre-election periods.
No populist policies in the pre-election period
That is why the current talks with the IMF team headed by Martin Hardy are revolving around two main themes. One is that the Ecevit Government is not just a temporary caretaker government, but it has been ruling the country in partnership with ANAP for nearly two years now and that it stands the highest chance of being the ruling power after the elections. This is an argument used against the IMF’s intention to wait for the new government after the elections.
The second point is that, contrary to previous Turkish governments, it is not following populist policies and that the economic stability parcel of the 55th government, as well as the 18-month close watch arrangement it made with the IMF in July 1998 are still holding good.
The best proof of the continuation of these stability measures will be the inflation rates that are sure to go down. The 55th Government managed to lower the inflation rates from 99.1% in consumer prices and 91% in wholesale prices in 1997 to 69.7% and 54.3%, respectively, in 1998. As the 3-year stability program put into force at the beginning of 1998 foresees reducing wholesale prices to 50% at the end of 1998, this performance was a great achievement for the Yýlmaz-Ecevit coalition, especially given the fact that it was materialized during a politically instable period and a global financial crisis.
The inflation figures for January are not yet known, but when they are released on February 3rd it will be seen that the yearly inflation rate has gone down by 2-3 points to 67% or so for consumer and 52% or so for wholesale prices. This can be confidently said now because the monthly inflation rates were 7.2% and 6.5% respectively in January 1998. If they are cut down to half this month, and it is not too optimistic to expect this to happen, these figures appear for the year up to the end of January.
In February and March the inflation rates may go down less markedly, because they were not very high last year – 4.4% and 4.3% for consumer prices and 4.6% and 4% for wholesale prices. That is why for the inflation rates to go down in February and March the Government should manage to keep the inflation rates below 4% a month until the elections.
Not only the inflation rates, but other indicators of the economy also lived up to the targets of the 3-year stability program. For instance the 1998 budget foresaw TL3,900 trillion deficit and the actualization was smaller, TL3,690 trillion – TL11,887 trillion public revenue and TL15,577 trillion expenditure. On the dollar basis the budget deficit went down by 1.6%. Of the total public revenue 51.9% or TL6,177 trillion was debt interest payment. The budget surplus excluding the debt repayments was TL2,486 trillion compared to TL97.1 trillion in 1997.
The weak point of the Turkish economy – high interest rates
But despite this successful and faithful performance of the stability program in its first year there is one big weakness of the Turkish economy – about 140% compound interest rates for domestic borrowings. Interest rates at 140% when the inflation rates range between 55% and 70% is clearly exorbitant.
Interest rates have to be lowered at any expense if this stability program is to attain its goal. The Government did manage to reduce the interest rates steadily in the first half of last year and they were as low as 70% last July. But when the global financial crisis hit Russia after the Far East, $7 billion foreign capital left Turkey and interest rates soared back to the 140-150% level.
In the first four months of this year the Ecevit Government will repay $24 billion debts, but only $1.8 billion of it is external debt servicing. The rest is domestic debts. The economic stability program foresees repaying domestic debts with external financing so that the need for domestic borrowing and consequently interest rates go down. This principle worked in the first half of last year, but was reversed after the global crisis hit Russia and indirectly Turkey.
Despite everything, the Ecevit Government has managed to lower the interest rates by 14 points in January.
The average interest rates for the whole year in 1998 was 115.2%. They were 135.8% in September, 140.8% in October, 145% in November and 145.1% in December. In January they dropped to 131.9%. Lowering the average interest rates in treasury bonds was not the only achievement of the new Government. It also managed to stretch out the terms of domestic debts in four tenders for treasury bond sales in January. The average term for the borrowings in these four tenders was 382 days and it was the longest period in the last 19 months. The average borrowing period was 280 days in December and 239 days for the whole of 1998.
The Treasury started issuing two-year bonds in January and these bonds with quarterly interest payments both helped the extension of the borrowing period and also lowered the compound interest rates. At the latest tenders, the Treasury sold TL400.98 trillion bonds at 129.98% interest. The Government expects that this trend will continue with the lowering of the inflation rate in January.
Structural changes in the banking system to consolidate the system
As from Tuesday (February 2nd) the Government expects to pass the 1999 budget through the Budget Planning Committee in one day and through the House Floor within a week. Then it will exert efforts to legislate the Bank Bill in a short time before Parliament becomes inoperable with parliamentarians canvassing for the elections.
The opposition may try to forestall the Government’s plans to operate smoothly. President Demirel whispered in FP Chairman Recai Kutan’s ear when they were together at the airport for a State visit to Algeria last week, “Help the Government for the legislation of the Bank Bill.”
Meanwhile, the Government has prepared a parcel of measures to consolidate the banking system. This “Financial Sector Rehabilitation Parcel” was given the finishing touches at a meeting last week under Deputy PM Hikmet Uluđbay and Finance Minister Zekeriya Temizel. It provides for merging certain small and weak banks after nationalising them under Article 68 of the Bank Law, following the legislation of the new Bank Bill. The article in question stipulates that the Central Bank’s Saving Deposits Insurance Fund takes over the banks in distress.
The World Bank has promissed a SAL (Structural Adjustment Loan) of $300 million to $1 billion to support this scheme if the Bank Bill is legislated. The IMF has also tied its support to the Turkish economy to the urgent legislation of the Bank Bill.
A high-level economy bureaucrat said that international finance quarters were not adversely affected by the collapse of three small banks in Turkey recently because they expect that the new Bank Bill will be legislated quickly and save the small banks through mergers and other measures. “But if the Bank Bill is not legislated rapidly and the necessary measures are not taken in time the correspondent banks of several Turkish banks abroad may suspend these transactions and narrow their loan limits. It may give way to a big collapse in the banking system.”
The banking sector is under obligation to repay $7 billion short-term loans in 1999 and its “open position” at the end of 1998 was $7 billion, “open position” being the gap between a bank’s foreign exchange assets and liabilities.
Over $20 billion foreign exchange deposits and Turkey’s impeccable record in honouring its external debts during the global financial crisis are certainly big advantages in overcoming the current economic difficulties. Still the Government has to be very careful. It has to legislate the Bank Bill and the budget in the following few weeks. Failing to do that, the banking system may not collapse as some fear, but the nation may have to pay higher interest rates for external loans needed to check the inflation and to improve the economy. uras@ada.net.tr, January 30th, 1999