Turkey’s government outlined a multi-billion dollar public spending programme at the weekend, easing fiscal policy ahead of a new, probably much less stringent, agreement with the International Monetary Fund.
The finance ministry said it was revising some key budget targets between 2008 and 2012 to release about 17bn new Turkish lira (YTL) ($13.4bn, €8.7bn, £6.8bn) for investment in infrastructure. The announcement is a sign that the government, chafing under strict IMF oversight and beset by a political crisis, intends to pursue an ambitious public spending programme, much of it concentrated in Turkey’s unsettled south-eastern region.
The government’s ability to spend on infrastructure has been curtailed since 2002 by a $10bn (€6.5bn, £5bn) loan agreement with the IMF that set strict targets for public finances. The most visible of these was a primary surplus – the budget surplus before interest payments – that was once as high as 6.5 per cent of gross domestic product.
Kemal Unakitan, the finance minister, said the government was revising the primary surplus target down to 3.5 per cent for 2008 and to 2.4 per cent in 2012, after an upward revision of the size of the economy this year.
The shift to increased public spending is unlikely in principle to worry the financial markets, given Turkey’s YTL 750bn economy. What might concern investors, however, is that it coincides with an economic slowdown, heightened political tensions and signs the central bank might raise interest rates steeply this month to curb inflation, currently at 9.7 per cent. Monetary policy is about to be tightened as fiscal policy is loosened.
The five-year investment programme includes funds to boost agricultural production and keep food prices from rising excessively. It suggests the government will seek a looser arrangement with the IMF when the agreement ends on Saturday. Turkey is expected to sign a “precautionary stand-by arrangement” that will allow for some fund oversight of fiscal policy but will not include guaranteed funding.
Mehmet Simsek, the economy minister, said the spending “draws a clear road map for the next four to five years, offering a perspective to speed up investment in infrastructure, to keep inflation under control and to prevent the current account deficit from getting worse”.
