The Impacts of the Covid-19 on Turkish Economy and Policy Recommendations on Government Spending

INTRODUCTION

Coronavirus (Covid-19), a pandemic that started in December 2019 in Wuhan, China, spread across the Far Eastern economies, then to America, Europe and the rest of the world. Approximately 25% of the world’s population was at risk by March 2020 due to the Covid-19. Its impacts on the global economy, especially tourism, industry, and services contributed to a rapid decline in domestic production and international trade. Consumer and producer confidence indices fell sharply.^[1] Government budget revenues declined and expenditures rose. Unemployment rose.^[2]

In this context, the spread of the Covid-19 has impacted production, supply chains, and consumption, causing the global economy to contract. In some industries, the contraction almost brought them to a halt. The world has entered a crisis state as a result.^[3] In comparison, the epidemic that affected the entire world is more severe than the global financial crisis of 2008. Globally, large monetary and fiscal measures have been implemented in order to prevent permanent damage to employment, supply chains, and production capacity. The Central Banks of developed and developing countries have undertaken numerous monetary measures including interest rate cuts, asset purchases, liquidity increases and loan support programs.^[4]

From the middle of March 2020, the epidemic started to affect the economic activities of Türkiye through foreign trade, tourism, and domestic demand channels. In April, these effects spread throughout the economy. The slowdown in the Turkish economy has accelerated in the second quarter. As a precaution, Turkey has closed shopping centres, cafes, coffee shops, and restaurants. From textiles to the automotive industry, domestic and foreign demand has decreased, resulting in a halt in production. To prevent permanent damage to the Turkish economy, fiscal and monetary measures have been taken. In order to analyse the effects of the pandemic on the Turkish economy, it is important to examine the general outlook of the Turkish economy before and after the pandemic.

2. GENERAL BALANCE OF THE TURKISH ECONOMY AS OF THE END OF 2019

The general balance of the Turkish economy for the years 2015 – 2019 is given in Table 1. Türkiye’s GDP was 754 billion $ in 2019 and it grew by 0.9% with the effect of the 2018 currency crisis. Consumer Price Index (CPI), while it was 20.30% in 2018, almost decreased to the level of 2017 with 11.84% in 2019. Unemployment rate realised as 13.0%, labour force participation rate was 52.3%. As of the end of 2019, 1 USD = 5.95 TL, EUR = 6.68 TL. Figures in foreign trade shows that, compared to 2018, exports increased to 180.8 billion $, imports decreased to 210.3 billion $ in 2019. Finally, foreign trade deficit of Türkiye in 2019 was 29.5 billion $.

Table 1. General Balance of the Turkish Economy (2015 – 2019)

Source: Turkish Statistical Institute, Republic of Türkiye Ministry of Trade, Republic of Türkiye Ministry of Treasury and Finance

3. POST-COVID GENERAL BALANCE OF THE TURKISH ECONOMY

Table 2. Post – Covid General Balance of the Turkish Economy (2020 – 2022)

Source: Turkish Statistical Institute, Republic of Türkiye Ministry of Trade, Republic of Türkiye Ministry of Treasury and Finance, Central Bank of the Republic of Türkiye – (*) indicates estimated figures

Table 2 presents the general balance of the Turkish economy for the years 2020 – 2022. Türkiye was one of the few countries to experience positive economic growth in 2020, despite being hit hard by the Covid-19 pandemic. Among members of the G20, Türkiye’s GDP grew by 1.8 percent, only behind China’s.^[5] Lockdowns and production halts caused the unemployment rate to increase 0.2% over 2020. Thanks to the reopening of the world economies last year, Türkiye’s growth rate was 9% and the unemployment rate fell to 12.6%. Moreover, Türkiye’s exports and imports levels^[6] increased last year due to recovering international trade.^[7]

4. GOVERNMENT SPENDINGS

In response to the pandemic, governments and central banks around the world have introduced policies aimed at mitigating at least some of the negative economic impacts. Türkiye has also increased its government expenditures, but this has been at a much lower rate than other countries.

Türkiye’s Government Spendings in Turkish Lira (2019 – 2021)

Source: Turkish Statistical Institute

Türkiye’s government spending reached an all-time high of 77.265.678 TL (10.371.232 billion $) in the fourth quarter of 2020. Last year it reached from 63.282.968 TL (7.249.908 billion $) in the second quarter of 2021 to 68.816.970 TL (7.758.395 billion $) in the third quarter of 2021. (1$ = 7.45 TL in December 2020 / 1$ = 8.73 TL in June 2021 / 1$ = 8.87 TL in September 2021). Health spending as a percentage of gross domestic product grew to 5% in 2020 because of the pandemic, up from 4.7% in 2019.^[8]

In 2020, Türkiye has launched a stimulus package (Economic Stability Shield) costing USD 15.4 billion to combat the Coronavirus pandemic, consisting of:

• A three-month deferral of loan payments by companies and will offer additional financial support to affected businesses
• Accommodation tax will be cancelled until November
• Social security premiums will be deferred by six months for retail, iron and steel industries, shopping malls, automotive, entertainment and hospitality sectors, food and beverage businesses, textiles as well as event organization sectors
• Stock financing assistance to importers who are affected by the global pandemic.^[9]

Table 6. Turkish Government Expenditures to GDP (%)

Source: Republic of Türkiye Presidency of Strategy and Budget – (*) indicates estimated percentages of government spending

The Presidency of Strategy and Budget reports total government expenditures have increased slightly from 36.1% to 36.4% in 2019 and 2020, respectively. In 2021, government spending dropped by approximately 2.1% and was recorded as 34.3%. This value is expected to decline to 33.3% in 2022. Despite the potential it has, Türkiye has increased its government expenditures to a limited extent in the post-Covid period.^[10] According to Statista’s data, Argentina increased its government expenditures by 4.39 percent in 2020, compared to the previous year.^[11] In 2020, government expenditures to GDP increased by 5.3% in Brazil,^[12] 6.7% in France, and 12.9% in the UK compared to 2019.^[13] On the other hand, Turkish government expenditure showed a very slight increase compared to other developing and advanced economies.

5. POLICY RECOMMENDATIONS ON GOVERNMENT SPENDINGS DURING COVID-19

5.1 For fiscal policies to work, increasing subsidies is crucial

Fiscal policy can effectively protect household demand, and it can help economies to recover through aggregate demand during and after the pandemic. While entering the normalisation process, issues such as the size and components of subsidies to be provided to households and companies should be decided very carefully. Türkiye’s additional expenditures (such as cash aid, short-term work allowances, and unemployment benefits) or reduced revenues (such as lower VAT rates) were less than 2 percent of its gross domestic product in 2020, compared to 16.5 percent in the UK, 25 percent in the United States, and 8.8 percent in Brazil. In emerging markets and low-income economies (4%), as well as in advanced economies (16.62%), the average additional spending and foregone revenue was higher than in Türkiye. In fact, the social assistance package of 1100 TL (82$) provided to citizens who are impacted by the social and economic consequences of the coronavirus is not enough to cover the increased living expenses due to high inflation. To prevent poor people from economic crisis, the amount of social assistance should be increased. Besides, until the economy recovers from the effects of the coronavirus, the rental assistance that was provided to the firms for three months (around 100 $) in 2020 should continue. Additionally, as rising rent costs pose challenges, especially for Small and Medium-sized Enterprises, the amount of rental assistance should be increased accordingly. Increased government spending may result in higher taxes in the long run. However, if the negative economic effects in the short term are not solved, citizens may face even more severe economic consequences. Fiscal incentives are crucial for health systems and physical and digital infrastructure as the pandemic slows. In the case of limited fiscal space, economies must generate income, increase spending and encourage productive investment. Structural decisions should be taken in harmony with the world, which will ensure sustainable economic growth not only during the pandemic period but also in the post-pandemic period.

5.2 Policy coordination is essential

The magnitude of the economic costs in terms of fighting Covid-19 requires national and international coordination of policy instruments. Chakraborty and Thomas (2020) suggest that this can be achieved by making monetary and fiscal policies more coordinated.^[14] There is also a need for global coordination in trade, finance and macroeconomic policies, as well as health and medical infrastructure. At the national level, coordination of monetary, macroprudential and fiscal policies can effectively reduce the effects of Covid-19. While the main purpose of macroprudential policy is to ensure financial stability and avoid systematic risk, monetary policy aims to maintain its stability and manage liquidity. On the other hand, the aim of fiscal policy is to increase aggregate demand. As a result, higher policy coordination will provide greater policy effectiveness in mitigating Covid-19’s negative impacts.

Dans la même thématique, la rédaction vous propose les articles suivants :

firstsecondthird