The many hidden cracks in Turkey’s economy

The International Monetary Fund says Turkey has the fifth biggest economy in Europe, after Germany, Britain, France and Italy, with a GDP of $2.3 trillion in terms of purchasing power parity. But these figures are misleading - Turkey’s GDP per capita is much lower and is a better estimate of wealth of its people.

Turkey’s Treasury and Finance Ministry, run by President Recep Tayyip Erdoğan’s son-in-law, Berat Albayrak, said in a presentation last week that GDP per capita in Turkey was $9,632, slightly lower than it was in 2007, and less than in other European countries, except for those in the Balkans. 

The ministry said the proportion of the country’s 82 million people under the age of 14 was higher in Turkey than the rest of Europe and the percentage of the population over 60 was the lowest.

Turkish politicians repeatedly talk up the advantages of a young population while other countries in Europe struggle with the issues of an ageing populace. But this advantage becomes a disadvantage when the education system is poor as many studies show Turkey’s to be. Projections also show that what advantages Turkey may have from a young population are likely to not last long as by 2050, the population distribution will be similar to other countries in Europe.   

This could be the reason that Erdoğan frequently urges Turks to have more children, but demographics usually ignore the pleas of politicians. 

Unemployment reached 12.8 percent in May, the highest level since the ruling Justice and Development Party (AKP) came to power in 2002, except for a sharp increase during the 2008 global economic crisis. Non-agricultural unemployment, a more reliable figure, is at 15 percent. 

Participation in the labour force has declined slightly from 52.9 percent in May 2019 from 53.3 percent in the same month last year - almost half the population is now outside the labour market.

The second big issue is that almost 23 percent of those in non-agricultural employment and 88 percent of those engaged in agriculture work in unregistered jobs. In total, 33 percent of workers in Turkey are employed in the informal economy, which makes it difficult for the government to achieve its financial targets. While ministers have repeatedly pledged to tackle the informal sector, it is no simple task, particularly with the presence of so many migrants. 

Turkey’s inflation rate meanwhile deviates significantly from the average in developed and emerging economies. Turkey now has the sixth highest inflation in the world, the same position it had in 1999. During Turkey’s 2001 economic crisis, it had the world’s third highest inflation rate, but fell to as low as 64th in 2007 after the AKP implemented an IMF restructuring programme.

Foreign trade figures are also illuminating. Turkey’s imports of machinery and equipment have shrunk back to 2008 levels, pointing to troubles in the manufacturing sector. While ministers point to a trade surplus, it is a result of decreases in imports of energy and intermediate goods due to the fall of the lira, rather than an increase in exports. 

The fall in foreign direct investment is another area of concern. Peaking at $22 billion in 2007, foreign direct investment fell to $13 billion last year. A large proportion of the investment now comes from the Middle East, Russia and other non-Western countries, in contrast to the previous decade.

Public finance figures are particularly troubling. The AKP’s former economic success was based on financial discipline. The 2019 budget puts total public expenditure at $178 billion and revenue at $163 billion, hence the Treasury was expected to borrow some $15 billion lira this year. The problem is that it had already borrowed that amount by June.

Gross outstanding external debt remains a key risk. In 2002, when the AKP came to power, the gross outstanding external debt was $130 billion. This year it reached $453 billion, $119 billion of which are short-term liabilities. Some $334 billion of the outstanding external debt belongs to the private sector and $90 billion of the outstanding private sector debts are short-term loans. Meanwhile, the total public sector short-term debt is $24 billion. 

How Turkey will repay this external debt stock has been questioned by international rating agencies for some time. Rising unemployment makes it especially hard. 

 

© Ahval English

The views expressed in this column are the author’s and do not necessarily reflect those of Ahval.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.