Ambitious targets of the Medium-Term Program.
The targets regarding economic growth and inflation in the program are quite ambitious, all the more since these targets had already been announced in previous programs and were not met. That said, the program seems realistic and consistent if two critical sets of policies promised are implemented. These policies concern the public fiscal stance and structural reforms.
The program realistically predicts 3.3 percent gross domestic product (GDP) growth for this year, 4 percent for next year and 5 percent for the 2016-2017 period. Furthermore, GDP growth would be balanced thanks to export increases that are higher than import increases, so that the current account deficit ratio to GDP would decline from the forecasted 5.7 percent this year down to 5.2 percent in 2017.
Another crucial feature of the program from the supply side is that labor productivity, which has been stagnating for three years, would start increasing again. The inflation targets are even more ambitious: The program admits defeat on the inflation front for this year, forecasting 9.4 percent for the end of year. Next year the rate of inflation will decrease to 6.3 percent then reach the official target of 5 percent.
If all those targets are successfully attained, no doubt we can affirm that Turkey is on the way to extracting itself from the middle-income trap. Is it too good to be true? Not particularly. The program seems doable regarding the strategy adopted if two critical policy promises are fulfilled. Those are an astonishingly tight fiscal policy and well-known structural reforms.
I must confess that I was surprised by the tightness of the fiscal policy targeted in the program. The budget deficit ratio to GDP is forecasted at 1.4 percent this year, which is already a very good performance. The budget deficit is then expected to decline to 1.1 percent next year and continue to pursue its declining path to reach 0.3 percent (!) in 2017.
Accordingly, and in conjunction with the GDP targets, the public debt ratio to GDP will decrease from 33 percent to 28 percent. This very tight fiscal stance might be necessary to attain the disinflation targets as well as balanced growth. Indeed, one can easily calculate from program figures that the increase of domestic savings will reach 2.2 percentage points of the GDP for three years, and 1.4 percent of this increase would come from the decreasing budget deficit.
Is this very tight fiscal stance is possible, particularly in 2015 when general elections -- extremely important for the Justice and Development Party (AKP) --will be held? The program plans to put a harsh limit on public spending next year since spending would be slightly decreased in real terms. On the other hand tax receipts would increase more than spending. If these fiscal targets are achieved during electoral times, all I can say is, "Well done!"
The necessary complement to the tight fiscal policy are structural reforms. The program once again promises comprehensive reforms aiming to improve the human capital stock, the efficiency of the labor market, the innovation process and the quality of institutions. For years these reforms have been promised but not carried out. Will it be different this time? After the general elections it might be. This will depend on the electoral results.
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