The government will give its first test in the economy

No matter who wins the presidential election in the second round, the new government’s main agenda will be the economy. All the problems that have long been swept under the rug will now inevitably be brought to the table. Although the policies implemented by the Central Bank, which have upset the money markets in particular, have temporarily limited the rise of currencies, it is poised to leave behind a major shipwreck.

The additional charge imposed on the Treasury for Currency Protected Deposits (KKM), which was designed to prevent the next exchange rate shock on December 21, 2022, reached 92.5 billion lira. It is estimated that the obligation to pay this amount is also met by the Central Bank. Despite the exchange rate protection, which was put in place to create a temporary buffer, a new currency crisis is waiting at the door.

The new government will probably give its first test in the money markets. As of Monday morning, the steps to follow in the face of a possible exchange shock will also give clues as to how economic policies will be configured. High inflation, unemployment, and income inequality are not only pressing issues, but are also among the issues that are frequently mentioned in polling places and promised to citizens.

The stagnation in the investment environment after the pandemic, the high inflation that has continued for the last year and a half, and the earthquake in 11 cities caused serious damage to the economy and an urgent solution is needed. Here are the main problems of the economy that have turned into gangrene.

ILLEGAL INCOME

While growing domestic consumption, which has brought with it the demands of those who want to protect themselves from inflation with the New Economic Model, supports growth, it is necessary to take serious measures to sustain economic growth. The large drop in exports in April will be reflected in the export figures if no action is taken.

Income distribution will be the main problem. According to TUIK data, while the growing labor force share was 36.3 percent in 2016, this rate decreased to 26.5 percent by the end of 2022. In the same period, the capital share increased from 47.5 percent to 54.5 percent. Furthermore, all economic indicators point to the fact that while Turkey’s richest 5 percent are gaining more and more wealth, the group known as the middle class has been rapidly impoverishing since 2021.

The additional budget is inevitable

The central government budget recorded a deficit of TL 132.5 billion in April and TL 382.5 billion in the first 4 months. It is stated that it is not possible for the government to end the year without making an additional budget. In the January-April period, budget revenue increased 38.6 percent compared to the same period a year earlier, reaching 1 trillion 62.701 million lira. Budget expenditures increased 83.9 percent in the same period, reaching 1 trillion 445.197 million lira. Economists say an additional budget of 1.5 trillion lira may be necessary.

The real unemployed reach 8.3 million

The unemployment rate in Türkiye is around 10 percent. The broad definition of unemployment, which many authorities show as the “real rate of unemployment” and includes those who have given up looking for work, is at a very high level at 21.8 percent. In other words, one in five people who can work in Turkey is unemployed. According to DİSK data, the actual number of unemployed in Turkey reaches 8.3 million.

Peak lending and deposit rates

With the interest rate cuts made by the Central Bank since September 2021, the policy rate decreased to 8.5 percent. However, as Treasury and Finance Minister Nureddin Nebati put it, the policy rate has become insignificant. While interest rates on banks’ TL deposits were 40 percent, average interest rates on consumer loans hit 39.28 percent in the week ending May 19, hitting a 20-year high. Access to credit was also a major problem.

inflation cap

The fact that Turkey became the leader in inflation among European countries, exceeding 85 percent last year, arose as a result of the monetary policies followed. Among the G-20 countries, Turkey became the country with the highest inflation after Argentina. In addition, although inflation decreased to 43.6 percent according to official data, annual consumer inflation remains at the level of 105 percent, according to ENAG, which makes an alternative calculation of inflation. Inflation is expected to close the year above 40 percent. The increase in producer prices, on the other hand, rose to 157 percent.

Current account deficit exceeds 54,000 million dollars

The “high exchange rate-low interest rate” model led to record current account deficits and foreign trade deficits. According to the latest data announced by the CBRT, in the first quarter of 2023 the current account broke a record with a deficit of 23.6 billion dollars. The 12-month current account deficit was $54.2 billion.

LOSS IN EXPORT

Exports fell 17 percent in April, experiencing their first sharp drop since the pandemic. Thus, the foreign trade deficit increased 44 percent in the last year, reaching $120.4 billion as of April 2023, breaking a new record.