Turkish opposition’s economic policy proposal: Realistic

Türkiye’s opposition alliance that is called Nation Alliance (The Table of Six) announced the Common Policies’ Consensus Text on Monday, January 30, 2023. The 244-page text composed on 9 different sections detailing the opposition alliance’s future program if they would win the upcoming election. This article will focus on the Economy, Finance, and Employment section.

Above all, I need to point this out: As far as I know, the People Alliance of the President Tayyip Erdoğan’s Justice and Development Party (AKP) and Nationalist Movement Party (MHP) does not have a policy text with the same clarity and scope. Instead, there is the economic policy that has been implemented so far. This policy requires a more thorough change since it needs to be more sustainable. Moreover, the realizations are far from the promises made for 2023 per capita income, exports, and similar variables.

First, I will rephrase some parts of my last article, which mainly discussed what could happen after the election. The fundamental question was whether the economic policy would be normalized. What do I mean by normalization?

Normalization of the economic policy

First comes the policies aimed at creating macroeconomic stability: the Central Bank’s return to its primary objective –its fight against inflation. Removal of all constraints that have the potential to distort the balance sheet of the banking sector. Begin to reduce and gradually eliminate black holes in the budget (such as abandoning the currency-protected deposit system and reviewing income guarantees stemming from the private-public partnership projects).

Gradual reduction of the public debt to its citizens in foreign currency. Implementation of a budget that prioritizes the rights of the poor and low-income earners. The unemployment insurance fund should be used for its primary purpose.

The second group consists of priority structural reforms: Establishing an institutional structure that will provide confidence in the announced statistics. Rewriting the procurement law from scratch. Setting up a central institution that will monitor the Turkish and world economy, design economic policy alternatives, and analyze the implemented policies’ impact. Making legislative changes that will restore the independence of the Central Bank. Taking similar steps for institutions such as the Banking Regulation and Supervision Agency and the Competition Authority. Establishing an independent judicial system that works justly and quickly is essential.

All the policies I mentioned in my last article are appropriately planted in the sections ‘Economy, Finance and Employment’ and ‘Law, Justice, and Judiciary,’ which is not my field. Undoubtedly, there is much more. For example, establishing a ‘case and damage assessment committee,’ terminating the wealth fund, implementing a fiscal rule, creating a financial management reform strategy, financing the green transformation, designing a tax policy for green transformation, establishing nurseries and after-school activity centers to increase women’s participation in the workforce, etc. The ‘Sectoral Policies’ section is also essential; however, I do not go into these sections. Let me state this: It is understood that significant steps will be taken mainly in the agricultural sector.

How realistic are the goals?

The inflation target, one of the numerical targets, is quite realistic. It is expected to reach one digit in two years. Let us assume that consumer inflation will be 45 percent in June. In this case, getting a level of 8-9 percent means a decrease of 36-37 points. A goal that can be achieved in two years without ‘jeopardizing’ economic activity to grow at its potential. Especially given that the comprehensive program will significantly reduce the risk premium. Unquestionably, external conditions are also crucial: Mainly the interest policy of the major central banks, the risk appetite of international financial investors, economic growth in our main export markets, and energy prices. Within the framework of current developments, it can be said that interest rate policies and risk appetite will not hinder countries like ours as of the year’s second half. However, it is too early to judge the likely growth rate in the export markets and the level of energy prices.

The prediction that the average growth rate will be above 5 percent is also realistic, given that the risk perception for Turkey will decrease significantly. On the other hand, the targets of doubling the per capita income in dollars and increasing exports to 600 billion dollars in five years sounded somehow ambitious to me. Getting the credit rating back to the ‘investment grade’ level may take a long time. However, the announced program will enable rapid progress toward this goal. The promise to strengthen international foreign exchange reserves is also realistic, and below I will discuss it as essential for solving a potential problem.

A potential problem: the overvaluation of the lira

Normalization of the economic policy has a potential cost: the possibility of an ‘overvaluation’ of the lira. Since, within the framework of a program that will reduce the risk sharply, it is expected that the demand for foreign currency will decrease and the foreign exchange supply will increase. An appropriate policy mix is needed to prevent overvaluation, which could adversely affect our competitiveness in international markets and increase the current account deficit.

First, some appreciation of our currency may be suitable for disinflation; however, if overvalued, there is a risk that our competitiveness in international markets will be adversely affected. Second, the solution to the valuation problem should be based on more than just monetary policy, as there is a limit to what monetary policy can do. Cooperation with the BRSA is crucial. Thirdly, since the 2018-19 crisis outbreak, many successive decisions have been taken which aim to control capital movements. Some can be preserved, and it is necessary to determine which benefits outweigh the harms to protect which ones. Especially those with the potential to create systemic risks, should be repealed immediately. Fourth, the Central Bank should buy foreign currency and increase its reserves in a way that does not disrupt the floating exchange rate regime, that is, through auctions, the rules of which have been announced beforehand. The last three are in the text.

To sum up, the announced program, if applicable, is valuable in ensuring stability in the economy and putting the institutional structure on the right path.