Turkish government has credibility problem on reforms

The new government keeps saying “We will be a reform government,” but it continues to suffer from a chronic credibility issue. Even though the prime minister and his ministers repeatedly vow to pass all kinds of necessary reforms, they have not been able to create confidence in the markets.

The reform package announced last week created disappointment in the markets. The opening of a new EU accession chapter and government statements promising to “add the EU and reform anchors to the fiscal discipline anchor” have also not been enough to create this confidence.

Feeling the need to further concentrate on economic matters, Prime Minister Ahmet Davutoğlu has started repeating in all of his speeches that “the 2016 budget will have a surplus” and “fiscal discipline will not be abandoned.”

The spokesperson for the government, Deputy Prime Minister Numan Kurtulmuş, has said a major portion of this week’s cabinet meeting was spent on the economy. He also said the 2016 budget will be discussed and reforms will be made at the end of December. He vowed that fiscal discipline would be maintained and a renewed medium-term program would lead to a “phase change” in the Turkish economy.   

In short, the government is aware that it is experiencing a credibility issue regarding reforms. This issue stems from the fact that several pledges that require serious spending were made before the Nov. 1 election, though there is no clarification about where the extra resources will come from. In the packages so far announced there are no serious or radical measures.

Speaking after the cabinet meeting, Kurtulmuş said fiscal discipline and a huge reform package were “conflicting issues,” but in the 2016 budget both fiscal discipline would be maintained and significant steps would be taken to implement the reform action plan. He said the budget was prepared based on encouraging investment, production and exports. 

Indefinite resources 

The government is aware that unless its credibility issue is solved, business will not continue as usual. However, credibility will not be possible with the steps disclosed so far. We are still awaiting with curiosity to see how a balanced budget will be achieved or how the need for resources will be met. If it is met with tax and price hikes, then this would threaten macro equilibriums. 

It is also not even certain yet how the government plans to share the burden on employers imposed by the minimum wage rise. If eyes turn to other funds, then things might start to stir up politically. 

What’s more, the measures announced so far as reforms do not quite match with the reform criteria of international and domestic markets. It looks very difficult for Ankara to actually be credible without taking the kind of radical measures that can truly be called genuine reforms.