Turkish President Recep Tayyip Erdoğan has presented the awaited Medium Term Economic Programme (MTP) on September 6 in an event attended by the economy cadres of the ruling Justice and Development Party (AKP).
Emphasised as Türkiye’s roadmap for 2024-2026 period, the MTP promises to increase the GDP to 1.3 trillion US dollars and per capita income to 14.855 US dollars by the end of 2026.
As the country’s economy suffers from record inflation for two years, the program predicts that the inflation will fall to 8.5 percent by the end of the 2026. That is the country’s inflation level of 2013. However what was striking in the program that the year-end inflation forecast for 2023 was increased.
“It is going to be around 65 percent” Vice President Cevdet Yılmaz said in his technical presentation, exceeding the last official forecast made by the Central Bank Governor Hafize Gaye Erkan, who said the 2023 will end with 58 percent inflation, which was already surpassed by August inflation rate: 59 percent. It was forecasted to decrease to 33 percent at the end of 2024.
I will get the political economy caps in the MTP projections in a moment, but first, I would like to elaborate on the political messages of Erdoğan’s presentation.
“I am your interlocutor”
There are two important messages of Erdoğan, let’s say political translation of it, in MTP presentation:
First is that Erdoğan made the MTP presentation himself and took full responsibility for it. He also gave the leading role in the MTP to Vice President Cevdet Yılmaz. In the seating arrangement, he placed Yılmaz on his right and Minister of Treasury and Finance Mehmet Şimşek on his left. In terms of his contributions to the program, he mentioned Şimşek, without naming him, in the same framework with İbrahim Şenel, the Presidential Strategy and Budget Director, also without naming him.
This has two meanings. First, it means “Your interlocutor is me, not Şimşek”.
He does not want Şimşek to be seen as a “savior” by domestic and foreign capital like it was the case for Turgut Özal in 1980 and Kemal Derviş in 2001. The second is to shield Şimşek from the arrows of criticism – which are likely to increase – both from the opposition and from within the AKP.
“The government fully supports the MTP” he said. What else this sentence mean?
Political messages to foreign investors
Secondly, it is possible to summarize Erdoğan’s MTP presentation and his view of the MTP in a single sentence. At the beginning of his speech, the President said the following:
“With the opening of the polls after May elections, all uncertainties have disappeared and it has become clear who will govern Türkiye,” he said.
This sentence was mostly addressed to foreign investors.
Foreign investors have started to take into account the possibility of Erdoğan’s replacement in the 2023 elections after the big cities, including Istanbul and Ankara, went to the CHP in the 2019 local elections. In addition to problems such as economic unpredictability and judicial independence, political uncertainty has started to negatively affect investment plans in Türkiye. At a time when domestic capital was starting to invest outside Türkiye due to uncertainty and insecurity, they too put their investment plans on hold.
Erdoğan wants to say, “Here I have won, I will rule the country for five years, let’s meet”.
“Let’s build trust so that we can achieve stability,” he says, realizing that the job is not easy.
But this second point can also be seen as a message, especially to foreign investors, “I am your interlocutor”.
Let’s come to the issue of “building confidence”.
The eye-catching elements are strong but
Erdoğan highlighted the eye-catching elements of his MTP presentation.
For example, the promise of structural reforms.
For example, the establishment of a kind of energy exchange market within the Istanbul Finance Center and the plan to establish a natural gas base in Thrace with Russia.
There is the “periodic review of public expenditures and the elimination of inefficient spending programs” in the MTP report, which economist Hakan Kara sees as a difficult to fulfill but “game-changing commitment.” (I wonder if Canal Istanbul will be affected by this?)
Then there is the promise to meet the EU’s Maastricht Criteria by the end of 2026 (apart from earthquake spending) and the promise to update the Customs Union. There is also the concept of “Twin Transformation”, which combines “Green Transformation” and “Digital Transformation” of production. There is also a plan for Greenhouse Organized Investment Zones to rein in food prices.
But how will it be done?
For example, which structural reforms are planned? How will the Customs Union be updated without fulfilling certain EU demands, including judicial independence and democratic rights? Where will the green transformation fall while coal power plants are given full throttle?
How will the independence of the Central Bank, for example, be strengthened to ensure confidence?
There are other “How?” questions
Hakan Kara, a former chief economist of the Central Bank, calculated. He says that according to the MTP report, the US dollar exchange rate forecast for the end of 2023 is 29.9 liras. Again, according to the MTP calculation, if the increase continues, it can rise up to 43 liras at the end of 2024.
In an environment where the exchange rate is assumed to increase by 44 percent, how will inflation at the end of 2024 fall to 33 percent?
I will tell you what he did not say. In this situation, how will you convert those who have money in the bank from dollars and euros to Turkish lira without coercive measures?
Again, according to Kara, the 2023 cost to the Central Bank of “inflating” the currency-protected deposits (KKM) and keeping the lira “overvalued” before the elections will be more than 700 billion liras.
Erdoğan said the KKM project “has completed its mission” and there should be a return to TL deposits.
Ali Babacan, Erdoğan’s former chief economic advisor when he had brought inflation down to single digits, and now chairman of the DEVA Party, says that the KKM project is “a project to bankrupt the state” and Erdogan was playing with words and still defending it.
“There is no concrete step towards taxing rent income. The burden is once again on the shoulders of the narrow and fixed income earners,” he added.
Is a U-turn possible with political stances?
Economist Selva Demiralp makes another calculation. She says that 4 percent growth and the fight against inflation can only be possible with “strong capital inflows”.
“But they are not convinced,” she says, asking “can the Central Bank display the hawkish stance that will convince them?”
We return to the issue of confidence.
Demiralp argues that “if they have to choose between tham, the target to be sacrificed will be the fight against inflation”.
The answer to the question of what Erdoğan would choose if he had to choose between growth and other targets in a process is actually in the MTP speech: “There is absolutely no compromise on growth” he said.
You will say, of course he will, he will not want to let go of the political reins. It might sound good if we don’t pay the bill all together.
Erdoğan already seems to be trying to overshadow Şimşek’s visible impact on the economy with the appearance of protecting him. Let’s see if Şimşek will be able to take “more rational” steps more easily after the local elections on March 31, in an environment where the opposition continues to “bicker” within itself, as Erdoğan calls it.