MINI CRISIS BRINGS FOREIGN CAPITAL MOVEMENTS INTO FOCUS
Now that PM Mesut Yýlmaz’s three-party minority coalition is doing exactly that within an absolutely transparent program and doing it admittedly successfully, it is facing a serious problem threatening the very existence of the Government itself.
The smallest partner of the coalition, the DTP led by Hüsamettin Cindoruk, insists on a 40% rise in civil servants’ salaries in the second half of the year, but the Prime Minister backed up by his Deputy Bülent Ecevit’s DSP, does not want to budge an inch on its pledge of 20% to the IMF.
So seemingly a small difference of 20%, which can normally be bridged without much difficulty with the politicians’ well known legerdemain of statistics, is proving to be an unsurmountable hurdle threatening the smooth functioning of the Government. Yet another main feature of this Government is that as a shaky coalition of two right-wing parties and a leftist party, it has functioned surprisingly harmoniously for over a year now.
At the time of writing this article, it was still unknown how this deadlock would end up. The DTP will probably not go as far as leaving the coalition, but it has to show some action to its sympathizers to save face. The DTP ministers may reject signing some decrees such as the relevent decree for salary increases, but the Government is sure to survive for another five months or so even if the DTP quits the coalition, unless the coalition parties themselves decide on an earlier election in November, as Ecevit is now considering.
The DTP maintains that the pay rise concerns 8,150,000 civil servants and pensioners who are hard up in view of the inflation and that the difference of 20% would not cost the budget more than TL250-300 trillion. In such a big budget that is doing better than the estimates, it would not be difficult to find this sum without harming the disinflation policy.
Budget is already strained over 20% pay rise
There is certainly great truth in what the DTP says, but close scrutiny of the budget shows that the resources have already been strained by the Finance Ministry in order to accord a 20% pay rise. There is not much room to make transfers in the budget without upsetting the macro balances or passing an additional budget. The Prime Minister is, on the other hand, on the record not to pass an additional budget this year. He knows full well that not only himself, but the whole of Turkey is under a magnifying glass to see how credible the current disinflation policy is.
This fact is one of the most imortant factors preventing the Prime Minister from being flexibile on this issue, especially given the fact that the psychological aspect of the disinflation efforts is most important for success.
But there are other reasons concerning the budget figures.
- The Budget has TL3.5 quadrillion approriations for personnel expenditure and in the first half, 56% of it, ie TL1.9 quadrillion has already been spent. For that reason, the Government was able to increase the salaries by 5% only in the second half. To be able to accord a 20% rise the possibilities of the budget have already been strained and the TL350 trillion reserve appropriations were allotted to it.
- There is a TL450 trillion surplus in the budget revenue and it is possible to use it for salary increases, but it requires passing an additional budget and PM Yýlmaz is on the record and under the pledge to the IMF that he will not pass an additional budget this year. Besides, interest payments have surpassed the estimated figures by TL200-250 trillion and this surplus may be used for that purpose, but that also requires an additional budget.
- The additional burden of TL300-375 trillion for exceeding the 20% limit is possible by obtaining this sum through domestic borrowing, but it clashes with the principle of increasing the budget revenue excluding interest payments so that the inflation will be pulled down.
- Efforts are focused on transfers within the budget from such items as the social security subsidies, which may have some surplus, or using the income from privatization for this purpose.
- Another possibility is increasing the lower income brackets at higher rates and keeping it low for high-level civil servants.
- The Prime Minister says that in the first half of this year they accorded a 30% increase to civil servants and the inflation rate was 26.4%. The 20% increase in the second half will further increase by 5%, with a 10% reduction in tax rates when they go into force as from July 1st, upon the legislation of the new tax reform bill soon. If the inflation rate is not reduced to 50% by the end of the year, an additional increase may be made to the salaries in October.
- To prove its sincerity and determination about curbing inflation, the Government has announced low rates of increase for new farm products. Raisin prices were increased by 60%, grape prices were going up from TL30,000 to TL48,000 and aniseed prices by 50%.
Impact of the mini-government crisis on the economy
The political aspect of the mini-government crisis between PM Yýlmaz and Hüsamettin Cindoruk is not very important because even if it ends up with the DTP’s withdrawal from the coalition, it will keep on supporting the Government from outside as the CHP is doing.
Unfortunately, the impact of the crisis was more telling on the fragile economy, and on July 10th the interest rates for 9-month Treasury bonds went up by 2-3 points. It is continuing to rise a few points more, after having reached the record low of 70.72% before the three political party leaders announced on Friday that they had not reached an agreement.
It was too late for the Stock Exchange to be influenced by this announcement on Friday, but the negative impact was seen on Monday when the Istanbul Stock Exchange went down by 120 points in one day. This drop may continue, along with the rise of interest rates, if the dispute prolongs in the coalition.
Foreign speculators’ ill-effects on the Stock Exchange is under review.
It is a world phenomena that an unfavourable development, let alone a crisis, in politics anywhere in the world makes an out-of-proportion ill-effect on the bourse. But this impact is much more prominent in the emerging economies such as Turkey and the “tigers” of Asia.
The recent mini crisis of the Government revealed new evidence of this fact and brought into focus falling shares despite sound economic fundamentals.
Shortly before the IMF agreement was concluded the compound interest rates were falling sharply from 125-130% toward 70%. The dollar or gold were not appreciating fast and the money had nowhere to go other the the Stock Exchange, but still share prices were falling.
The scrutiny of the “why”, “who” and “how” of this strange development that is diametrically opposed to the basic rules of the science of economy showed that foreign capital was constantly selling shares and bonds.
While foreign capital accounted for 55% of the Istanbul Stock Exchange at the beginning of May, this rate fell to 45.95% at the end of last week with net sales of some $350 million of shares by foreign speculators like Soros. It has now come to a halt, but the dangers of such foreign speculations are self-evident for any developing economy and even the most developed nations like Japan can suffer from it if timely measures are not taken against it.
That is why, in the light of the Asian crisis experience, measures are envisaged for monitoring and regulating international capital movements just as there are such rules for international commodity and labour movements.
In 1989 the Turkish economy boomed when enormous foreign capital was poured into the country upon liberalizing international capital movements. But when the same foreign capital moved out of the country in 1991 it caused a rapid contraction in the market and the economy.
Foreign capital arrivals enliven emerging economies. They also cause high sterilization costs. In other words, to prevent an inflationary impact on foreign capital arrivals the Central Banks buy these foreign exchanges through minted local currency and bonds sales, but this causes the interest rates to go up.
The tight monetary, financial and foreign exchange policies the Turkish Treasury and Central Bank are now enforcing are aimed at controlling, but not restricting, these foreign capital movements. Taxing and imposing time restrictions on foreign capital arrivals in Turkey are among the measures envisaged in this respect. All these steps are being taken with the utmost care
so that foreign capital will not be discouraged from coming into Turkey, but once it arrives it should not be able to rock the economy by an arbitrary massive exodus at critical times of the country.
Despite enormous problems encountered in the Turkish economy in recent years because of foreign capital manipulations, it is a fact that Turkey has been one of the most resilient emerging economies of the world to survive and stand on its feet by itself. New measures and economic stability programs in force will reinforce this resilience in future years. uras@ada.net.tr.