OBG talks to Mehmet Şimşek, Minister of Finance

Interview: Mehmet Şimşek

How did the government perform in fiscal terms during 2011, and what steps have been taken to reduce the trade deficit?

MEHMET ŞİMŞEK: On the fiscal front, our core achievements since 2002 have been a significant reduction in debt and the deficit. We lowered the general government deficit from 10.8% of GDP in 2002 to 0.6% in 2011. Similarly, gross public sector debt fell to 39.4% of GDP from 74% in 2002. Thanks to the restoration of fiscal health, we have improved the credibility of Turkey’s fiscal stance. During the 2008-09 global crisis, debt and deficit rose, but we managed to reduce it to pre-crisis levels in two years. A combination of strong revenues and spending controls has provided us with a small surplus in the first nine months of 2011. In the last quarter of the year, had we not spent TL11.1bn (€4.7bn) on infrastructure, we would have had a small surplus in the general government budget. However, Turkey needs to invest in infrastructure, in people, and in research and development (R&D). Nevertheless, we overperformed relative to our general government deficit target of 1% of GDP, which is well within the Maastricht criteria.

Given our current account deficit (CAD) and strong domestic demand, it is important to maintain fiscal discipline and tighten fiscal conditions. To maintain success, we unveiled a medium-term economic programme that foresees the general government budget deficit declining to 0.4% of GDP and debt falling to 32% by the end of 2014.

What role will the new taxes announced in late 2011 play in reducing the CAD?

ŞİMŞEK: The tax increases in October 2011 were aimed at containing demand and helping moderate the CAD. For example, we increased taxes on cars with engines over a certain size. Taxes on mobile phones also went up, because in the first half of 2011, Turkey imported 7.9m mobile phones. Unless we had taken measures, it would have been almost 20m. We raised a surcharge on loans for imports, so if you import products and pay in instalments or by borrowing, the credit is more expensive. These measures help moderate the size of the CAD.

What are the primary factors driving the growth in the country’s economy? ŞİMŞEK: Growth is predominately driven by private consumption and investment. These two components have been strong partly due to the banking sector, which has a very healthy balance sheet. Once the crisis was over, banks were in such good shape that they were able to support the economy. The household sector is also strong, due to the creation of 1.5m jobs in 2011 and 3.8m since the end of 2007.

During 2007-11, some 26m jobs were lost globally, including 5.1m in the US and 8m in the EU. New jobs in Turkey support the recovery and the recovery creates more jobs. The jobless recoveries seen in the US and EU have resulted in an unemployment that remains stuck at about 8-11%. In Turkey the rate also went up, but then it fell well below pre-crisis levels.

How willing is the government to employ fiscal stimulus in the event the crisis in Europe becomes a bigger challenge for Turkey?

ŞİMŞEK: Since we were able to bring the deficit and debt down, we have room to manoeuvre. We will maintain fiscal discipline and keep the debt-to-GDP and deficit-to-GDP ratios on a downward trend, but if there is a significant external shock, we can provide stimulus, as we did in 2009. However, because we withdrew that programme relatively quickly, we did not find ourselves in a position where our debt sustainability was in question. We have a lot of experience in terms of crisis management, and 2008-09 was a great stress test from which we emerged successfully. None of this means that we would not be affected by a global or regional crisis. However, the issue is not what happens, but how we respond.