Reducing the Primary Surplus

Turkey

Economic News

22 Jul 2010
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The contents of Turkey's 2008 draft budget, which was submitted to parliament on October 17, triggered a largely positive response from local economists, with the primary surplus for 2008 lowered from previous years. Though not in keeping with the initial recommendations of the International Monetary Fund (IMF), with whom Turkey has a three-year $10bn stand-by agreement due to expire in May 2008, the Fund officially endorsed the released target.



The pursuit of its tight fiscal policy approach since first coming to power in November 2002 has allowed the Justice and Development Party (AKP) to consider reducing the budget surplus, with the 2008 budget targeting a primary surplus of 5.5% of gross national product (GNP) instead of the 6.5% of previous years initially recommended by the IMF. But Turkey is hardly resorting to a slack policy - as illustrated by IMF endorsement - with a 4.3% of GNP primary surplus expected by the end of this year.



On October 23, the IMF stated , "The mission (IMF office in Turkey)...supported the authorities' intention to target a public sector primary surplus of 5.5 percent of GNP in next year's budget. While welcoming the associated reduction in primary spending of three quarters of a percentage point of GNP relative to this year's expected outturn, the mission noted that adequate safeguards needed to be developed to ensure that the primary surplus target is achieved.''



Such safeguards include tax hikes, more effective tax collection and social security reform - all of which are at the top of the government's agenda. Turkey's Minister of State Mehmet Simsek and Minister of Finance Kemal Unakitan have committed to an overhaul of the social security system along with greater enforcement of rising tax evasion. Enhancing the auditing capacity of the Revenue Administration will be key in this regard. The privatisation of such entities as Halkbank, Turkey's electricity distribution and production units, sugar factories, highways and the remainder of Turk Telecom - of which 55% is owned by the Oger Telecoms Joint Venture Group - will also play an important role in increasing economic efficiency while injecting revenue into government coffers.



Both the Turkish government and the IMF agree that a reduction in the primary surplus should ease the public debt burden while allowing for a reduction in inflation and real interest rates, which in turn will provide the conditions for private-sector led growth. The government has made significant headway in decreasing its public debt.



"As a result of fiscal policy implementation, net public debt fell to 45 % of GNP in 2006 and is expected to fall below 40% of GNP this year," Simsek said at the 2007 annual IMF board of governors meeting in Washington earlier this month.



Analysts say that election-related government spending in the run up to the presidential and parliamentary votes helped account for the revision of the primary surplus. A 10% rise in spending is also on the cards next year, accompanied by economic growth of 5.5%, inflation at 4% and an ambitious spike in per capita income to $7000 from an estimated $5500 in 2007 through economic growth and investment. Public sector employees can also expect a 7.6% pay increase from the government.



Turkey's loan agreement with the IMF is in the meantime due to expire next May with a new agreement between the Fund and Turkish government yet to be revealed. An IMF mission is scheduled to arrive in Ankara in the coming days for discussions on the seventh review of the country's economic programme. Discussions between the government and the Fund were held in Ankara on October 8-17, with further talks held on October 18-22 in Washington during the annual meeting of the IMF and the World Bank.



The debt stock owed by Turkey to the IMF is currently $8bn, meaning that the government has no reason to create a new stand-by agreement with the IMF. Economists expect relations with the Fund to continue - considering the size of the current account deficit and public debt - albeit in a weaker form. At the end of 2006 the central government's total debt was $245.5bn, according to government figures. By the end of September 2007 the government's outstanding debt stood at $282bn. Turkey's state planning organisation expects Turkey's current account deficit to hit $36.4bn by year-end, with $39.2bn expected in 2008.



Positive projections on the economy cannot ignore significant risk factors. Noise from Ankara over the Kurdistan Workers' Party (PKK)'s continuous presence in northern Iraq and a potential incursion by the Turkish military followed by extended deployment could conceivably spoil investor appetite in the medium-term, increasing government military expenditure as well as reducing local demand and consumption. The shadow of the global credit crisis remains, even though Turkey has so far weathered the storm. In view of regional and global uncertainties, projections on Turkey's primary surplus may seem academic.

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