Turkey Needs More than a Palliative Solution to Cope with COVID-19
by Zeynep Beyhan
The COVID-19 pandemic is primarily a healthcare issue. However, the measures that have been applied to deal with contagion have slowed international trade which is being felt in nearly every economic sector. To stave-off economic ruin and prevent subsequent political upheaval, governments around the world have launched major financial stimulus packages. Besides fiscal policies, monetary policy plays an important role in tandem, and many central banks — re: the European Central Bank and the US Fed — have taken monetary action to keep the financial sector liquid and assist financing conditions in the economy.
Turkey also announced similar fiscal and monetary measures—although to a lower level. Yet, many of these steps, notably in monetary policy, are inappropriate given Turkey’s current economic environment since it is facing an ongoing economic crisis caused by foreign currency debts of non-financial corporations which began even before the pandemic. Moreover, the financial package announced by the government, called the ‘Economic Shield Stability Package,’ is full of gaps that may cause serious economic problems in the future. The COVID-19 crisis was, at first, very well managed in Turkey. However, after the first confirmed case on 11 March, the number of active cases and the mortality rate rapidly increased to some 69392 cases with 1518 dead by 15 April.
Turkey’s ‘Economic Stability Shield Package,’ worth $15.4 billion (USD) is meant to cushion the economic effects of COVID-19. Not only will it support salary payments and postpone loan payments, it will also provide flexibility for taxpayers. Notably, the Turkish government announced that it will maintain minimum wage support to employers regardless of the firms' size. The government will continue to provide monthly TL 75 (Turkish Lira) — approximately $10.85 (USA) — per employee through 12 months. Furthermore, the government would prohibit employment layoff for three months under draft legislation aimed at protecting those with job insecurity and it would pay 60% of the salaries of those employed in firms that have been forced into insolvency directly due to the pandemic. Through the ‘Short-Term Employment Allowance,’ which will support people working in businesses forced to shutter, the Turkish government promised direct transfers — within the range of TL1,752 to TL4,381 (re: $254 to $634 USD) — to employees’ bank accounts (1). This fund may seem to be a supportive step by the government, yet it is insufficient. This is sure to several factors.
First, it does not comprise all labourers. Employees would have had to have worked for 600 days in the same employment to qualify—though a sub-limit reduces that number to 450 days. Second, an official employment contract valid for the past 60 days is required. Considering that there are nine million informal employees in Turkey — according to TUIK, the Turkish Statistical Institute — this social segment will be unable to benefit from the government’s short-term employment allowance. It is also noteworthy that it is not forbidden to force employees to accept unpaid leave even if being laid-off has been banned for three months. Employees forced to take unpaid leave receive a monthly income of 1177 TL (roughly $170.73 USD) from the unemployment fund—well below the minimum monthly wage of $370 USD. Due to such gaps in the package, employees risk receiving only $170 from the unemployment fund instead of receiving monies in the range of $253 to $633 by applying the short-term employment allowance (2). That said, the debt relief of banks — for bank customers — from three to six months and the bolstering of liquidity, which doubled the limit of the Credit Guarantee Fund (a fund that assists loans drawn by the beneficiaries) was increased from TL 25 billion to TL 50 billion. These are important dimensions of the package.
COVID-19 hit Turkey when it already had a weak economic forecast. The currency-rate shock, following the Brunson Crisis (August 2018) caused considerable pressure on foreign currency debts of non-financial corporations, which are estimated at more than $225 billion (USD). Additionally, the 2019 local elections and the ruling AKP’s (re: the Justice and Development Party) loss of two major city municipalities — İstanbul and Ankara — caused it to panic; the government resorted to an ad hoc solution rather than the more painful structural reforms required. In this context, the Central Bank’s resources declined from $136 billion (USD) to $90 billion (USD) in a very short period. Capital outflow increased and foreign currency accounts of residents — because of low TL interest rates and loss of confidence — substantially increased. Residents’ foreign currency demand was catered by foreign currency sales of state banks (more than $30 billion USD) from the pocket of the Central Bank. Attempts at suppressing the exchange rate in those ways are always a palliative solution to the Turkish economy and is now replicated by the Central Bank of Turkey.(3)
On 30 March 2020, Turkey’s Central Bank announced that it will adopt Quantitative Easing (QE) which is an unconventional monetary policy tool implemented by central banks to inject money into the economy by purchasing longer-term securities from the open market.(4) The European Central Bank and the US Fed have also launched QE’s to battle coronavirus’ economic impact but it is not necessarily good for Turkey. Because quantitative easing can only really work in economies that have low inflation, a highly traded currency and long-term growth problems like Eurozone. QE can cause serious economic problems in developing countries, like Turkey, where inflation rates and foreign currency pressures, based on current account and budget deficits, are high and especially if a country’s currency is not a reserve currency (in the way that the Euro and US Dollar are). Turkey struggles with a high inflation rate. According to the IMF World Economic Outlook Report, inflation figures are estimated to be 12% for both 2020 and 2021.Thus, Central Bank of Turkey has to be clearer and reinforce the idea that these steps will not trigger inflation. On the other hand, Turkey urgently needs foreign currency, and hence all foreign currency options must be kept open. In this context, finding foreign resources is much more essential than the Central Bank’s QE programme.
Turkey needs more than palliative solutions to reduce the volatility of its macroeconomic outlook and to eliminate the adverse effects of the pandemic. While few may have expected the outbreak of COVID-19, people do expect that their government’s are able to provide solutions in times of crisis. Turkey is trying to, but needs to rethink its strategy.
27 April 2020
Notes:
1 ‘Stimulus Package Shields Public from Pandemic as Turkey Charts Own Path to Protect Economy,’ The Daily Sabah (12 April 2020). This article is available at: <https://www.dailysabah.com/business/economy/stimulus-package-shields-public-from-pandemic-as-turkey-charts-own-path-to-protect-economy>.
2 Tekin, Aynur (2020), ‘At the Mercy of their Employers, Thousands Unable to Benefit from Gov’t Short-Term Unemployment Fund,’ Duver English, at <https://www.duvarenglish.com/health-2/coronavirus/2020/04/08/at-the-mercy-of-their-employers-thousands-unable-to-benefit-from-govt-short-term-unemployment-fund/>
3 Gürses, Ugur (2020), ‘Underlying Diseases of Turkey’s Economy during Coronadays,’ Duvar English, <https://www.duvarenglish.com/columns/2020/04/14/underlying-diseases-of-turkeys-economy-during-corona-days/>.
4 Lancaster, Ross (2020), ‘Turkey Joins QE Club with New Programme, Global; Capital, <https://www.globalcapital.com/article/b1kzxvgzbmmh10/turkey-joins-qe-club-with-new-programme>.