In my previous column, I discussed Turkey’s Medium-Term Economic Programs (OVP) for the 2012-2014 period, which was also included in the final communiqué issued by the G-20 at Cannes. The Turkish experiment proves that growth can go hand-in-hand with the adoption of fiscal discipline, and Ankara called on other G-20 members to announce their OVPs.
If we are to elaborate on that last point, we have to mention that Turkey made a series of commitments for the action plan submitted to the last G-20 summit, ranging from fiscal measures to structural reforms. Turkey pledged that the ratio of budget deficit to gross domestic product (GDP) would gradually be brought down to 0.4 percent by the end 2014 from 2.9 percent in 2010. It is expected to drop to 1 percent by the end of 2011. In contrast, Japan estimates it will have a 9.1 percent budget deficit to GDP ratio this year. The same ratio stands at 7.9 percent in the US, at 5.8 percent in France and at 8.8 percent for Britain.
The public debt to GDP ratio is projected to decline to 32 percent by the end of 2014 from 42.2 percent in 2010. The yearend figure is expected to be 39.8 percent. Again, in contrast, the public debt relative to GDP is quite high in the eurozone and is expected to rise to 90 percent by the end of the year. This figure is 100 percent in the US. By next year, the public debt relative to the GDP will climb to 238 percent in Japan, and to 121 percent in Italy.
On monetary and exchange rate policies, Turkey promised at the G-20 that it would continue to address inflationary pressures while adhering to flexible exchange rate regimes. The target is set at 5 percent for 2012 and 2013. That may be a too ambitious a goal and difficult to achieve considering that consumer prices rose by 9.48 percent in November compared to 7.66 percent a month before, inching closer, as is the general expectation, to a double-digit mark by the end of 2011. Central Bank of Turkey Governor Erdem Başçı believes Turkey is likely to have an inflation rate close to the targeted 5 percent next year as the upward pressure that emerged from a weaker Turkish lira and higher commodity prices eases. We will see if he is right.
As for the financial sector policies, Turkey promises tougher regulation and a tightening of rules for banks and financial institutions. It announced at the G-20 that the Basel II international bank regulatory agreement will fully be implemented by June 30, 2012 and the transition to Basel III, which will kick off following the phase out of the Basel II rules, will again be made in line with the G-20 commitment. Turkish Finance Minister Mehmet Şimşek argues that all banks in Turkey exceed capital ratios required under Basel III even though compliance was postponed to 2019 because many European countries are not yet ready for it. Though the national law dictates that banks maintain 8 percent of total assets in capital reserves, Turkish banks had 16.6 percent in cash reserves as of August 2011. On structural reforms, Turkey’s commitments require ambitious measures to address challenges in unemployment, investment business environment, the soaring current account deficit (CAD), energy diversification and the informal economy, some of them being hard to tackle.
Going back to the Turkish position on the G-20, the fourth point is that Turkey wants to keep the flexible informal mechanism of the G-20 with better coordination and effectiveness. It argues that producing concrete results is more important than the formal institutionalization of the G-20. If members reach consensus on establishing a permanent secretariat, however, Turkey would not stand in the way but would ask İstanbul to be considered for its headquarters because of its geographic proximity to many capitals and the ease of air travel to and from the city. This goes hand-in-hand with Turkey’s efforts to turn İstanbul into one of the most important financial centers in the world. Moreover, Turkey does not want to expand the membership in G-20 but supports the “outreach role” with non-members, something it wants to perform. The troika mechanism that includes immediate past, current and next chairs for the G-20 should be strengthened, it argues. Turkey endorses the view that the G-20 must be coordinated well with other international organizations such as the UN and World Trade Organization (WTO) and that its scope must be enhanced without overlapping on the similar issues.
Fifth, Turkey advocates reducing the reliance on credit rating agencies so that these agencies do not trigger aggressive market reactions. On the sixth note, Turkey has reservations about a proposal for a financial transaction tax to raise new funding for poor countries, an idea floated by France but that failed to win the backing of the G-20. While the United States, Britain and Canada are worried about its added burden to their banks, Turkey and other emerging economies are concerned that proceeds from a global financial transaction tax would go toward to helping heavily indebted eurozone countries and not the poor.
The last but not the least point touches on the so-called “social dumping.” Turkey at different times has signed a total of eight fundamental International Labour Organization (ILO) conventions and lobbies with other G-20 members to follow suit in order to achieve a fair competition and level playing field. The US, China, India and South Korea have not signed all the conventions, and Turkey argues this is tantamount to social dumping. The G-20 established a Task Force on Employment in Cannes to tackle these issues, and Turkey hopes that when the task force convenes under the Mexican presidency of the G-20, there will be some progress.