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Economic stability is top priority. First quarter is promising. Tax bill as new instrument to fight inflation, but foreign exchange reserves and consumption spree do not facilitate curbing inflation. Election economy will be avoided at any cost. Billion-dollar public works, energy, communication projects are underway. Privatization revenue helps investment enthusiasm. Development of East and Southeast enjoys high priority.

(In this article billion equals 1,000 million or 10 to the power of nine,

trillion equals 1,000,000 million or 10 to the power of twelve,

quadrillion equals 1,000,000,000 million or 10 to the power of fifteen,

the American way, not the old English one.)

At the beginning of the year, the government decided to establish economic targets on a quarterly basis and make them public so that comparisons could be made between the targets and the actuals without waiting for a year. PM Mesut Yılmaz said on Sunday, May 24^th, that this was necessary to regain the nation’s confidence and support in the government’s efforts for economic stability. Previous governments also had anti-inflationary targets, but they were never materialized due to the nation’s lack of confidence.

“We have been 100 per cent successful in realizing our targets in the first quarter, and even surpassed them in such areas as tax collection”, he said.

According to the information given by the Prime Minister, the program for the first quarter foresaw an 18% inflation rate, the lowest in the corresponding period of the last five years, and the actualization was even better, 15.9%. This achievement was despite the fact that the first quarter faced heavy debt servicing of domestic and external loans received last year and before.

The inflation rate for the second quarter is even more ambitious, 8%. Though April had an inflation rate of 4%, the Prime Minister is confident that they will live up to that objective by not exceeding 4% inflation in the following two months. The new and abundant crop in the spring will help the anti-inflationary efforts, he believes.

The government’s main instrument to curb inflation is budget discipline. According to PM Yılmaz, the previous government claimed to have a balanced budget last year, but in reality there were very big deficits. “When we came to office in the second half of the year we had to introduce an additional budget to cover these deficits. This year we drew up a sincere and realistic budget with a TL3.9 quadrillion deficit. We are keeping to its objectives and sometimes improve on budget estimates,” he said.

By passing the Tax Reform Bill with its 80 articles before the recess, the government will obtain an additional powerful instrument to fight inflation, believes the Prime Minister.

The main feature of this bill is to curb the so-called “unregistered economy” (also see The Backgrounder) and bring it within the jurisdiction of the tax system as registered economy. To this end, tax rates have been reduced to encourage tax registration. The tax rate of the lowest income bracket has been reduced from 25% to 15% and the highest bracket from 50% to 35-40%. Investments by high-income groups will be encouraged with these reductions in tax rates. “We cannot possibly continue as a country with 50% unregistered economy,” stresses Yılmaz.

The tax bill will also put an end to levying taxes in advance on the basis of the past year’s tax declarations. “It is not fair to levy taxes on unearned income. Such a practice exists nowhere in the world. Instead, we will levy taxes on a quarterly basis so that there is justice between levying taxes at source from wage earners and taxes paid with tax declarations,” he said.

Under this new bill, all economic transactions will be registered with symbolically low stamp duties and levies. The aim is not to collect fresh tax revenue, but to “register” the economy. Also, everyone will be allocated a tax number as is the case in the United States and this will greatly forestall tax evasion. With the help of the World Bank the Çiller government passed such a bill in 1995, but its implementation started only last year. The system has not yet settled, but the practice will gain momentum and this will be the biggest step in the right direction for harnessing any unregistered economy.

The Prime Minister believes that this Tax Bill is the biggest tax reform in Turkey for the last 30 years, since the Demirel government passed new fiscal rules in 1969. Another big tax bill was passed by the Özal government in 1984 when Turkey implemented the EU’s VAT (Value Added Tax) system, even before Greece did as a full member.

Another important instrument to fight inflation is the Wholesale Fruit and Vegetable Market Bill. The new system will encourage competition in this market and cut down high duties in these transactions, resulting in lower fresh fruit and vegetable prices for the consumer.

The Prime Minister believes that if these bills are passed, and budget discipline is resolutely observed, Turkey will be able to reduce the inflation rate to 50% at the end of this year and to the EU level (3% or so) at the end of three years. Whether or not his government is in office during this 3-year period, they would avoid the implementation of an election economy in Turkey for the success of this program, he said.

In previous economic stability efforts, Turkey’s biggest problem was the tight balance of payments. This time it is totally different. The foreign exchange reserves of the Central Bank rose from $16 bn to over $25 bn since his government took over 11 months ago and this trend will continue, stresses Yılmaz.

The reserves now stand at $26 billion and Economy Minister Güneş Taner said on May 29^th that it would be further increased by $10 billion by the end of the year.

While this record level of foreign exchange reserves are welcomed by almost everyone, some economists, namely a former Central Bank (CB) governor, Rüşdü Saraçoğlu, see it as a factor to harden the success of the anti-inflationary policy. Saraçoğlu explains:

The CB’s reserve money has gone up to TL1.5 quadrillion as a result of these foreign exchange purchases. Yet the reserve money objective of the CB within its program to fight inflation is TL450 trillion. In other words, there is more than a three times increase in the CB’s money supply on its estimate of the (money) demand. If the TL150 trillion decline in deposits in public sector banks is added to this TL1050 trillion excess in the money supply, the total sum needing sterilization reaches TL1.2 quadrillion. Instead of trying to reduce this sum, the CB is increasing it with its ever-enlarging foreign exchange purchases. Why?

“In my opinion,” says Saraçoğlu, “having dashed its hope that the government will achieve the structural reforms, the CB has pushed the anti-inflationary policy to the background and is now making preparations for a possible foreign exchange crisis. It’s exceedingly natural to do so.”

Another factor forestalling quick success in the anti-inflationary policy is the continuation of the high rate of economic growth and the boom in demand, despite the care taken by the Treasury and the CB to restrict the money supply. Following 7-8% economic growth a year in three successive years after 1994 this year will also see a similar growth rate, given the performance of the first five months. “The economy is growing by 8% this year too. Exports are rising by 6%. Increases in imports are continuing. The capacity utilization (of the manufacturing industry) is high. Inflation will continue with its monthly drop and become 50% at the end of the year. What’ll happen next year depends on the steps to be taken on social reform,” says Güneş Taner.

The other difficulty in the success to fight and cut down inflation is the boom in demand. The “consumption statistics for the first quarter” published by the SPO shows that there is a striking rise in consumption. Compared to a year before, sales of music sets rose by 176.2% in the first three months. This rate is 80.7% in glass products, 67.9% in buses and minibuses, 31.8% in tractors, 16.5% in cars, 27.5% in video sets, 26.6% in TV sets, 17.8% in washing machines, 9.5% in vacuum cleaners, 6% in refrigerators, and 8.9% each in cement and electricity. This boom in production and consumption is also a proof of the continuing heating up of the economy.

Even though the Central Bank’s first priority may be to avoid a potential foreign exchange crisis, as Saraçoğlu notes, theYılmaz government’s economic policy has the following main objectives:

The third item foresees $12 billion privatisation revenue this year. Even though it may prove too ambitious at the end of the year, the performance of the first quarter and the following two months has been a real success. The Prime Minister says that the $1.3 billion they earned from privatization in the first quarter is more than twice the amount earned from this source in the whole of the most successful year in the past. And this figure does not include the $1 billion earned from the privatization of mobile telephone licences and $625 million from İşbank in April and May.

It is also a fact that, partially thanks to this privatization revenue, the Yılmaz government has given a boost to big public works projects, particularly highways, energy and communication investments. “In Atatürk’s time the country was woven with a network of railways. In Menderes’s time the highways network was spread throughout the country. In Özal’s time motorways were introduced to Turkey. We will cover the entire country with a network of oil and natural gas pipelines. Already by increasing the natural gas through Bulgaria from 6 billion cubic meters to 8 billion first and then to 14 billion we have avoided an energy crisis this year” says Mesut Yılmaz.

The last item of economic objectives concerns the development of eastern and southeastern Anatolia where there has been a State of Emergency since August 1984. It figures high on the list of the government’s economic priorities and is especially necessary to restore political and social peace and quiet in the region now that PKK terrorism has been taken under control. Deputy Prime Minister Bülent Ecevit is particularly interested in this policy and intends to put into action this summer the plans already prepared for this purpose. The very generous business incentives announced by the Government to attract private enterprise into this region have already begun to show their impact on the economy of this region.

President Demirel revealed last week that 73% of the energy projects foreseen in GAP (Southern Anatolia Development Program) had already been achieved. It was an enormous success, but they had to find new financial resources to realize the other development projects of GAP, given the fact that of the $32 billion needed for the completion of the entire project only $12.8 billion had been spent so far, emphasized the President.