The State Statistics Institute (DIE) released March inflation figures on April 3rd that indicate some progress in Turkey’s battle against inflation. Consumer prices (CPI) rose 1.2% against market expectations of 2.5%, while wholesale prices (WPI) rose 1.9% against expectations of 2.6%. Analysts have reacted favourably to the announcement, and the Istanbul Stock Exchange's 100 Index was boosted some 4.5% on the news. Other commentators are concerned, however, that low price rises simply indicate a lack of economic growth. A further report from the DIE last week indicated that Turkey's GNP had contracted by 9.4% in 2001, rather worse than the 8.5% most economist had estimated, but the general expectation remained that the central bank would lower interest rates anyhow. It did so on April 8th, bringing rates down by three percentage points. All the same, the real indication of economic recovery - economic growth - has yet to be detected, although officials remain optimistic. The government is continuing with its push to implement IMF-required reforms to help bring the economy back on track, but faces some resistance.
The March inflation figures compare relatively favourably with March 2001 figures - the first monthly data after the Turkish government abandoned the currency peg and was forced to float the Turkish Lira - when the CPI and WPI were 6.1% and 10.1%, respectively. Thus, this year’s March figures significantly decreased year-on-year inflation to 65.1% for CPI and 77.5% for WPI, compared with 73.1% and 91.8% respectively, and accumulated inflation in the first quarter of 2002 was 8.4% and 8.8%. However, a breakdown of wholesale prices reveals that one of the central indicators of inflation - private sector manufacturing - increased to 1.3% from February’s 0.7%. Analysts point to a relatively strong lira, low domestic demand and controlled rises in prices in the public sector for the inflation decrease.
Minister of Economy Kemal Dervis applauded the CPI figure as the lowest in 15 years and the WPI as the lowest in 21 years, a good sign that Turkey can meet a year-end target of a 35% CPI set by the austerity and structural reform programme backed by the IMF. Furthermore, he stated that since there was relatively low market pressure, inflation expectations will continue downward. Analysts agree that Turkey will be very close to government annual inflation targets, although few believe that the target will actually be met. Seasonal changes are expected to further lower inflation in the coming months, as well as low domestic demand and a stronger Turkish Lira. "Inflation can be beaten if we don’t make any mistakes", Dervis said.
While indicating a downward trend in inflation, economic stagnation persists. Figures released last week by the State Institute of Statistics stated that Turkey’s GNP shrank by 9.4% last year, the worst since World War II. Per capita income decreased by 37.2% to $2160 from $2967 in 2000. Analysts do not expect positive growth until the latter half of 2002. Furthermore, the Institute stated that Turkey’s average annual income growth in the last five years was 1.76%, lagging behind the annual average growth of population of 1.8%, a negative indicator for the future. Moreover, the economic contraction, while expected, was higher than the level foreseen by Turkey and the IMF’s plan. The IMF delegation that recently visited Turkey stated that there was little sign that economic indicators supported Turkey’s targeted 3% growth for 2002, but remained hopeful that it would be attained.
Despite a considerable debt and high real interest rates, Dervis recently said he believes that growth of 4% is possible, and that number could increase up to 6% if more foreign investment is attracted to Turkey. Although admittedly difficult to decrease real interest rates to single digit percentages, Dervis stated that as long as real interest rates are ahead of the growth rate, the deficit can be fed with the primary surplus, which the IMF programme estimates should be 6.5% of GNP this year.
Investors then waited for an announcement from the central bank about interest rate cuts. The central bank had cut interest rates twice over the past two months because of downward pulling inflation indicators. "This time we are now expecting a larger rate cut as high as 400 base points," said Finansinvest economist Ahmet Orhun Akarli last week. All the same, Central Bank Governor Surreya Serdengecti said on April 5th that interest rate decreases would not be "immediate".
But on April 8th the interest rates came down as expected, by three percentage points across the board. The overnight borrowing rate dipped to 51% from 54%, and the corresponding lending rate to 58% from 61%. The weekly interest rate for central bank borrowing also came down three points to 52%. The accompanying central bank statement said that strict implementation of the economic programme would reduce inflationary pressures.
Ajay Chhibber, the World Bank Turkey Director, said that the World Bank was poised to help, with Turkish officials expecting the Bank to provide around $5bn over the next three years. He also stated that politics should not affect the restructuring programmes. Last week, Prime Minister Ecevit caustically criticised IMF-backed regulators because he believed that they, along with the state banks, the central bank and other state institutions, had too much autonomy. IMF-backed regulators include the central bank, BDDK, Telecommunications Board and Energy Market Board. A proposed draft law due in Parliament on April 5th was set to curb that power, but Dervis commented on April 3rd that he expected the letter to be diffused in Parliament.
Established under the IMF-backed economic programme, the regulators’ autonomy is critical to Turkey’s loans. Any violation of their independence could result in a cancellation of the billions promised to Turkey. The regulators specifically target government waste in the agriculture, banking, energy and communications sectors. The draft law, which states that individual ministries rather than the full cabinet can appoint regulators, raises concerns over political motivations for post assignments. The bill originally sought to curb the president’s and prime minister’s powers on some appointments, thereby empowering individual ministers. Though it does not specifically mention the appointment of regulators, it also does not intentionally exclude them either. The draft law corresponds with Ecevit’s intentions, but it is likely to be defeated in Parliament as the three party coalition that is opposed to it constitutes 335 votes of the 550 seat Parliament.