Turkey will slowly recover its economy after the coronavirus pandemic

The coronavirus crisis is leaving national economies around the world hard hit. Especially those that, like Turkey, are in the process of developing to overcome the economic crisis of 2008.

The pandemic landed in Turkey at the beginning of March. The question now is: what measures have to be taken so that the economy can survive the impact and recover from the stagnation it has been in the last years? Early social disengagement, mobility restrictions, testing and improvements in health capacity helped contain the spread of the virus and the number of deaths. 

However, the economy came to an almost sudden halt during the second quarter of 2020. And fiscal, monetary and financial measures focused their support on alleviating some of the most serious consequences of the pandemic. 

Forward looking indicators, as published in the economic journal Brookings, suggest that both supply and demand are making up lost ground. "At the same time, monetary expansion supported by already negative real interest rates contributed to macroeconomic imbalances and the erosion of external mattresses, which eventually led to a reversal of monetary easing," say experts Auguste Tano Kouamé and Habib Rab in the US daily.

These political trade-offs, together with the continuing uncertainty due to the pandemic, present a range of possibilities for the economic outlook. "We project that the economy will contract in 2020, but the extent will depend on how the pandemic evolves in Turkey and among close trading partners, some of which are experiencing a second wave," explain Kouamé and Rab.

The impact on household incomes could increase Turkey's poverty rate from 10.4 per cent to 14.4 per cent, but the response of existing government policies is likely to reduce the rate significantly from 14.4 per cent to 11.5 per cent. At a baseline where the pandemic is under control in early 2021, "economic growth could recover to 4 per cent in 2021 and 4.5 per cent in 2022," the experts at Brookings have said.
 

Looking ahead, the challenge for Turkey will be to focus on maintaining macroeconomic stability and preparing for the long term. This would imply departing from the tradition of stimulating economic growth in the short term and preparing for a race to the bottom.

To reach this point, the government should ensure macroeconomic stability and investor confidence. Recent statements by the newly appointed Finance Minister, Lütfi Elvan, seem to confirm that this objective will be given priority. "In a world where competition for external capital is likely to be fierce, a focus on macroeconomic stability could have positive benefits in terms of capital flows, exchange rate stability and lower risk premia," Kouamé and Rab state.

Turkey can afford to maintain a responsive and flexible fiscal policy to manage the coming recovery. The medium-term fiscal framework under different macroeconomic scenarios suggests that the country can absorb limited shocks even with the recent increase in fiscal imbalances. 

Thanks to the existing, albeit declining, fiscal space, automatic stabilisers and targeted measures can play a role in protecting the economy from the impact of the COVID-19. This can help avoid significant social and economic costs, including widespread lay-offs and insolvencies, and a permanent fall in household income over the life cycle due to asset sales and loss of human capital. 

The impact provides an opportunity to use some fiscal space to ensure that public spending on education can help improve learning outcomes and the returns to human capital.

"It will also be necessary to repair the balance sheet of companies to lay the foundation for a return on investment," the Brookings newspaper announces. Given the over-indebtedness resulting from the pre-Coronavirus credit booms and the credit expansion during the pandemic, more credit is unlikely to sustain growth in the medium to long term.

The revival of the business sector is necessary to prepare for a resumption of private sector investment as the world begins to recover from the crisis. "This may require closer monitoring of the current challenges to the health of the banking sector and support for an orderly resumption through corporate debt restructuring," the US daily's experts say.
 

This crisis is an opportunity to refocus attention on structural reforms and to rebuild a resilient economic system that will propel Turkey into the high-income group of nations. These reforms are reflected in the new economic programme and the 11th National Development Plan. 

Deepening trade integration and participation in global value chains, accelerating labour market reforms, promoting innovation, diversifying the financial sector and improving access to long-term finance, and ensuring competition are among the priority areas to help boost the economy's growth potential. 

These efforts, together with investments in human capital, should help reverse the decline in labour force participation, including among women. "Turkey almost reached high income status in 2014 thanks to a period of sustained growth supported by structural reforms in the previous decade and a half. If a good crisis is not to be wasted, the shock of the coronavirus provides an opportunity to seriously implement the structural reforms currently envisaged in several Country Strategy Papers," Kouamé and Rab state. 

The new Turkish Minister of Finance, Lütfi Elvan, has said that he expects a growth of the Turkish economy of 0.3%, although the International Monetary Fund (IMF) estimates a fall of 5% due to the effect of the pandemic.

"We anticipate that the recovery trend in consumption, investments and exports will have a positive impact and that growth in 2020 will be 0.3%," Elvan said this week before the Turkish Parliament's plans and budget committee.

The minister explained that the measures to prevent the spread of the pandemic had had a negative impact on exports and tourism, so "the Turkish economy contracted by 9.9% during the second quarter of the year".

Elvan stressed that Turkey is one of the countries least affected by the pandemic, predicted that the unemployment rate for the year will remain at 13.9% and predicted that the country will enter "a phase of stable growth in 2022 and 2023".

Elvan's forecasts are clearly more optimistic than those of the IMF, which last month predicted that the Turkish economy would contract by 5% in 2020, while inflation would rise to 14.6%. The Turkish Central Bank last month revised its year-on-year inflation forecast to 12.1% by the end of the year, while the Turkish lira suffered losses in value of up to 10% in one month.

But since the appointment of Lütfi Elvan, who last Tuesday replaced Berat Albayrak, son-in-law of Turkish President Recep Tayyip Erdogan, the Turkish currency has recovered 10% in only five days, although since Wednesday it has again lost almost 1%.