Turkey unveils austerity plan to tackle inflation

The number of new public sector employees will be limited for three years and only essential state investment projects will be developed 
El presidente de Turquía, Recep Tayyip Erdogan - PHOTO/FILE
Turkish President Recep Tayyip Erdogan - PHOTO/FILE
  1. Cuts in public administration 

Months after Turkey's local elections, Vice President Cevdet Yilmaz and Finance Minister Mehmet Simsek have unveiled a long-awaited austerity plan amid high inflation rates. 

In order to curb inflation and attract foreign investment, Turkey needs to maintain its fiscal reform and austerity measures in the public sector. Therefore, the austerity plan presented by Ankara envisages only essential state investment projects in the coming years.  

Priority will be given to planned initiatives in seismic zones, green and digital transformation plans and port-railway projects near industrial zones. 

PHOTO/REUTERS - Sede del Banco Central de Turquía se ve en Ankara, Turquía
Turkish Central Bank headquarters in Ankara - PHOTO/REUTERS 

However, experts are sceptical about the implementation of the measures, which they see as a goodwill gesture that falls short of expectations. 

In addition to symbolic measures such as reducing the number of unnecessary and luxury public vehicles or limiting the number of public sector employees, the focus is now on the direction and scope of a meaningful fiscal policy to curb inflationary pressures. 

Wolfango Piccoli, co-chairman of Teneo Intelligence in London - quoted by Arab News - believes the new measures are not a coherent way to strengthen the fiscal sphere, but rather a move to appease Turkish voters who are increasingly concerned about the rising cost of living

Istanbul, Turkey - PHOTO/FILE

"Moreover, previous similar initiatives have shown that implementing (and monitoring) austerity measures applied to Turkey's bloated state apparatus will be a challenge," he adds. 

Piccoli also explains that "some of the most striking measures, such as a freeze on the purchase and lease of new vehicles and a limit on the hiring of new staff, will have a limited impact on budget spending in 2024". 

The analyst believes that the measures are primarily aimed at achieving some control over public administration, but will not repair the deep economic damage caused by the economic policies of recent years. 

Market in Istanbul - PHOTO/FILE

The Eurasian country's annual inflation rate reached almost 70% last April, a figure that will continue to rise as the central bank's latest quarterly inflation report expects it to peak at between 75 and 76% next month. 

By the end of the year, however, the central bank expects inflation to fall to 38%. 

In contrast, a recent joint survey by Koc University and KONDA Research found that household inflation expectations for the end of the year rose to 96%, up from 72% in January. 

Moreover, in a departure from its traditional policy, the Turkish central bank has already raised its key interest rate by 4,150 basis points since last year. 

Cuts in public administration 

Under the austerity package, public institutions will be banned from buying and renting new vehicles and from purchasing or constructing new buildings for three years. 

The salaries of civil servants who sit on boards of directors will also be restricted, and activities such as trips, cocktail parties and dinners will not be organised except for international meetings and national holidays. 

After announcing these measures, Minister Simsek assured that the government would push for additional reforms to public finances and accelerate structural reforms. 

Turkey's annual inflation rate reached almost 70 percent last April - PHOTO/FILE

The number of new public sector employees will be limited for three years to those needed to replace retired workers, while funds for the purchase of goods and services by state institutions will be reduced by 10% and those for investments by 15%. 

Simsek, who travelled to the United States in April to meet with officials from the World Bank, the International Monetary Fund, the G20, as well as many fund managers, expressed confidence in the nation's improved credit rating, i.e. Turkey's ability to service its debt.  

"The continued decline in the annual current account deficit over the past eight months is a success of our programme," the Turkish minister noted, adding that with this decline and the positive outlook for external financial flows, "the improvement in foreign exchange reserves will be sustained".  

AFP/ADEM ALTAN - Banco Central de Turquía, en Ankara. El presidente turco, Recep Tayyip Erdogan, nombró al exejecutivo de Wall Street Hafize Gaye Erkan como gobernador del banco central el 9 de junio, lo que indica un posible cambio de sus políticas no convencionales para combatir la inflación galopante
Central Bank of Turkey - AFP/ADEM ALTAN 

The leader of the main opposition Republican People's Party (CHP), Ozgur Ozel, compared the new plan to an "IMF programme in disguise". 

Turkey posted a current account deficit of $4.5 billion in March. Since Simsek did not specify to what extent the austerity package would reduce the deficit in the 2024 budget, experts point to the impossibility of assessing performance. 

"At best, the measures are expected to lead to savings of between 100 billion and 150 billion Turkish liras ($3.1 billion to $4.65 billion)," Piccoli notes. 

He also stresses that the government's budget deficit for 2024 is approximately 2.4 trillion Turkish liras, so Simsek's austerity package "amounts to a rounding error".

Experts stress the need for a comprehensive and focused reform programme - PHOTO/FILE 

"It is not a coherent and credible austerity plan that supports the disinflation process. Even if 150 billion lira is saved, the budget deficit will be more than 6% of GDP in 2024," he added. 

Experts therefore stress the need for a comprehensive and focused reform programme with a clear timetable to build confidence in the recently announced measures. 

Selva Demiralp, professor of economics at Istanbul's Koc University, recalls the situation in the early 2000s, when Turkey faced another major economic crisis. 

REUTERS/Murad Sezer - Oficina de cambio de divisas en Estambul, Turquía
Foreign exchange office in Istanbul, Turkey - REUTERS/Murad Sezer

At that time, Kemal Dervis returned from the US to be appointed state minister in charge of the economy. He was sworn in on 13 March 2001 and subsequently announced the "Transition to a Strong Economy" programme on 14 April. 

"In that programme, measures were taken to increase transparency in government procurement, abolish incentives for areas of low productivity, broaden the tax base through the use of tax identification numbers and increase tax penalties," Demiralp tells Arab News.  

Demiralp believes that, with the new measures announced recently, "we see steps towards increasing tax penalties, which is a positive step". "Similarly, measures to reduce luxury spending in the public sector have symbolic value," he added. 

However, Demiralp pointed out that luxury spending constitutes a small proportion of the state budget. 

She says the main problem stems from non-transparent spending, "such as tenders and incentives in inefficient sectors". 

"We don't see any steps towards transparency in this regard. Academic studies by Turkish professor Ufuk Akcigit show that Turkey is one of the countries that offers the most incentives, but these incentives are not controlled or monitored," she says. 

Demiralp believes that reducing civil servants' salaries in real terms should not be part of austerity measures, but that the central bank should "do whatever it takes" to meet inflation targets, ensuring that employees are not negatively affected.