OBG Talks to Economy Minister Masum Turker

Turkey

Economic News

22 Jul 2010
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The following interview with Economy Minister Masum Turker appears in the current edition of Emerging Turkey 2003, which has just been released internationally. To order the book call +90 212 677 0580/81 or +44 207 403 7213, or visit our website, www.oxfordbusinessgroup.com.



PRESIDING OVER PROGRESS



OBG: The second quarter results for economic growth were exceptionally high, as were the growth rates for the quarterly industrial production index. Do you find these results to indicate that the economic crisis is over? Or do you believe, particularly with respect to the national accounts, that high second quarter growth was more a reflection of the extremely low level of the base period (second quarter of 2001) against which the recent figures were measured?



TURKER: Upward movement in the business cycle starting with the first quarter of 2002 is expected to continue over the rest of the year, as evidenced by rises in the industrial production index. In the second quarter of 2002 GDP grew at a rate of 8.2% compared to the same period of 2001, while the GNP recorded an increase of 8.8% in the same period. Seasonally adjusted GDP and GNP grew by 0.5% and 1.7%, respectively, quarter-on-quarter in the first six months of 2002. As in the first quarter, the main reason behind growth in the second quarter was the inventory build-up, which contributed 10.0% to GDP growth and also the strong external demand.



From the supply side, the developments in the components of GNP indicated that the leading factor that contributed to the upturn of GNP in the second quarter of 2002 was the 12.2% rise of industry value added, which has a share of 32.9%. The improvement in the industrial sector production arises mostly from the strong stance of the manufacturing industry. Also, the services sector, which has a 58.4% share of GDP, grew by 7% in the second quarter of 2002, compared to the same period of 2001. On the demand side of the economy, while the increase in private consumption remains at 3.1% in the second quarter of 2002, there seems to be an improvement compared to the first quarter.



After a serious contraction in 2001, it is inevitable to record growth rates without the base effect. However, the monthly indicators of industrial production index, the capacity utilization rates and exports indicate an increasing pattern. The long-run potential output is expected to be met by 2003.



In the coming quarters there might be a slowdown in stock-building, but we expect the external demand to be strong. Also, we expect the agricultural sector to perform better in the second half of 2002, as base effects and production cycles become favourable this year. An economic recovery at a rate which will probably be over the targeted rate will be achievable in 2002 through various challenges of lower inflation, a stable exchange rate and interest rates, continued progress in financial sector restructuring and improved market confidence, all of which will stimulate domestic demand by boosting real income and wealth, further boosting private consumption.



OBG: Inflation figures through August were likewise promising. Turkey seems to be winning this year’s battle against inflation. Will decelerating inflation from 35% at end-2002 to 20% at end-2003 prove more difficult? Do your preparations for that task include measures in addition to the approach you have been pursuing throughout 2002?



TURKER: The downward trend in inflation in 2002 can be attributed to the limitation of the monetary expansion, strict adherence to the monetary programme, elimination of backward indexation in wages in the public sector, the strengthening of the Turkish Lira between November 2001 and May 2002, and slow domestic demand, particularly at the beginning of the year. With the help of improved business sentiment, inflationary expectations diminished, which eased the "inertial behaviour" as one of the main dynamics of inflation in Turkey. Taking also into consideration the budgetary performance, it can be concluded that the year-end inflation targets should be achievable without difficulty, unless an unpredictable external shock appears.



We are pursuing a stabilisation programme for the period of 2002-2004 with the support of the International Monetary Fund (IMF). Within that programme, policies to bring down inflation at first to 35% in 2002, then to 20% in 2003 and to one digit levels in 2004 are very well defined. The inflation targets are set together with the Central Bank of the Republic of Turkey (CBRT) and the government. Therefore, fiscal and monetary policies are well designed to work harmoniously. For now, the year 2003 budget is being prepared in accordance with the 2003 growth and inflation projections. The administrative price adjustments for the year 2003 are planned in accordance with inflation projections. Monetary policy is also set in line with the 20% inflation projection for next year.



OBG: Will an inflation-targeting model be implemented before the end of the year, as promised in the July 30, 2002 letter of intent? Does it concern you that only one country (Mexico) has ever successfully begun an inflation-targeting model with an inflation rate as high as Turkey’s?



TURKER: The CBRT is now independent, and its major aim is to achieve price stability. As of now, the CBRT is able to identify and conduct its policies together with the full support of the government. It has the necessary tools, mainly through interest rates, to intervene in the markets when it becomes necessary and has been quite successful in 2002. Technical preparations under the CBRT have been completed to switch to an official inflation targeting policy. The CBRT has been implicitly pursuing inflation targeting since the beginning of the program. It has been following some intermediate targets such as Monetary Base, Net Domestic Assets and Net International Reserves successfully. Thus far, the CBRT has made some efforts to achieve credibility by attaining the mentioned quantitative objectives and communicating with the public about the policy outcomes. The CBRT also has made efforts to improve its communication mechanisms for transparency. Thus, the CBRT officially will start inflation targeting as soon as the appropriate political and economical conditions are formed.



It is clear that starting inflation targeting with low levels of inflation rate is advantageous. However, some academic studies indicate that inflation targeting helps both reducing the rate of inflation and the inflation expectations compared to pre-inflation targeting periods. There are successful country examples of switching to inflation targeting policy with double-digit inflation, such as Chile and Israel. Also, the CBRT might be in a better position than the Bank of England and Central Bank of Israel were ahead of those countries’ inflation targeting programmes.



The CBRT and the government is dedicated to break this inertia and bring down inflation. The pass-trough mechanism in inflation has been easing in recent periods. Together with efforts to establish forward indexation policies in all sectors of the economy and the continuation of successful monetary and fiscal policies it is expected that this inertial structure will be broken and the future targets will be achieved without difficulty.



OBG: Interest expenditures in the consolidated government budget exceeded tax revenues in 2001. This was the first time that the primary source of revenues fell short of satisfying payments on interest. This was an alarming development, despite the ongoing improvements in the primary surplus. Did this prompt the government to devise and implement new measures to increase tax revenues?



TURKER: A rise in interest rates and shortening the maturity of the government securities during the financial crises of 2001 led to huge interest burden on the 2001 budget. With the Transition Programme for the Strengthening of the Turkish Economy, the implementation process of measures towards fiscal discipline and structural adjustment policies have been accelerated to reduce the budget deficit and debt stock in a short period of time. In 2001, in order to meet immediate needs arising from the crises, some precautions had been taken to raise tax revenues. On the other hand, rather than short- term measures to increase tax rates and expand tax revenue, our aim is to broaden the tax base and simplify the system, as well as to constitute a more efficient administration.



Also with the existing programme, the tax burdens on corporate earnings are scheduled to be reduced. In this process, exemptions and allowances will be brought down to a minimum level and withholding tax on corporate earnings will be redefined. Moreover, the tax exemptions on investment will be simplified in order to encourage entrepreneurship.



To achieve the goals I mentioned, the government has initiated a number of efforts, including modernising the Finance Ministry’s General Directorate of Revenues, introducing regional tax collection offices, automating of a considerable number of tax offices, simplifying the tax declaration system, reducing the tax burden on corporate earnings, introducing Tax Identification Numbers (TIN), strengthening tax policy capabilities, establishing an institutionalised auditing system; and introducing a Special Consumption Tax (SCT) in line with the European Union’s indirect tax legislation.



OBG: Does the current election environment hamper your efforts toward satisfying performance criteria and structural benchmarks with respect to the stand-by arrangement with the IMF? Do you foresee any delays or deficiencies in this respect? If so, in which areas?



TURKER: Our performance criteria have been met and delays related to the performance criteria and structural benchmarks are not expected. The current election environment is not going to have an impact on the fulfilment of our commitment, since most of the structural benchmarks and performance criteria are related to bureaucratic efforts rather than the efficient functioning of the parliament. In addition to this, coalition leaders of the ruling government declared their support for the program and stated that the programme will be implemented in line with the agenda.

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