Confessions from the finance minister

I am aware that readers of this column, which is mostly reserved for economic issues, may not have much interest in another article on economics because the local elections will be held this Sunday and extreme political tension is dominating the campaign.
Most readers would perhaps prefer I write again about the possible outcomes of March 30, but I already said what I think about them. I will just reiterate the main points of my personal thoughts on the electoral debate before discussing an assessment of the Turkish economy made last Saturday by Finance Minister Mehmet Şimşek. I think this assessment is worth being discussed, whatever the final result of March 30 may be. VPM Babacan & FM Şimşek, trying to be realistic  To be brief, I think that on March 30, for the future of our democracy as well as for economic stability, a sizable fall in the Justice and Development Party's (AKP) share of votes is crucial. I do not expect a clear defeat of the ruling party for many reasons. Nevertheless, a share of votes at around 40 percent nationally seems plausible to me, and this outcome would be sufficient to put in motion new political dynamics for getting the country out of the nightmare in which it is living nowadays. As for the finance minister, what he said last Saturday at the Uludağ Summit, a kind of local Davos Summit, goes beyond the impacts of the current political tension on the economy. Mr. Şimşek spoke on four points: current account deficit (CAD), budget performance, interest rates and economic growth. The key points of his speech were growth performance and, to some extent, the actual interest rate level. So, let's start with those. The finance minister claimed, "Maintaining [key] interest rates at just over 11 percent while the inflation rate is above 8 percent is a great success.” Alright! Due to the new monetary stance of the US Federal Reserve, expected real interest rates increased in developing countries, including Turkey. Given the slow but determined increase of the US Treasury Bond's interest rates and given the increased risk premiums for Turkey -- thanks to the authoritarian approach of Prime Minister Recep Tayyip Erdoğan regarding the biggest graft scandal of the republican era -- the actual interest rate level might be revealed as insufficient to stabilize the exchange rate and the inflation rate. What I understand when our finance minister says “great success” is that the central bank could be obliged to increase its policy rate in the near future. I'll let you guess what might be the reaction of our prime minister, the greatest enemy of high interest rates. The nominal and particularly the real interest rates are much higher nowadays than before, and this is, of course, not good for domestic demand. However, before the interest rate could increase, the AKP government took some restrictive measures on the use of consumer loans. It is aiming to discourage the import of consumption goods as well as take control of domestic demand. These measures started to have their effects felt in February. Şimşek said that businessmen are not happy with these measures, but the government had to take them because of the necessity to decrease the CAD. Finally, high interest rates coupled with restrictions on bank loans are expected to lower economic growth. Mr. Şimşek did not make any prediction about growth perspectives in Turkey, but he admitted that “developing countries have entered a period of low growth and the next decade will not be better than the last decade.” Nevertheless, Mr. Şimşek implicitly recognized that the growth rate will be lower than the planned 4 percent in the medium term, since he confessed that it would be very difficult to reach budget targets this year because of lower tax receipts due to weak domestic demand. The only good news he pointed out is the decreasing CAD, thanks to low domestic demand, low economic growth and decreasing imports; exports will receive an extra push due to a moderate revival in the European market. Well, given the finance minister's summary of the economy, what may be said regarding the AKP rule? At least two things: First, once low economic growth becomes apparent so close to the general elections, Erdoğan will strongly react to the tight monetary policy as well as to the loan restrictions, breaking the already fragile balance existing between him and those who govern the economy. Second, the low growth rate, around 3 percent, will start to show its adverse effects on the social conditions of the poor.