Selva Demiralp

Selva Demiralp is a professor of Economics at Koç University, Istanbul, teaching monetary policy and central banking.

Treasury and Finance Minister Berat Albayrak reveals the new economy program. (Photo: Ministry)

The government revealed its new economic program for 2021-2023 on Sept. 29. The long-term goals of such programs hardly go beyond being a wish list worldwide. This is because the economy is an equation with so many unknowns. Hence, it can even be difficult to predict the following month not to mention the following year.
But are these long-term forecasts totally useless? No, there are times when they can work. They might be very useful in terms of expectations management in environments with high institutional credibility if they also include solid steps on how to reach the defined goals. By signaling a successful program correctly, one can reap the benefits even before the program kicks in. This is because the leading components of investment decisions are forward-looking confidence and the potentials for profitability.

Effect of successful estimates

The projections that the U.S. Federal Reserve (Fed)’s FOMC members share with the public might be considered as such successful examples. Despite the billions of dollars injected into the markets after the 2008 crisis, the Fed did not raise its long-term inflation forecast above the target. Combined with the calming speeches of then-Fed Chair Ben Bernanke, who was under fire by politicians, these predictions have fulfilled their purpose. Thus, the Fed’s release of long term forecasts can be seen as an example of effective expectation management.
That being said, let’s keep in mind that even the Fed renews such forecasts every three months due to uncertainties that lie ahead. Thus, in a country like ours, where institutional credibility is low, volatility is high, and the precision of the previous goals is not even brought up by the policymakers, I find a discussion on the likelihood of 2021-22 targets rather redundant.

Clues on monetary policy

Therefore, instead of writing an article that is overwhelmed with the numeric goals for the next three years, I would like to share my observations on the very short term signals of the program and how these signals would affect the current perception.
There are two points that international rating agencies frequently highlight in the recent downgrades about Turkey: Meritocracy and institutional independence. In its latest downgrade on Sept. 13, Moody’s did not bother to wait for the announcement of the new economic program, which was scheduled to be announced at the beginning of September. Instead, in its statement, Moody’s referred to the country’s institutions as “unable” or “unwilling” to address the challenges.

Interest hike or weaker lira?

Then came the new economic program. I would like to discuss the monetary policy aspects since it is my area of expertise. In the program, the inflation forecast for 2020 was pronounced to be 10.5 percent. This figure is below the market expectations that hover around 12-13 percent.  Why does it matter? Let me elaborate. First, in an environment of serious economic contraction, ending the year with such an elevated inflation rate is rather unheard of. It is an unfortunate consequence of our poor policymaking,  wrong priorities, and not considering inflation as the primary macroeconomic responsibility. But these are not the topics of discussion for today.
Second, this figure will most likely appear as the year-end forecast in the next inflation report of the Central Bank. There is no problem with this. The government and the Central Bank are expected to work together in preparing these forecasts. However, this unrealistically low inflation forecast as we enter the last quarter means more than just another revision by the end of the year. It means that the Central Bank will be “unwilling” to consider another rate hike in the upcoming days.
Nobody would like to slow the economy down with an interest rate hike in the middle of the pandemic. However, consistently neglecting price stability in the past and the futile efforts to repair the side effects of the low-interest rate policies with short-term “patches” makes a sizable interest rate hike inevitable today.
Research shows that the contractionary effect of depreciation is much greater than the contractionary effect of rate hikes on the Turkish economy. Now that there are no more reserves left to defend the value of the Turkish Lira, there is no other option but to increase interest rates.
One would have preferred that our warnings and concerns in our field of expertise had been taken into consideration before heading for such an adventure.  If interest rates had been kept slightly higher before inflation reached these levels, we would face the pandemic in better terms with lower inflation numbers. Then, we would have the room to cut interest rates without raising inflation during a time of crisis. But it is too late to go back and pity.
Instead of focusing on the past, if we focus on the current day, we see that the “unwillingness” expressed by Moody’s has been confirmed by the new economic program estimates on the monetary policy front.

Flexible working

Another point that deserves attention in the new economic program is the regulations for employees over 50 years old. “Transition of full-time employees over the age of 50 to work part-time will be encouraged” reads the text of the program. I am not an expert on this topic and labor market specialists would evaluate this step thoroughly. Still, here is my two cents:  The age of 50 refers to a period of high productivity, experience, and corporate memory.  The cost that may be incurred by “encouraging” employees over 50 to work part-time and be replaced by inexperienced young employees should be evaluated rather carefully.
There is no doubt that it is important to offer young people job opportunities. However, if experienced employees with high productivity retire early to provide room for young workers, this will not increase the overall employment figures, but merely reduce the average work experience. If the transition is not smooth, it might negatively affect productivity and growth.
A sustainable increase in employment can only be possible with long-term education policies, R&D and technology investments, and credible policies that establish an environment of confidence. Such policies will encourage private sector investment, attract foreign direct investment and lead the way for sustainable growth that will provide employment opportunities for all ages.