Turkey's Economy - Action Needed Now

Having traveled to Istanbul three times in the last two years, I'm interested in how the Turkish economy is bearing up. I emailed a Pace University MBA graduate, Filiz Bakirhan, who was both a student of mine and an intern at the NYC Comptroller's Office, and now lives in Turkey. I asked her for an update on the economy.

She reports that Turkey is affected deeply, like so many other countries, by the financial crisis that stems from U.S. subprime mortgage problems beginning in 2007. She says:

By the third quarter of 2008, Turkey’s economy was seriously affected and the crisis is expected to worsen in 2009. Global production and trade has decreased sharply. Many sectors in Turkey with difficulty refinancing their short-term debts. Some companies have gone bankrupt even with strong sales. Credit problems have contributed to an increase in the unemployment rate to 10.9% in October 2008 from 9.7% in 2007. Consumers have decreased their spending because of the economic insecurity.

Apparently Turkey has been slower to take action than other countries. Turkey’s AKP (Justice and Development Party) has not introduced its own stimulus package, and faces local elections next month. Businesses are looking for tax incentives or tax reductions.

Payroll taxes are high and payroll tax cuts would lower the barriers to hiring workers from the unregistered economy. Businesses are also hoping the government will increase public spending to spur demand. Some also urge the government should restructure its tax sources to raise more revenue from taxes on land. In Turkey, many people are squatters and pay no taxes on land. But a series of Turkish governments have sought votes from squatters by giving them rights.

What has Turkey done so far? Filiz says it has taken one concrete action:

On January 15, the Turkish Central Bank cut its interest rate to 13% from 15%. Although the Turkish Lira has lost almost a quarter of its value in 2008, Turkish commentators think that it is presently secure.

In addition, the government has been negotiating with the IMF:

Turkey’s previous three-year $10 billion standby loan deal expired in May. A new agreement is expected to be for 18-24 months and includes financial support in the $20-25 billion range. Some economists believe that an IMF deal won’t be finalized until after the March elections and in any case won’t affect the situation greatly because the IMF money won’t be enough. But the new deal might boost confidence in the market and help the non-financial sectors recover their debts.

Is this enough? Filiz says no:

The AKP needs to give Turkey a stimulus package including tax reduction and public spending as well as a new IMF agreement, before next month’s elections.