Turkey: From crisis to recovery

• Pages: 261-264

Page 261

IMF SURVEY: Turkey has undergone an amazing recovery since the 2001 crisis.What made this possible?

DEPPLER: Turkey's growth has averaged 6-7 percent over the past two years, well above the 5 percent forecast under its Stand-By Arrangement with the IMF. Inflation has come down from around 70 percent to single digits (see chart below);Page 262 government ran the highest primary surplus on record in that country-just over 6 percent of GNP.

But if you look more closely at the budget, difficult challenges lie ahead. For example, three-fourths of total spending is nondiscretionary, leaving the government with little flexibility to control expenditures. And because tax rates are already very high, there is little room to increase revenues. International experience shows that sustaining fiscal adjustment depends, to a large extent, on controlling expenditure.

There are other challenges as well. During the crisis, current spending was increased at the expense of capital spending. This must now be reversed to make room for more public investment in infrastructure and social programs. All of this points to the need for structural fiscal reforms to sustain the fiscal performance.

IMF SURVEY: Paying down Turkey's debt will be difficult to reconcile with the social demands placed on the state by high unemployment, regional inequality, and population growth. How can the government balance these contradictory demands?

DEPPLER: With the crisis giving way to recovery, there is clearly a shift to paying greater attention to social issues. Unemployment, in particular, has become a greater concern. Needless to say, this is a concern we share.

The real issue is how to address it. As you suggest, many people see increased public spending as the solution. My answer to them is that Turkey's very tough fiscal policies have lowered interest rates dramatically, and this has led to very strong economic performance. Real interest rates are still about 15 percent, which, by any standard, is extremely high. Policies that reduce real interest rates to single digits-which are more the norm in emerging market economies-will pay off much more in terms of reducing unemployment and increasing tax receipts to fund social programs than would token spending policies in favor of particular programs. Do not underestimate the growth that can be achieved from sound fiscal and monetary management in a situation like Turkey's.

IMF SURVEY: Has Turkey finally kicked the...