Fifty shades of the IMF
The Turkish economy may be going through difficult times, just like other economies across the globe, but in Turkey’s case the degree of difficulty is unique.
A combination of the ruling Justice and Development Party (AKP)’s monetary and fiscal policies over the past few years, along with the lasting effects of the 2018 currency crisis, are leaving the government in a bind as it seeks to deal with a deepening crisis surrounding the pandemic.
Turkey’s 100-billion lira ($15 billion) preliminary aid package to help combat the epidemic now looks outmoded. It was announced in the days when the AKP leadership had either not fully comprehended the extent of the impending crisis, or thought it could play it off through denial. Consequently, there is virtually no financial support in the programme for the groups that are most affected by the pandemic.
Just as in all developing economies, the coronavirus crisis is hitting small and medium-sized enterprises (SME) in Turkey the hardest and consequently requires the government to focus its attention and money on SMEs and low-wage earners.
Unfortunately, Turkey does not have the financial resources to keep such a wide swathe of the economy afloat.
When private-sector debt left over from the 2018 currency crisis, which is driving demand for foreign currency, is included in the picture, the battle against the coronavirus crisis becomes even more complex and fraught with risk.
Turkey’s inflation rate of 12 percent is three times higher than the average across developing economies. Meanwhile, increased spending in the lead-up to the 2018 presidential elections and in its aftermath, when the currency crisis struck, made use of tens of billions of liras in central bank cash reserves. The budget deficit to GDP ratio doubled to reach almost 4 percent.
Meanwhile, foreign currency has stopped flowing into the country. Over the past 10 months, the central bank has exhausted its reserves to help the government spur economic growth while containing inflation.
Restrictions on foreign exchange swaps – tightened again this week - make it almost impossible for Turkey to acquire hard currency. Monetary easing by the U.S. Federal Reserve has not bolstered the lira, proving that the supply of foreign currency is not enough to meet demand.
The government’s efforts to secure swap deals with the Fed and European Central Bank also seem to be failing. The AKP is now learning the hard way that trampling on the central bank’s independence has not only left Turkey powerless to control inflation, but also outside of international agreements.
The dead-ends on economic policy that the government now faces are of course a result of the decisions it has made in the past few years. Those decisions have now left Turkey’s hands tied as it attempts to deal with the virus’s impact.
Turkey’s dependency on foreign currency resources to stimulate economic growth is not a structural issue.
After the last standby agreement with the International Monetary Fund, which ended in 2008, the political leadership in Turkey was able to attract foreign capital due to zero-level interest rates around the world and extreme market liquidity.
One can argue about the quality of economic growth in Turkey, or how these cheap resources were allocated to achieve it. But the government’s burgeoning self-confidence that overflowed in the post-2008 period became a determining factor in how it reacted to the 2018 currency crisis when, in contrast to Argentina, it waved off IMF help without even sitting down with fund officials to discuss it.
Every decision has its consequences.
Just as the cost of submission to an IMF programme would have meant the AKP relinquishing its free hand over the economy, the cost of not choosing the IMF in 2018 was to once more create macroeconomic imbalances.
Despite the legendary tales of the government’s past economic successes, often cited by foreign economists as a basis of hope for the future, Turkey has reached a point where it cannot tackle the economic repercussions of the coronavirus.
Looking at the example of Argentina’s 2018 programme, an IMF deal would have been a bitter pill to swallow for the government. However, the real reason why the AKP, in power for almost 18 years, abstained was the transparency and shared leadership that would have come with the deal.
Today, this is again the reason why the AKP is turning its back on the IMF, even when faced with the current gargantuan economic problems of this natural disaster.
But the IMF is swiftly transforming from the IMF we know.
After the 2008 global economic crisis, as majorities in various countries voted increasingly radical governments into power, the IMF began to take indicators such as income distribution into consideration. But the global shocks that the pandemic is now causing could now turn the fund into an entirely different institution.
The IMF is now starting to provide opportunities for member countries that are far more attractive than the binding, stand-by credit agreements that governments such as Turkey dislike so intensely.
In these unusual times, when almost everyone in Turkey is hurting financially, the AKP must find a way out of the corner it has put the country into, even though it may conflict with its own blueprint for political survival. It seems that the IMF is the only option left.
Perhaps the most eye-catching alliance the IMF has established during the coronavirus crisis, which makes use of the $1 trillion it has earmarked to prevent the epidemic from crashing the global economy, is its agreement with the World Health Organization.
The IMF has placed healthcare spending at the top of its list, and is prioritising help for doctors, nurses, hospitals, medical equipment purchases, and those who are most vulnerable. At the same time, it is creating broad funding options for curbing unemployment and bankruptcy and for securing economic recovery in the long term.
The fund is also working with the World Bank to erase the debts of the poorest countries and intends to use existing lines of credit to expand a pool of emergency liquidity to $100 billion from $50 billion to help emerging markets.
Of course, the IMF is no angel without wings. But the fund must now undergo a caterpillar to butterfly transformation to protect the global system. A key factor here will be whether or not the governments of the world’s largest economies such as the United States, Europe, and Japan contribute funds to the IMF to add to the $1 trillion already announced.
Returning to Turkey, a swathe of foreign currency-denominated loan payments will soon be coming due. Difficult days will follow. Neither currency swaps, investments by the sovereign wealth fund, exports nor tourism will rescue the AKP from the dead-end it is in. The central bank bank’s cash reserves have long dried up.
For the government to overcome these difficult days, President Recep Tayyip Erdoğan will have to face reality, identify the IMF resources that are most appropriate for Turkey to apply for, and compromise in order to save his ship.