Government’s lost credibility blights economic prospect

When the world tipped deeper into recession on September 11 it found that Turkey was already there deep down in the hole – a recession veteran. Assisted by the IMF, Turkey has been trying since 1999 to overcome its worst economic crisis since the Second World War. It has had little success. Its support for the US means more funding is likely, but funding alone can’t solve Turkey’s problems.

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Bulent Ecevit

The September 11 assaults on the World Trade Centre and the Pentagon were a major blow to Turkey because they worsened the international background. The two comparative bright spots of the Turkish economy, tourism and exports, both took a battering. Lenders' heightened aversion to emerging markets forced the state treasury to scale back plans to borrow $1.5 billion by the year-end from the international market. Privatization plans were shelved indefinitely.
On the other hand, the US response to the September 11 events will have improved Turkey's chances of getting new help from the west. The Bush administration indicated that countries that offered help to the US in its war against terrorism were likely to receive help in return. Since Turkey - Nato's only Muslim member - is historically one of the US's staunchest allies, Ankara is virtually assured of a positive response to its application for additional IMF funding.
IMF managing director Horst Köhler said he had agreed "with the United States that we need to closely monitor the situation [in Turkey] and discuss what could be done if things get worse."
The IMF is not likely to abandon its carrot-and-stick approach of cash against reform and will probably wait until the 2002 budget is passed by parliament before committing the new cash. This will happen some time in December. The market expects Turkey - which is already the IMF's biggest debtor - to get around $9 billion. This would go a long way towards alleviating concerns about the government's ability to finance its debt burden in 2002. Some economists believe that without a new cash injection, servicing the $110 billion debt might be impossible.

But what will this money achieve? Can the additional financing get Turkey out of continuous crisis mode? Prime minister Bulent Ecevit's three-party coalition has fulfilled many of the conditions attached to the $15.7 billion IMF agreement and enacted many fundamental reforms. Budget performance has been on track to meet the year-end targets and all of the monetary performance criteria have been met.
But reaching these benchmarks has done virtually nothing to reverse economic decline. The economy is expected to contract by 8% by the end of the year. Investors have no confidence in either the government, the programme or the Turkish lira. A cartoon by Salih Memecan in the weekly news magazine Aktuel summed up what Turks think of Ecevit as an economic manager. Under the headline "President Bush decides to destroy Afghan economy" the cartoon shows Ecevit being parachuted from a US aircraft over Afghanistan. As he descends, the Taliban look up in abject horror.
The lira has lost 60% of its value in eight months since the free float in February and interest rates are still as high as 90%. Interest rates at this level are unsustainable. They reflect a lack of confidence on the part of investors and the public in general. This is rooted in lack of trust in the government and the political establishment, which is perceived to have brought about the recession through its greed and corruption. Highly publicized financial scandals have demolished the standing of the political establishment in the eyes of the public. Since the collapse of the initial programme in February the recovery effort has been plagued by the public's fear that political problems might undermine the economic programme.
By year-end the domestic debt stock is expected to be 60% of GNP, double the level of the previous year. Interest payments already exceed 100% of tax revenues and will increase further next year. With average maturity at around eight months the treasury is under constant rollover pressure.
The government has lost popular support and the likelihood of an early election has increased. According to a recent public opinion survey by Anar, an Ankara-based company, more than 88% of those polled find the government's economic performance unsuccessful.
If an election were to be held, none of the three parties in Ecevit's coalition would garner the minimum 10% of the vote required to gain seats in the assembly. Indeed their combined votes at 11.7% would just about be sufficient to go over the electoral hurdle.
Economy minister Kemal Dervis has also lost support, although he is still regarded by the outside world as the only efficient and trustworthy politician who understands both Turkish and international realities. The Anar poll shows that between July and September Dervis's approval rating dropped to 23.3 from 42.6. Less than one-third of the population now has faith in his policies.
The war in Afghanistan is going to grind the government down further. Ecevit has decided to give the US full support. But Anar says that while 78% of Turkey's population (of which 99.5% is Muslim) disapproved of the terrorist attacks on the US, two out of three are opposed to the Turkish government's support of the American bombardment of Afghanistan.
Turkey's economic problems are of its own making, an accumulation of years of bad government and corruption. Both bad government and corruption still prevail. It is probably this, more than anything else, that is preventing the IMF programme from achieving results.
It is possible to argue that no amount of money can put Turkey on the track to recovery unless there is a dramatic change in the political establishment, which has been running Turkey under different guises since the republic was established in 1923.
"We reiterate our long stand recommendation to stay clear of the Turkish market," comments a JPMorgan report dryly. It is not difficult to understand why.

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