The financial turmoil precipitated by the rapid devaluation of the Turkish Lira against the U.S. dollar, and the ensuing (negative) economic ramifications since then have caused many to offer possible steps to be taken as ways out of the economic troubles now Turkey has been going through. In this respect, a recurrent suggestion has revolved around “more saving” and “less consumption.” Indeed, saving is a merit on its own and evokes giving up short-term wants and desires to reach long-term goals.

However, since the modern economic/financial system we live in is mind-bogglingly complex with numerous variables and very significant feedback mechanisms, it is critically important to take into account and ponder the possible economic consequences and ramifications of the economic steps taken. This situation holds particularly for saving, a “macro” variable resulting from general workings of the economy.

When considering saving subject, one should pay attention particularly to two things: feedback mechanisms and the relationship between saving and investment. Firstly, one should not forget that in modern economies people produce mainly not for personal consumption, but to sell the products in the “market.” So, more saving and less consumption of one person (buyer/consumer) translates into less products sold and less income earned for another person (producer/seller). So, trying to save more and consume less altogether on the part of consumers in a market economy have to result in slack demand, higher unemployment rate and (possibly) an economic recession.

This situation could easily and ironically result in “less” saving instead of more at the end of the day. This is the Keynesian “paradox of thrift” and it emanates from the “fallacy of composition” principle: being true at the individual level does not make it automatically true at the general level. If a person wants to increase his/her saving level, he/she could achieve this with spectacular success. However, if everyone strives to do this, then things will go awry.

Therefore, when facing economic difficulties as a country, the wise suggestion is not to save more, but to keep the consumption level the same. Economies are based on trust and expectations. An economic crisis could happen out of mere expectations, since people would decrease their consumption levels out of fears of uncertainty regarding the future trajectory of the economy. This is self-fulfilling prophecy.

Therefore, one should underscore not more saving or less consumption, but increasing the productivity level of the “consumption composition” when going through economic difficulties. It is not “more saving,” but “more productive consumption.” Actually, this fact is not known much: the amount of savings in a country is not determined simply by calculating the unspent part of the national income. There is no such calculation and there cannot be within the framework of current national income (GDP-Gross Domestic Product) calculation techniques.

There are three dimensions/sides of national income (GDP), which are production, income and consumption. And total production, total consumption and total income level in a given year in a closed economy must be equal to each other out of logical reasons and mathematical consistency. This is a hard fact regarding national income calculation techniques. Then, where does saving find a place in this story?

Here: national income could be and is split in two parts as “consumption expenditures” and “investment expenditures” and the latter is regarded and labeled as “saving.” That is, we infer the saving level from the investment level. This calculation technique, though indirect, is totally meaningful and understandable: any saving that is not turned into investment is a saving wasted.

Yes, not only in times of economic difficulties, but we always, as earth inhabitants, should avoid wasting resources. In order to achieve this, we need to strive for “more productive consumption” always. Within this framework, the current will of the Turkish government to curb unnecessary expenditures in public institutions is praise-worthy. However, the emergent monetary resources out of decreased expenditures should be channeled to more productive areas.

The public debt to GDP ratio in Turkey is just 28 percent, one of the lowest in the whole world. So, the Turkish government does not need to reduce its overall expenditure level. Hence, the savings to be achieved by, for example, decreasing the number of official cars had or leased by the government could be channeled to R&D (research and development) projects run by the government itself or the private sector. Turkey, on the one hand, could sustain the current level of economic activity and avoid an economic crisis, and on the other hand could feed the long-run economic momentum.

Turkey is tackling an economic turbulence driven mainly by massive speculative attacks on its currency (Turkish Lira). With all their efforts, the economic management team has been taking necessary steps to rebalance the Turkish economy. Two weeks ago the Central Bank of the Republic of Turkey (CBRT) raised the policy interest rate by 625 basis points, surprising financial markets that expected around a 400 basis points hike. The CBRT sent a strong signal that it will maintain a tight stance in monetary policy, ending futile discussions about central bank independence.

After this monetary policy decision, all economic agents held their breath on hearing about the path of fiscal policy that the government will follow in the medium term. The New Economic Program (NEP), which includes macroeconomic targets and fiscal policies to be implemented for the 2019-2021 period, was announced by the Minister of Treasury and Finance Berat Albayrak last Thursday. The initial reactions from the business sector and financial markets for the announced plan are positive, emphasizing that the NEP provides a consistent, realistic and remedial road map for the medium term.

The NEP clearly shows that the first priority of the government in the medium term is to re-balance the economy by slowing down inflation and the current account deficit. To achieve this, the government is determined to implement a more stringent fiscal policy than in the past years. Fiscal policy will be more coordinated with monetary policy over the next three years.

The government decided to reduce some public expenditure items, which are waste and not indispensable, and to collect more revenues from specific areas. These steps are expected to save 76 billion lira (around 12 billion dollars) in public finance. Expenditures on official cars, housing and social facilities will be cut down. Due to drying global liquidity conditions and high interest rates, investment projects for which tender processes have not been started or for which tender processes have been started but not finalized are planned to be suspended. The government targets to improve the tax collection process and widen the tax base.

All these policy actions will help reduce inflation and the current deficit to a certain extent. However, they will not be enough without more structural steps. So, the government needs to also focus on producing more structural solutions to problems. For example, as part of the comprehensive anti-inflationary program, the Product Monitoring Mechanism, in which price fluctuations in food products will be closely monitored by using big data and advanced analytical methods, will be implemented. To deal with the current account deficit in a sustainable way, industrial policies will become more selective, giving more weight to promising sectors, such as pharmaceuticals, petrochemicals, energy, machinery-equipment and software, in channeling public incentives.

By doing so, Turkey can increase value-added and productivity growth, reduce its dependency on imported high-tech intermediate goods and services, and increase its share of high-technology exports. This will help Turkey not only to keep its current account deficit under control, but also increase long-term economic growth.

Unfortunately, tight policies aimed at bringing the economy into a stable path again have some side effects. According to the NEP, Turkey will be highly likely to experience modest economic growth figures below its real potential and high unemployment rates. Weak domestic demand and investment conditions, caused by high interest rates, deterioration in expectations and the depreciation of the Turkish Lira, will cool down economic growth, and in turn increase unemployment rates.

It is important to note that switching to a tight fiscal stance does not mean that the public sector will be out of the economic equation. Turkey does not need to implement strict austerity measures, as the Southern European countries did during the global financial crisis. It needs to reduce redundant government expenditures and wipe out non-effective tax exceptions and other incentives. Thanks to its low level of public debt, the government has fiscal space to provide financial help to firms and industries that are productive and key for the future of the Turkish economy, while maintaining fiscal disciple (not allowing the public deficit-to-GDP ratio rise above 2 percent). For example, in his presentation, Albayrak clearly indicated that if needed, a comprehensive plan will be introduced to strengthen the capital structure of the banking system further and to provide external finance to the real economy at affordable rates. The Development Bank for Turkey will be restructured to offer new external financing opportunities to promising firms and sectors.

Yes, it is important to reveal such a program to improve perceptions regarding the stability and rationality of economic governance, but it is much more crucial to show the implementation of the program. The eyes of all economic agents will be on the implementation of this program. The progress made under this plan will be monitored in 3-month periods by the Public Finance Transformation and Change Office, a new governance establishment for budget discipline. If the NEP is implemented properly, it will not be a surprise for Turkey to regain macroeconomic stability and to grow again at a level close to its long-run potential.

The Turkish economy has proved its resilience again and again in the last decade. First, having endured a sizeable contraction of 4.8 percent in terms of GDP in the aftermath of the 2008 global financial crisis, the Turkish economy has expanded tremendously by 8.8 and 9.2 percent in 2010 and 2011 respectively. Second, starting from 2013, different terrorist organizations, namely FETO (Gulenist Terror Organization), PKK, Daesh and DHKP-C, one after another, so to speak, have waged war against Turkey. However, the Turkish economy managed to grow by 3.3 percent a year on average from 2012 to 2016. Although this growth performance is weaker than the long-term average growth rate (4.7 percent) for the last six decades in Turkey, it is still a considerable performance given the bleak performance of the world economy and particularly the struggling European economy, not to mention the extremely dire situation in Syria and Iraq. Third, Turkey suffered a hideous coup d’état attempt by FETO on July 15, 2016, only to be crumbled in the hands of the Turkish people. However, once again, the Turkish economy proved its robustness: There was hardly any panic in the financial markets, no negative impact on the real economy nor deterioration in consumer confidence. It was amazing that the economy of a country, which had just lived through a coup attempt, was running as if nothing particular happened. The Turkish economic growth rate is expected to be well over 7 percent in 2017, the very year right after the coup attempt.

After a brief period of “silence” after the coup attempt, all of the aforementioned terrorist organizations resumed their attacks against Turkey mostly in the form of bombings. In addition, “stranger things” began to occur in the financial markets as of November 2016. The Turkish lira started to lose value against the U.S. dollar in a very “strange” way. It is true that national currencies of almost all emerging countries lost value against the U.S. dollar in November 2016 after the election of Donald Trump as the next president of the U.S. and because of the growing expectations that Fed would raise policy interest rates in December, which duly materialized. However, the Turkish lira lost more value than that of most of the emerging countries in that month. This was strange as the Turkish economy and financial system have been in good shape, as has been proved in the last decade time and again, and which can easily be seen in the “important” ratios such as the public debt-to-GDP ratio, which is only 28 percent in Turkey. More, Turkey is among the most successful countries in the world in terms of public debt-to-GDP ratio.

However, this financial attack was only the beginning. After a relatively calm December with a 4 percent loss of value, the Turkish lira plunged in the first days of 2017 – it had declined by 10 percent against the U.S. dollar in November 2016. In the first days of 2017, as of 11 January, it lost its value by an additional 10 percent. However, in the following months, the Turkish lira appreciated against the U.S. dollar, gaining more than the ground lost in the second financial attack, only to be followed by yet another attack that occurred between September and November 2017, in which the Turkish lira depreciated by around 25 percent, losing almost all gains made in real terms after the second attack.

The financial attacks against the Turkish lira between November 2016 and November 2017 were truly extraordinary in the sense that such volatility did not happen in years, if not decades. Moreover, such volatility needs a very good explanation, only there was none. Hence why it was very understandable that both Turkish society and politicians thought that high volatility in Turkish lira had nothing to do with economic fundamentals.

Therefore, it is no surprise that there is a general sentiment within Turkish society that volatility in the Turkish lira has its roots not in economy, but in politics, and is an economic extension to the slow motion war against Turkey waged by “subcontractor” terrorist organizations.