’Türkiye is defeating inflation through production’ says Turkish minister of treasure and finance
On 26 January he was in the European Parliament for a conference entitled: Challenges and opportunities for the economic ties between EU and Türkiye in a period of global uncertainty, organised by the European Parliament’s Committee on Foreign Affairs (AFET). He also met Nacho Sánchez Amor, MEP, AFET Rapporteur for Türkiye and Olivér Várhelyi, EU Commissioner for Neighbourhood and Enlargement, and Paolo Gentiloni, EU Commissioner for Economy.
EU Reporter took advantage of his visit to question the Minister on a whole raft of issues, ranging from the war in Ukraine to EU-Türkiye relations.
Could you briefly explain the new growth model you are implementing? Why does Türkiye need this new model? Which targets are planned to be achieved within the scope of the model?
The Türkiye Economy Model (TEM) features a heterodox approach that takes into account our economic dynamics and factors specific to Türkiye. In designing the model, we have considered many parameters such as internal and external dynamics, geo-strategic conditions, past experiences and opportunities arisen by new global economic climate during and after Covid-19 pandemic outbreak. We do not, however, diverge from free market economy principles while taking actions to achieve our goals.
TEM aims at both ensuring simultaneous macroeconomic, financial and price stability, and providing sustainable and healthy growth for our economy. Investment, employment, production and exports are focal points for TEM. It includes policies that increase our value-added production and bring Türkiye to the top of the global supply chains Launched last year, TEM already has achieved great success in terms of growth, machinery&equipment investments, employment and exports despite adverse global conditions. Inflation rate has also started to decline, and we expect this trend to accelerate in the coming months. We will see that the gains obtained with TEM will become more evident in 2023 and beyond and that Türkiye will continue to positively differentiate from peer countries in growth, employment and exports within the framework of TEM.
Many countries try to fight against inflation by raising policy rates. Although inflation has started to fall in some countries, they now face the risk of recession. Türkiye, on the other hand, is following an economic model that goes against the conventional wisdom and seems to be willing to accept high inflation for high growth. Which policy is better? Do you think Türkiye is better or worse off compared to these countries?Advertisement
Due to expansionary policies to fight against the adverse economic effects of the pandemic, huge rises in commodity prices and the disruptions in global supply chains many countries faced record high inflation rates.
Consequently, major central banks such as the Fed and ECB started implementing tight monetary policies and raised policy interest rates to fight against inflation. Especially the Fed’s interest rate hikes last year was the fastest in the last 40 years and rates reached to the highest level seen in the last 15 years. This resulted in a slowdown in economic activity and increased recession probabilities.
With the Türkiye Economy Model, we put into practice a human-oriented approach in the fight against inflation. Instead of tightening steps that may increase unemployment and slow down economic activity, we are implementing policies that focus on investment, employment, production and exports. Despite all the unfavorable global conditions, we see that our Model has started to produce its outputs.
Thus, our economy has been positively decoupled from other economies with its growth performance of 9 consecutive quarters. The machinery-equipment investments have been increasing for 12 consecutive quarters and exports continue to break records every month.
We continue to fight against inflation with the measures we have implemented. With the normalization in global commodity prices and the stability achieved in the exchange rate together with the contribution of the FX protected deposits, consumer inflation declined in November and stood at 64.3 percent at the end of the year. The downward trend in inflatioın will be accelerated in 2023.
What awaits the Turkish economy in 2023? What do you think are the risks and opportunities that stand out?
In 2023, the uncertainities regarding supply of natural gas in EU, re-elevating commodity prices, slowdown in global demand and monetary tightening in developed countries pose downside risks on global and Türkiye’s economy.
On the other hand, it is considered that the continuation of market and product diversification in exports, the limited decrease in the risk of global recession in the recent period and nearing the end of the tightening of monetary policies in leading developed countries thanks to improvement in the inflation outlook may mitigate these risks.
Furthermore, we will continue to support investment, employment, production and exports with selective credit policy. With the contribution of the strong tourism, we expect the growth to be 5 percent.
Besides, we anticipate that the expected outlook in growth will reflect positively on labor market and within this framework, the upward trend in employment will continue.
The downward trend in inflation is expected to continue with the help of continued stability in the exchange rate thanks to the FX Deposit Scheme and the macroprudential measures implemented since 2022, the improvement in expectations and the decline in global commodity prices. In 2023, we anticipate that current account deficit will be reduced significantly with the decrease in commodity prices and the continuation of the positive outlook in tourism revenues.
Another prominent concept is green and digital transformation. What kind of work is being carried out on these subjects?
We implement necessary policies to reach our target of net zero greenhouse gas emissions by 2053. We have been working cooperatively with sectors to reshape production and investments for green transformation, and support our companies by comprehensive incentives. We raise energy efficiency and use of renewable energy sources in production processes. On the other hand, we support the development of a sustainable finance ecosystem. The most notable steps we have taken in this area is the “Sustainable Finance Framework Document” that published in November 2021.
Green transformation cannot be separated from digitalization. Green and digital goals are seen to complement each other and called as twin transition. Leveraging the potential of digital transformation is a key for reaching green objectives. For this reason, we strengthen our digital infrastructure and support the private sector to integrate new technologies such as big data, artificial intelligence, and the internet of things into their business processes.
When you evaluate the FX-Protected Deposit Scheme you implemented to stabilize the exchange rate, do the benefits or the costs outweigh?
In the period when we put into practice the FX Protected Deposit Scheme, there was a serious increase in the exchange rate volatility, which was not compatible with Türkiye’s macroeconomic dynamics affecting the real sector as well.
We implemented FX Protected Deposit Scheme towards the end of 2021 to prevent this volatility, which has reached a point that threatens our financial stability, and succeeded. This instrument played an important role in promoting Turkish lira savings, which is one of the main pillars of Türkiye Economy Model. FX Protected Deposit Scheme attracted great interest from our citizens and its cost to our budget was limited.
Many economies, including Türkiye’s major trading partners, are facing the risk of slowdown and recession. How will this situation affect Türkiye’s growth, which adopts an export-oriented growth model? Were these risks fully taken into account when setting the targets in the Medium-Term Program?
The global economy has been through a difficult period caused by the pandemic, the financial tightening and geopolitical tensions. In addition, recession expectations beginning the second half of the last year increased gradually.
Although there are risks, improvements have been observed in the recession expectations as commodity prices declined and inflation, which reached its peak in developed economies, began to decline.
When it comes to the Türkiye’s export, the share of the European Union in total Türkiye’s export is around 40 percent.
The slowing growth of our main trade partner may directly affect our exports. However, thanks to market and product diversity that we have achieved in the last twenty years, this effect is expected to be limited.
In addition, by using Türkiye’s advantageous aspects and supply chains that were re-shaped in the post-pandemic period, we increased our exports to a record level of 254.2 billion dollars in 2022, in line with the MTP settled. Besides, Türkiye’s share in world export has exceeded 1 percent.
Indicators of fiscal discipline, such as the Maastricht criteria, which were highly emphasized in the past, have been put on the back burner since the global crisis in 2008. However, Türkiye has consistently maintained a low budget deficit and debt stock relative to GDP. Do you think fiscal discipline will regain its popularity?
Fiscal discipline has been always one of the fundamental pillars of the achievements of Turkish economy. Thanks to fiscal space Türkiye has managed to recover fast from external shocks and diverged positively from other economies.
In 2022, although difficult economic conditions were experienced all over the world, we estimate a budget deficit to GDP ratio of 1 percent and primary surplus to GDP ratio of 1.2 percent. Thanks to fiscal discipline and effective borrowing policies, EU defined general government debt stock to GDP ratio decreased by 7 points to 34.8 percent as of the third quarter of 2022 from 41.8 percent in 2021. This ratio is well below the Maastricht Criteria of 60 percent and the EU average of 85.1 percent.
At a time when central banks in developed countries are tightening their monetary policies and recession concerns are coming to the fore, what do you think is the most vulnerable area of the Turkish economy?
In 2022, when the geopolitical risks increased and inflation became a global problem, many countries, especially the central banks of developed countries, fought with inflation by increasing the interest rates. The resulting strengthening of the US dollar due to the FED’s aggressive interest rate hikes adds pressure on the exchange rates and causes capital outflows from financial markets.
In order to minimize the impact of these developments on the economy, we have implemented a series of measures to ensure financial stability, in particular, by encouraging Turkish lira savings using FX Protected Deposit Accounts within the scope of Türkiye Economy Model.
Türkiye has achieved significant success in tourism sector after the COVID-19 pandemic. What are your expectations for the tourism sector in the upcoming period? Do you think that Türkiye will maintain these successes? Can we get your assessments?
In tourism sector, which has been negatively affected by the COVID-19 pandemic on a global scale, Türkiye has exhibited a tremendous recovery performance above the world average. In this period, Türkiye has showed the fastest recovery among European countries.
Despite the Russia-Ukraine war, this strong recovery performance in Turkish tourism sector continued in 2022. Efforts to ensure product and market diversity in tourism have made a significant contribution to Turkish tourism sector achievements. Thanks to the promotional and marketing efforts, European tourists, especially German and British visitors, showed great interest to Türkiye in 2022. In addition, we continue intensive promotion and marketing activities for Gulf countries such as Qatar and the United Arab Emirates whose visitors have high per capita tourism spending.
In 2022, we expect to surpass the tourism records of 2019, which is known as the golden year of the sector with $46 billion in tourism revenue and 51.5 million visitors. We have raised our tourism targets for 2023. We aim to have $56 billion in revenue and 60 million visitors.
What are the effects of current regional and global dynamics, especially the Russia-Ukraine War, on Türkiye-EU relations?
Türkiye-EU relations have always been shaped by regional and global changes as well as internal dynamics of the parties. Our bilateral relations with the EU are loaded with examples of this phenomena. Humanity is in a transition period in which great transformations are experienced at the global level. In recent years, new challenges such as economic problems, migration, terrorism, regional conflicts, and climate change have been added to the change in the balance of power, which has become increasingly evident since the end of the Cold War.
Having been affected by multitude of these crises, the EU has attempted to redefine and reposition itself globally. Finally, the Russia-Ukraine War has been an important test for the EU.
The war has brought the concept of geopolitics to the fore, let NATO’s key role in Europe’s security better seen, and in parallel, and once again revealed Türkiye’s importance for the EU. While challenges of the war concentrate on issues such as security and defence, economy, migration, energy and food security, Türkiye is among the countries that can contribute most to the EU in all these fronts. As a matter of fact, since the beginning of the war, our country’s facilitating role in peace negotiations between two sides, as well as its efforts in grain exports and prisoner exchange, have been the most concrete examples of Türkiye’s importance for the continent’s peace and prosperity.
All global and regional challenges, including the Russia-Ukraine War compels the EU to be more cooperative and inclusive, and to make a radical change in its basic policies, especially the enlargement policy. At this critical threshold, Türkiye-EU relations are one of the most important tests of the EU. Türkiye has always been an integral part of Europe and the EU anchor has always brought positive gains. As such, it is now more important than ever to remove obstacles to Türkiye’s EU membership. It is vital not only for Türkiye and the EU, but also for a much wider geography, not to miss this historic opportunity and to establish cooperation for struggling with common challenge
How can Türkiye-EU trade relations be improved? What is the current state of play in the modernization of the CU?
Customs Union (CU) has been a cornerstone for economic and trade integration between the EU and Türkiye since 1996.
Currently, the EU is Türkiye’s largest trade partner and Türkiye is the EU’s 6th largest trade partner. The share of EU in Türkiye’s total exports was realized as 40.5 percent (103.1 billion dollars) while the share of EU in our total imports was 25.6 percent (93.3 billion dollars) in 2022. In January-October 2022 period, the share of EU in foreign direct investments in Türkiye was 70 percent (except real estate purchases).Turkish firms are well integrated within the EU value chains and improve the EU industries’ competitive position. Green and digital transition as well as the importance of strong value chains in the post-pandemic era reaffirm the need for Türkiye and the EU to strengthen their economic ties and therefore urges the modernization of the CU.
With the evolution of the economic environment and the significant growth of EU-Türkiye trade, the current CU has become less equipped to deal with the modern day challenges in terms of trade integration. Additionally, asymmetric structure of CU has become a serious problem hindering proper functioning of the CU and potential of Türkiye-EU trade.
Thus, it is obvious that neither the EU nor Türkiye benefit from the full potential of the existing CU. In this regard, Türkiye and the EU have reached a common understanding on an update package in 2014 in order to remove structural problems stemming from implementation of the CU and to extend it to new areas such as public procurement, services and further concessions in agricultural products with a view to exploiting bilateral trade potential.
The new CU will be a win-win process and will foster bilateral trade potential and further economic integration in line with the EU Green Deal in the post pandemic era. Since the cost of getting late for negotiations will be too expensive for both sides, we urge the EU to start the negotiations as soon as possible.
As is known, Green Deal was adopted in 2019. Could you give information about Türkiye’s activities in this context?
Combating climate change and its effects is a high priority concern for us, and with this urgency in mind, Türkiye has accelerated its efforts in green transition in the past few years.
Türkiye announced its net zero target for 2053 and has published its own comprehensive Action Plan to facilitate the transition to a green, sustainable and resource-efficient economy.
We attach great importance to the realization of green transition in our banking sector, which is one of the strong pillars of our economy. Moreover, our efforts for developing a national green taxonomy has been going on. Taxonomy will trigger the use of green finance instruments and protect investors against the risk of greenwashing. Also in this area we need to intensify our cooperation.
Capital Markets Board has also announced the “Green Debt Instrument, Sustainable Debt Instrument, Green Lease Certificate, Sustainable Lease Certificate Guide” as of February 2022. These steps will pave the way for our country to become one of the active and important players in the rapidly growing green bonds market. In addition, we announced our Sustainable Banking Strategic Plan in December 2021.
In this process, we are also closely following the European Green Deal and Fit-for-55 legislative package with a view to preserving and strengthening the long-established value chains between Türkiye and Europe in a highly transformative environment.
I should underline that, the ongoing cooperation efforts between the EU and Türkiye regarding the Green Deal are highly valued. Indeed, we need to intensify our collaboration in this area not only to contribute to global climate change mitigation efforts by joining our forces, but also to ensure the proper functioning of the existing preferential trade regime between Türkiye and the EU.
As you would agree, among the European Green Deal elements, the Carbon Border Adjustment Mechanism (CBAM) and the Circular Economy Action Plan will have significant impacts for the functioning of trade between Türkiye and the EU, affecting both sides’ economic operators.
With these in mind, it is necessary that Türkiye participates in EU decision making mechanisms on areas directly related to the functioning of the Customs Union, such as the CBAM and Sustainable Product Initiative under the Circular Economy Action Plan. More regular and frequent technical cooperation mechanisms are needed to ensure this.
Taking this opportunity, with the finance perspective, let me express an issue of high importance for Türkiye regarding the design and implementation of the CBAM. As you are well aware, the comprehensive green transformation process ahead of us requires substantial financial resources. Especially, SMEs’ access to affordable finance is critical for inclusivity. Therefore, as a candidate country and Customs Union partner, the allocation of CBAM funds resulting from trade with Türkiye back to our country’s green transformation efforts remains a high priority for us. Such an approach would also be more in line with the Common but Differentiated Responsibilities and Respective Capabilities principle enshrined in the Paris Agreement.
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