Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive.
Prime Minister (PM) Erdogan disclosed a large stimulus package on Thursday. As is the norm for Turkish economists, comments on the package have covered the whole spectrum, all the way from declaring it a revolution to utterly useless.
The package is based on three pillars: Finance for small and medium-sized enterprises (SMEs), labor market measures and investment incentives. Of these, the first has been long in the making and is therefore not much of a surprise. It involves the setting of a credit guarantee fund with 1 billion liras from the Treasury, which will guarantee 65% of a loan, with the lending bank assuming the rest. However, the firms undertaking the scheme should have no overdue loans, so the program will not be a great help for those SMEs already in financial distress.
Temporary state employment for 120,000 forms the essence of the labor market measures. While the government will definitely do better than assigning half of these workers to digging holes and the rest to filling them, the caricature of such policies used during the Great Depression, one should nevertheless not expect a lot from this. On the downside, there is a real risk that these workers will stay on, especially if the government decides to go for snap elections. As for the other measures, most are unfortunately just rewrapping, i.e. policies that were already in place.
As for the new investment incentives, an overhaul of the outdated and inefficient Turkish incentives web has long been overdue. The announced steps, while far from perfect, are definitely a step in the right direction. Moreover, given the importance of private investment for growth in the medium-run, the idea does make sense. However the strains facing the corporates and the uncertain consumer demand are sure to put a break on the effectiveness of the program. In any case, with the time lag of new investment, the incentives are unlikely to boost the economy in the short-term anyway.
All in all, these measures are likely to support growth through domestic demand in the near term. However, I find it extremely disturbing that they were presented without the accompanying financing picture. In fact, we know neither how much these new measures will cost nor what, if anything, the government has in store for restoring the fiscal books. Such an approach not only bodes ill for fiscal transparency and predictability, but also runs the risk of losing any short-term gains of the measures in the medium-run. Even more worryingly, the PM’s answer to a question on financing hints that this is no inadvertent omission: “Do not worry, we will make all the payments”.
If that is indeed the case, no wonder the IMF is being kept off the table. But the government should know better: With this mindset, it will be only a matter of time before fiscal patching will start straining the private sector both through quantity (crowding out private sector) and price (higher interest rates) in a sense which would make the recent lending freeze and last week’s bond shakeup pale in comparison. The Central Bank could keep the dice rolling for some time with liquidity injections, technical rate cuts and the like, but without capital flows resuming, it doesn’t look pretty.
The government is continuing with its laundry list of measures rather than a comprehensive medium-term program or an IMF agreement. But then again, this has been its approach to the crisis from the very beginning: Throwing in anything but the kitchen sink without any sense of prioritization, impact analysis or a fiscal roadmap. If anything, no one can blame the government for inconsistency…
Prime Minister (PM) Erdogan disclosed a large stimulus package on Thursday. As is the norm for Turkish economists, comments on the package have covered the whole spectrum, all the way from declaring it a revolution to utterly useless.
The package is based on three pillars: Finance for small and medium-sized enterprises (SMEs), labor market measures and investment incentives. Of these, the first has been long in the making and is therefore not much of a surprise. It involves the setting of a credit guarantee fund with 1 billion liras from the Treasury, which will guarantee 65% of a loan, with the lending bank assuming the rest. However, the firms undertaking the scheme should have no overdue loans, so the program will not be a great help for those SMEs already in financial distress.
Temporary state employment for 120,000 forms the essence of the labor market measures. While the government will definitely do better than assigning half of these workers to digging holes and the rest to filling them, the caricature of such policies used during the Great Depression, one should nevertheless not expect a lot from this. On the downside, there is a real risk that these workers will stay on, especially if the government decides to go for snap elections. As for the other measures, most are unfortunately just rewrapping, i.e. policies that were already in place.
As for the new investment incentives, an overhaul of the outdated and inefficient Turkish incentives web has long been overdue. The announced steps, while far from perfect, are definitely a step in the right direction. Moreover, given the importance of private investment for growth in the medium-run, the idea does make sense. However the strains facing the corporates and the uncertain consumer demand are sure to put a break on the effectiveness of the program. In any case, with the time lag of new investment, the incentives are unlikely to boost the economy in the short-term anyway.
All in all, these measures are likely to support growth through domestic demand in the near term. However, I find it extremely disturbing that they were presented without the accompanying financing picture. In fact, we know neither how much these new measures will cost nor what, if anything, the government has in store for restoring the fiscal books. Such an approach not only bodes ill for fiscal transparency and predictability, but also runs the risk of losing any short-term gains of the measures in the medium-run. Even more worryingly, the PM’s answer to a question on financing hints that this is no inadvertent omission: “Do not worry, we will make all the payments”.
If that is indeed the case, no wonder the IMF is being kept off the table. But the government should know better: With this mindset, it will be only a matter of time before fiscal patching will start straining the private sector both through quantity (crowding out private sector) and price (higher interest rates) in a sense which would make the recent lending freeze and last week’s bond shakeup pale in comparison. The Central Bank could keep the dice rolling for some time with liquidity injections, technical rate cuts and the like, but without capital flows resuming, it doesn’t look pretty.
The government is continuing with its laundry list of measures rather than a comprehensive medium-term program or an IMF agreement. But then again, this has been its approach to the crisis from the very beginning: Throwing in anything but the kitchen sink without any sense of prioritization, impact analysis or a fiscal roadmap. If anything, no one can blame the government for inconsistency…
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