After 'wasted year,' Turkey turns attention back to economic reform

By Selcuk Gokoluk Reuters Published: January 3, 2008

ANKARA: Turkey hopes to increase its growth rate while reining in inflation in 2008, but economists say that the government's plans are insufficient during a time of tighter credit in global markets.
As part of its plan, the government led by Prime Minister Recep Tayyip Erdogan has vowed to raise the retirement age, shake up the labor market and increase aid for research and development. But such changes will have a positive fiscal effect on a slowing economy only in the long term, according to some analysts.
Drought, high energy prices and political wrangling prior to parliamentary elections in July - won again by Erdogan's pro-business AK Party - trimmed the growth rate for Turkey's gross national product to just 2 percent in the third quarter. Economic growth averaged a gung-ho 7.4 percent in the years 2002 to 2006, but was expected to come in well below that for 2007.
"Growth will be the most important economic indicator in the next five years instead of public finances," said Pelin Yenigun Dilek, chief economist at Garanti Bank, a midsize Turkish bank. "Growth of 4 percent will worsen unemployment and stoke social and even ethnic tensions."
Turkey needs to keep creating jobs for a fast-growing, young population. Its big cities are also surrounded by large shanty towns occupied by rural migrants, often from the impoverished, mainly Kurdish southeast.
Faruk Celik, the labor and social security minister, recently called 2007 a "wasted year" because of political opposition that stalled much of the government's agenda in Parliament.
At the same time, inflation for the year came in at 8.39 percent - double the target set by the central bank, which cut rates four times since September to try to head off a slowdown amid global economic turbulence.
The government is expecting a 5 percent growth rate for GNP for 2007 and has set a 5.5 percent target for GNP growth in 2008, and is counting on pushing through its legislative agenda to underpin that target.
The draft bills are still in Parliament and subject to change, but they currently call for gradually raising the country's retirement age to 68. Now there is no standard age, but it can be as low as 40.
The government proposals include a program of general health care for all citizens to help head off protests. It also plans to cut social security contributions paid by employers as a way to encourage hiring.
The economy minister, Mehmet Simsek, also is planning to accelerate the pace of privatizations during 2008 and 2009, aiming to sell enterprises like Halkbank, the cigarette company Tekel, and energy production and distribution companies as well as highways and bridges.
Business groups and economists are not entirely convinced about the efficacy of long-term, gradual transitions.
"This is a 15-year plan and it will not have a serious positive impact in the short term," said Gulay Elif Girgin, an economist at Oyak Investment, a unit of Oyak Bank. "General health insurance will create an extra burden on the budget in the coming three to five years."
Business groups also fret that the deterioration in economic indicators might worsen as global liquidity becomes more scarce.
"Improvements in inflation, the budget deficit, the current account deficit and debt dynamics have stopped," Erdal Karamercan, a member of the leading Turkish business forum TUSIAD, said last month. "The improvements have gone into reverse in some areas."
Turkey could have difficulty financing its growth because of scarce liquidity in international markets, he said.
A government official said there were no plans yet to revise the economic targets, because the final data on the last quarter of 2007 could still change the overall picture.
"There was uncertainty and worries due to elections but now these have disappeared and the economy has started to recover," the official said on the customary condition of anonymity. "Our growth targets are certainly within reach."
Economists agree that more privatizations in 2008 could help. Turkey was aiming to attract $25 billion in foreign direct investment in 2007, but likely missed that target.
"Even if prices are not as high as in past privatizations, there will be interest," Girgin said. "There is serious money in the Middle East and Turkey is one of the markets" Arab investors like.