On Thursday, Treasury and Finance Minister Berat Albayrak unveiled Turkey’s new economic program.

The medium-term program announced is based on three fundamental pillars: stabilization, discipline, and transformation.

In announcing the program, Albayrak stated that the country will activate a comprehensive set of economic policies.

“A Public Finance Transformation Office has been established under the new economic program.”

“We will use all necessary policies and measures to overcome economic challenges.”

“We expect a stabilization process for next year and 2020, so the new economic program aims for 2.3 percent economic growth in 2019,” he added.

The minister also announced that the expected economic growth rate for this year is 3.8 percent.

“The country will set sustainable and healthy economic growth through strategies and measures as announced in the new program.

“We aim to reach 3.5 percent growth in 2020 and 5 percent by 2021,” he added.

The Turkish economy grew by 5.2 percent this April-June, preceded 7.3 percent in the first quarter of this year, 7.3 percent in October-December 2017, and 11.5 percent in the third quarter of last year.

Stabilization, discipline

Albayrak stated that, “Our major intention is to support a stabilization process with disciplined public finance.”

According to the new economic Medium-Term Program (MTP), Turkey is targeting a 1.9-percent budget-deficit-to-gross-domestic-product (GDP) ratio this year, and 1.7 percent in 2021.

“In order to maintain our strong stance in public finance, we have begun to take some measures to ensure the correct use of resources in the public sector starting today,” said Albayrak.

Turkey’s central government budget balance posted a deficit of 50.8 billion Turkish liras ($11.4 billion) this January to August. The country’s budget revenues totaled 485.7 billion Turkish liras ($109 billion) in the first eight months of this year, up nearly 19 percent year-on-year.

Last year, the budget deficit was 47.4 billion Turkish liras ($12.9 billion), totaling around 1.5 percent of the country’s GDP.

Transformation, employment

On transformation, Albayrak said that the main target is to focus on value-added areas which will boost the country’s export volume and long-term production capacity.

“You will see the most concrete example of this in investment projects that we will support,” he added.

In creating employment, Albayrak said Turkey will generate 2 million new jobs by the end of the MTP period, with an unemployment rate target of 10.8 percent in 2021.

As of June, Turkey’s unemployment rate was 10.2 percent — some 3.3 million unemployed people — while the number of people employed was 29.3 million.

Last year, the lowest unemployment rate was seen in May and June with 10.2 percent. Over the past five years, the highest unemployment rate was 13 percent in January 2017, while the lowest was in June 2013 with 8.1 percent.

Struggle with inflation

Albayrak said a specific program of total struggle against inflation would be announced soon.

“Regarding inflation, the Central Bank will continue to use all instruments independently in line with its price stability objective,” he said.

Turkey’s annual inflation was 17.90 percent in August, up from July’s figure of 15.85 percent.

Over the past five years, the annual inflation saw its lowest level at 6.13 percent in April 2013, while the figure reached its highest level last month.

According to the new MTP, the country’s inflation rate target is 20.8 percent this year, 15.9 percent next year, 9.8 percent in 2020, and 6.0 percent in 2021.

Current account deficit

Albayrak also noted that current account gap narrowed significantly this year with the backing of increasing tourism and export revenues.

Turkey’s exports from January to August amounted to $108.7 billion with a 5.3-percent rise year-on-year. As of August, the 12-month overall exports reached $162.4 billion.

In 2014, Turkey’s exports hit an all-time high of $157.6 billion while the figure was nearly $157 billion last year.

Over the past five years, the highest export-to-import ratio was recorded in 2016 with 71.8 percent, while the country’s foreign trade deficit has fallen from $99.8 billion in 2013 to $76.8 billion in 2017.

“Investments in pharmaceuticals, energy, petrochemicals, machinery and equipment, and software sectors will be prioritized in public incentive to reduce current account deficit,” Albayrak added.

The MTP is targeting current-account-deficit-to-GDP ratio of 4.7 percent this year, 3.3 percent next year, 2.7 percent in 2020, and 2.6 percent in 2021.

According to the Turkish Central Bank, Turkey’s current account deficit in July — $1.75 billion — showed an annual down of 62.8 percent, while the 12-month rolling deficit reached $54.6 billion as of July.

Turkey’s annual current account deficit in 2017 was around $47.5 billion — around 5.6 percent of the country’s GDP.

As noted in the new MTP, tourism services, including health tourism, will be diversified to increase tourism revenues, while the program aims to generate travel income of $42 billion in 2021.

In the first half of this year, over 17 million foreigners visited Turkey and spent some $11.5 billion. Last year, the country’s tourism income was some $26.2 billion while the number of visitors was 38.6 million.

The Turkish government introduced its Medium-Term Program (MTP) last week. In this program the government revealed its economic expectations and targets for the next three years. The program provides policy-relevant clues that the government will pursue to achieve its medium-term goals. Turkish Deputy Prime Minister Mehmet Şimsek announced that the main objective of the MTP is to achieve sustainable economic growth by maintaining macro-economic stability, rising the quality of human sources and expanding the labor force.

The MTP targeted a 5.5 percent growth for the period of 2018-2020.  Although the Turkish economy lost momentum last year due to dramatic events, including terrorist attacks and the failed coup attempt, the economy recovered quickly.  The Turkish economy grew by about 5.2 percent in the first half of this year, making Turkey the third fastest growing economy (after China and India) among G20 countries. Improved export performance and government incentives such as state-guaranteed loans and tax cuts were the key factors behind this success. While not accomplishing the desired level in some areas including machinery and equipment, the contribution of private investments to growth in the second quarter was also good news for the Turkish economy.

The overall economic performance in the first half of this year indicates that as long as internal and external risks are controlled to some extent, and the government maintains a business environment in which the private sector can see the future more clearly, the Turkish economy is ready to succeed. If the government provides mechanisms that reduce uncertainties and channels its incentives to productive investments and promising industries, economic growth figures will be close to the targeted rate. Of course, it should be noted that global liquidity and the performance of trade partners are also crucial for reaching the target.

The government’s actions in supporting the economy has inevitably increased the budget deficit. According to the MTP, the budget deficit as a share of GDP is expected to increase from 1.3 percent in 2016 to 2.4 percent in 2017. While the budget deficit is still below the 3 percent as required by the EU’s Maastricht criterion, the government insists on remaining strict about fiscal discipline, which is a key pillar of macroeconomic stability.  In order to ensure this stability, the government plans to reduce the budget deficit to 1.9 percent in 2018 by increasing taxes and cutting off some expenditure items.

According to announced plans, the government will increase the motor vehicle tax on passenger cars by 40 percent, the financial sector’s corporate tax rate by 2 percentage points and income tax in the third tax bracket by 3 percentage points. The government expects these measures to contribute TL 28 billion ($8 billion) to the budget, preventing the budget deficit ratio to reach 3 percent. Finance Minister Naci Ağbal announced that the government will allocate TL 8 billion of this revenue to defense spending in order to strengthen the military capacity in the face of recent geopolitical risks.

Although maintaining the fiscal discipline is important for the future of the Turkish economy, the government could have chosen to increase its tax revenues from other tax sources. Instead of increasing the motor vehicle tax, which is an indirect tax, the government could have increased direct taxes that are progressive and thus reduce income inequality.  More, increasing the income tax rate of the fourth bracket could have been more reasonable, instead of increasing the income tax rate of the third tax bracket.

Considering that the central bank will maintain a tight monetary stance until inflation outlooks improve, the government’s plan to tighten the budget could make it difficult to achieve the economic growth target. Therefore, it will not be surprising to see the government expand the budget to some extent in the near future.

Price stability is another key pillar of macroeconomic stability. Due to high food prices and the exchange rate pass-through effect, inflation has hit double digits (10.68 percent).  According to the MTP, inflation is expected to reside at 9.5 percent by the end of 2017. Target inflation rates for the next following years are 7 percent in 2018, 6 percent in 2019 and 5 percent in 2020. To curb inflation, the central bank has been implementing tight monetary policy for the last few quarters. Aside from a tight monetary policy, structural reforms that increase agricultural productivity, improve the agricultural supply chain, reduce the high dependency of Turkish manufacturing industries on foreign inputs and diversify domestic energy resources are needed in order to accommodate the inflation target. However, it should be underlined that there is a trade-off between economic growth and inflation; as the economy grows, inflation also tends to increase in Turkey. Therefore, it is relatively difficult to achieve both growth and inflation targets at the same time. Nevertheless, in this case the government is expected to give more priority to its growth target. The unemployment rate has also been moving along the double-digit path for a while.

As Şimşek underlined, although Turkey is creating a significant number of jobs every year, the unemployment rate remains high due to the un-parallel increase of participation into the labor force, especially from younger generations and women.  The unemployment rate, which is now 10.2 percent, is expected to decline gradually and fall to 9.6 percent in 2020. In order to decrease its unemployment level to an acceptable and desired percentage, the government needs to implement structural reforms in areas of education and labor market regulations. The government should also be more aggressive on business environment reforms that promote domestic private investments and revivify foreign direct investments.

It is always difficult to produce medium-term economic plans at a time when global uncertainties and geopolitical risks are high. Nowadays there are numerous external factors that affect economic equilibrium. However, since the global financial crisis, Turkey has proven on many occasions that, despite highly unpredictable factors and events, the country is capable of displaying a stronger-than-expected economic performance. What the government needs to do now is make this performance sustainable by using policy instruments with lowest opportunity costs. After a year of staggering political and social incidents, instilling confidence to economic agents is important. Accelerating economic growth will more effective in this respect. Therefore, it is reasonable for the government to prioritize economic growth in the next three years. In regards to inflation and unemployment, structural measures should be implemented without delay in this period.