The eagerly awaited New Economic Program (NEP), for the 2019-2021 period was announced by the Minister of Treasury and Finance Berat Albayrak. It lays down the main parameters of the medium-term strategy in macroeconomic management. Under normal circumstances, the announcement of a medium-term program by economic policy makers is perceived as standard activity in Turkey; but grave difficulties with respect to currency shocks, speculative attacks and high volatility this year rendered the NEP perhaps one of the most critical documents in Turkey's recent economic history.
Since the formation of the new government in the summer, both local and international market actors were curious to see a realistic road map designed to fight of multifaceted challenges of rising inflation, currency volatility, increasing (private) foreign debt burden and decline in economic growth. Initial reactions coming from key market actors confirm that they were broadly pleased with the firm, decisive, realistic and comprehensive problem-solving approach outlined in the NEP.
As a result of both international conditions stemming from relatively tightening liquidity for emerging markets and diplomatic rows with the U.S. administration, as well as domestic factors related with the need for structural change, the Turkish economy is going through a difficult period. Hence, it was extremely important that the NEP realistically recognized the difficulties challenging economic stability, identified achievable targets, and specified viable strategies to achieve them on the basis of three underlying principles: "balancing, discipline, change."
In this vein, the first element of the new program is economic rebalancing based on a preference for moderate but sustainable growth, until the comprehensive anti-inflationary measures begin to produce credible responses. Accordingly, following the estimated GDP growth rate of around 3.8 percent this year, the government expects a GDP growth of 2.3 percent growth for 2019 and 3.5 percent in 2020, only reaching 5 percent in the year 2021. Politically speaking, this constitutes a critical turning point for the Justice and Development Party (AK Party) government which traditionally focused on the production of high-growth economic performance to sustain social legitimacy in the last sixteen years.
In recognition of vital structural problems that need to be resolved before turning into another high-growth path, the government seemed to accept moderate growth rates which was good for international credibility. The second fundamental principle which underlines the NEP is fiscal discipline which will be expressed through substantial cuts in various aspects of public spending. Both President Erdoğan and Minister Albayrak expressed that public investment projects for which the tender process has not been completed will be suspended. Among the continuing public projects, those projects close to completion will be prioritized and new projects will be delayed. There will be a comprehensive review of running public expenditures so as to create a more effective, lenient and prudent public spending regime.
Although Turkey's budget deficit ratio to the GDP currently stands at 1.9 percent, which is considerably lower than the Maastricht criteria of 3 percent, there is a strong will to reduce it towards 1.7 percent by 2021. As AK Party governments have traditionally focused on "service politics" with substantial investments in public services such as health, education, infrastructure and communication so far, comprehensive cuts in public spending also represent a difficult political choice. But it seems that prioritizing pure economic rationality is preferred so to reduce inflationary pressures and achieve sustainable growth in the long term.
The final principle of the NEP is structural change which indicates a move from the current configuration of the Turkish economy as a domestic system dependent on inflows of international credit resources for domestic consumption and construction-service industries to a production and export-driven model. The government is keen to spur domestic production capacity in critical sectors so as to reduce import-dependency in capital and intermediary goods, thereby also trying to shrink the current account deficit. But targeted support schemes in modern agriculture, value-added manufacturing and high-technology sectors will also have to accompany the NEP, as unemployment figures might temporarily rise over 12 percent due to moderate growth next year.
For the next three years Turkey will face the momentous task of realizing structural transformation simultaneously with economic rebalancing and the anti-inflationary struggle. But with strong leadership, effective planning, flexible strategies and perseverance a brighter path could be constructed for the future.
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