Outline
- Introduction
- Turkey’s economy outlook
2.1 Labor Market
2.1.1 Female Involvement in Turkish Labor Market
2.2 Future of the Turkish Economy
- Background
- Development
- The currency right now
- The currency is likely to decline in the future
- What is causing this situation
(1). a slowing economy
(2). rising inflation
(3) a rising tide of violence scaring away foreign tourists
- Benefits
- Government role
- Conclusion
- References
- Works cited
- Introduction
Turkey is a Middle Eastern country with a population of approximately 76 million people. Despite having a small portion sitting in Europe, Turkey is in Asia and the third largest country in the world. Turkey is dominantly an Islamic state, and they use the Lira as their currency. Currently, one Turkish Lira is equivalent to 0.35 US dollars, although this is bound to fluctuate depending on the market.
Turkey is not new to the financial crisis and the recessions that accompany it. The 2008-09 crisis was the fifth in 30 years. At the beginning of 1994, a financial crisis started, but was accompanied by a program to stabilize the economy and was supported by an IMF agreement in April the same year. Asian and Russian crises later brought about another crisis in 1998 and 1999 leading to inflation of over 60% (Erkan 5). In fact, this brought the announcement of a disinflation program and the 17th agreement with the International monetary fund (IMF) towards the end of 1999. The main aim of this agreement was to reduce inflation to a single digit and enhance economic growth towards the end of 2002. A crawling-peg exchange rate system developed in the context of the agreement made by the IMF was seen as the foundation of the disinflation program. It stressed on structural reforms, downsizing of the public sector, and privatizations. However, its objectives were not met due to another crisis in December 2000 and February 2001.This led to the cancellation of the crawling peg system, which was replaced by a floating exchange system accompanied by the 18th agreement with the IMF. The agreement ended in 2005 without issues, but the ambitious authorities asked for a 19th agreement with the aim of improving capital inflows and reducing fluctuations in the exchange rate.
The 19th agreement lasted for three years up to May 2008, but still a global crisis recurred in 2008. The newly elected government, which had taken office in 2007, however, decided not to take up another IMF agreement. The first quarter of the year 2009 recorded the highest GDP decline in the previous 30 years at -14.3%. In addition, the unemployment rate of approximately 16% was experienced (Erkan 5). Turkey was hit by a recession in 2009, which made the economy degrade by almost 5%. The Central Bank of Turkey (TCMB) and the government encountered this challenge by implementing a loose monetary and fiscal policy in a bid to revive the economy. Problems in Europe affected Turkish assets in 2011, and again the Central Bank of Turkey had to intervene with a rate hike in the month of October to stabilize the depreciating Turkish Lira. Eventually, these efforts were successful and in 2012, the Lira was quite stable. However, due to the stability of the Lira, organizations preferred to borrow in other currencies at lower rates. Borrowing from external sources also expanded in banks because they were not restricted to holding some of their Lira reserves in other currency. This resulted in an increase in the Turkish private foreign currency debt (Erkan 7).
Despite being on the receiving end of negative global attention in from June 2013 to January 2014, an emergency rate hike by the TCMB towards the end of January 2014 led to the recovery of Turkish assets. The present account deficit reduced because of diverted funds from Ukraine and Persian Gulf states (Comert and Hasan 44). However, it is worth noting that the high performance of Turkish assets concentrated more on external developments than on a sound economic policy. Turkey was in the category of the “Fragile Five,” which also included Brazil, Indonesia, India, and South Africa. In fact, these countries were considered vulnerable to the crisis based on the destabilization of oil prices. Contrary to these predictions, these countries have in fact improved where Turkey outperforms the others. However, Turkey’s economic improvement has been attributed to external developments (Comert and Hasan 45).
- Turkish Economy
The most fundamental development of Turkey’s economy over the past year is probably because of the decline in oil prices since Turkey is an oil importing country. Due to this decline in oil prices, the deficit reduced to below $35 billion, up from $52 billion in the period between June 2014 and November 2015. Turkey’s monetary policies and strong fiscal balances have stabilized loan growth and led to reduced levels of domestic demand in the process. If the decrease in oil prices continues, Turkey’s external balances are set to continue reducing. Therefore, it is possible that Turkey will record an account deficit of below 4% of its GDP in 2016. Indeed, this would be a huge stride in meeting the anticipations of the Procedure of the Macroeconomic Imbalances of European Union (Kenc 3).
In 2015, although there were positive developments in the economy, inflation was on the rise characterized by increased food prices and increased minimum wages. These factors contributed to the revision of inflation forecasts by the marginal propensity to consume (MPC) for 2016 and 2017 and the postponement of the previously projected 5% target to 2018. Looking at the positives, three developments that would help the inflation issue comprise the reduction of external balances coupled with the strong fiscal balances, which are set to improve the effectiveness of the monetary policy. Another development could be the implementation is the structural reforms laid out on the 10th development plan since it aims to unearth the structural causes of inflation. The third issue is the food committee, which was implemented in December 2014 with the aim of curbing food price inflation (Kenc 4).
Even though there has been a significant fall in the poverty ratio, Turkey still has a relatively high ratio when compared to other developing countries. Due to this aspect, fighting poverty is still a major issue for the Turkish government. The involvement of females in the Turkish labor market has been improving over the past years just like other macroeconomic indicators. However, Turkey still has a relatively low female participation when compared to other OECD countries (Onzel 24).
There are two connections between poverty and labor markets. The first one is an individual’s original standing, while facing the poverty line before joining the labor market. Investing in human capital and the process of obtaining a job is generally costly; therefore, the initial income level is an integral factor of this change. The second connection is that getting a job may not prevent the risk of one becoming poor. Informal and low paying jobs create and worsen working poverty. These are some of the questions that Turkey must find answers for, being a developing country. In the first instance, it is obvious that personal characteristics such as gender, age, marital status, the area of residence (rural, suburban, or urban), education level and demographic, social and financial characteristics of the families they come from highly affect the labor supply of the person in question. According to Degrimenci and Ilkkaracan, when an individual’s level of income reduces to a level below the poverty line, economic factors will influence the desire to join the labor market thereby influencing the chances of getting a job. In essence, people whose income is below the poverty line are under more pressure economically because they are expected to work more (12).
In addition, the general level of unemployment in a particular region increases the chances of part time employment. In the second specification, however, results showed that the chances of part time employment increase with age. An average level of education reduces the chances of part time employment, whereas a high level of education increases these chances. Therefore, the level of regional unemployment increases the chances of being unemployed probably due to discouraged workers (Oncel and Dereli 28).
Another factor of the Turkish labor market is the level of self-employment and unemployment. Ozerkek and Dogruel state that from the year 1966, the general trend of self-employment has been on the decrease in the majority of the countries. While studying OECD countries, Blanchard avers that the levels of self-employment are normally higher in poorer countries. This is indicated where he gives an example of Greece, Mexico, Turkey, Korea, and Portugal (5).
- Background of Turkish Currency
Increasing inflation usually brings about a high operational risk and a consequently a need for “large” banknotes. Multiple zeros bring about complications in representing monetary values, statistical records, and bookkeeping among others. In Turkey, inflation started becoming significant in the 1970s, thereby making the public experience many digits in their currencies that they had not seen before (Bayir 7). The representation of values started to be in terms of billions, trillions, and even quad-trillions. Therefore, the demand for cash in the economy was countered by the new banknotes with larger denominations being introduced for circulation almost every year from 1981. However, the large figures brought a couple of problems, including the loss of prestige of the Turkish Lira, which was connected to high denominations. By use of a strict fiscal policy, a proposal to re-dominate the Lira was put forward as part of a strict economic program after a significant reduction of inflation from high levels. Due to these factors, the removal of six zeros from the currency technically became a necessity. The first drafted bill that aimed at removing the five zeros from the Lira was tabled to the Prime Ministry in 1998, but the operation was not implemented until 2005. Therefore, the expected reduction in inflation could not be reduced to expected levels (Ilker 4).
Given the stabilized economy, a restoration of the validity of the currency and conquering the logistical and technical issues of the higher denominations was crucial. In 2004, the most difficult assignment of the Central Bank (CBRT) was to start, keep up, and organize endeavors in a goal to complete the redenomination of the national cash on January 1st. The first phase of currency reform was divided into two stages. Six zeros were removed from the currency and then the prefix new was added to the name of the currency to become New Turkish Lira (YTL). Banknotes and coins of the same were put into circulation on January 1, 2005. For simpler acknowledgment of the banknotes as well as to avoid experiencing the significant transition to YTL, denominations with the same value were created in the same hues and deigns as those of their antecedents. The Same approach of utilizing difference hues for progressive denominations was additionally applied while size separation was partially for 1, 50, and 100 YTL to forestall visually impaired and to battle falsifying. 1 YTL was put into flow both as a banknote and coin to restore the usage of the coins, which was overlooked. Toward the start of the currency change, it had also been decided that the prefix New added to the currency name during the transition would be removed during the second phase, a situation that took place on January 1, 2009.
Given the unquestionable requirement to alter the design and security feature of banknotes and coins in certain periods, the second period of the change was considered as a chance to issue the Turkish Lira banknotes with new outlines, sizes, and upgraded security highlights. The Turkish Lira banknotes highlight numerous firsts inside. The banknotes increased in size in ascending order, and the security highlights, which are regular to all and situated and in the same way. There are various open components, including an implanted security string bearing the letters TL and the denomination numeral, a watermark representation of Ataturk and an electrotype denomination numeral, a transparent element, dormant picture, and glowing stripe on the opposite. The banknote paper is tinted with the prevailing shading for every denomination, and all are printed one-side intaglio, with a progression of intaglio-printed spots in the upper left corner to help the visually impaired. Notwithstanding these open components, the new banknotes likewise incorporate scaled down lettering, miniaturized scale lettering and UV noticeable elements both inserted as strands and printed – for the advantage of expert money handlers. As it was executed in 2005, one-year double flow was stipulated to permit nationals to change over their banknotes and coins into new ones. The new Turkish Lira banknotes and coins were uprooted toward the end of 2009 and the recovery period for New Turkish Lira banknotes is 10 years while 1 year for the coins.
3.1Euro Changeover
The euro changeover was sorted out in a subtle nature and executed at the national level. It was supervised at European level by ECB. The Governing Council of the ECB assumed a noteworthy part in sorting out the cash changeover and set up a Euro framework advisory group at working level to arrange, execute and screen it.
In a few nations including Belgium, France, Italy, Portugal and Spain, the government assumed a part in organizing early change, in agreement with the banks. In Austria, Finland, Germany, Greece, Ireland, Luxembourg and the Netherlands, there was a completely decentralized methodology, in which the planning of the changeover was left altogether to individual banks and their affiliations. In all nations, the national central banks assumed a significant part in sorting out the cash changeover and observing or helping arrangements for finishing the non-cash changeover (Bayir 18).
In some European nations, there were issues, some because of poor responsibility organization. For instance, obligations of the Treasury, the Mint, and the Banque de France were not adequately clear; and the development of issues in coin circulation required revision that would set these roles clearly. Additionally, in Spain, coins couldn’t be conveyed to banks as fast as arranged, and banks notified clients that they would utilize the entire January and February to trade cash thereby clashing with the Governments message urging individuals to roll out the changes as fast as could reasonably be expected.
It was key that there would be a reasonable and far-reaching information campaigns about the changeover.Not just for the advantage of people in general, but to also minimize the danger of public perplexity, to inform staff in banks and organizations about the operation and to empower all divisions of the economy to be prepared in time. In the extent of the information crusade of the euro, besides the efforts sorted out by national governments, the ECB, and NCBs in the Euro framework, they set up organization programs with the private segment. The objective of the campaign was to acquaint people in general in the euro region with euro notes and coins before their presentation. It was therefore critical to ensure public support.
The campaign dispatched in August achieved a crest in the dispatch of euro notes and coins, and maintained amid the cash exchange period. An extensive variety of media counting TV, radio, press, boards, recordings, data flyers, devoted site were utilized to pass on messages to people in general, retailers and small organizations. Some campaign was also done in some nations outside the euro territory. As a result, there was a significant increase in public awareness. Unique consideration was given to disadvantaged individuals particularly the visually impaired and seniors (Bayir 18).
An extensive variety of different actions was taken at national level to acclimate the general society with the euro.they included, help lines, Q&As, practical examples, euro road shows, training people that would be handling cash, utilizing schools and universities as a channel for enlightenment, and interpretation of handouts into different dialects for foreign employees and tourists. The general population in the euro region promptly acknowledged the culmination of the changeover. It is safe to say the campaigns were effective. The general spending plan for the Euro framework campaign was around 400 million, including 80 million for the battle organized by the ECB (Bayir 18).
- Development
4.1 The Currency Right Now
One Turkish Lira equals 0.35 US dollars today. The TRY has floated higher against the USD lately, reinforcing to a four-month high. Developing business sector resources have profited from the US Fed Chair Janet Yellen’s more dovish tone on money related strategy. The ascent in crude oil costs has likewise given backing to the TRY. In any case, the TRY remains about 25% lower against the USD since mid-2014 and keeps on confronting downside risks from capital movements in favor of the USD. USDTRY is forecast to end the year at 2.95. According to the monetary and exchange rate policy for 2016, the Central Bank of the Republic of Turkey’s (CBRT) principle target is to accomplish value stability. In the 2016-2017 periods, the expansion focus for 2018 is set at 5 percent, according to the agreement made with the administration amid the readiness of the Medium Term Program. Being a component of the responsibility of the CBRT, the instability band will be kept up at a 2% rate focusing on both bearings, as in earlier years. Should the inflation rate go amiss from the year-end focus by more than 2% rate focuses toward the end of every quarter, the explanations behind the deviation and in addition the measures were taken, and those that will be taken to accomplish the objective rate will be clarified through the Inflation Report. The Bank will present a public statement to the legislature if expansion falls outside the instability band toward the end of the year (European Economic Forecast, 22).
4.2 The Currency is likely to decline in the future
For quite a while, specialists have seen Turkey as one of the best-rising economies because of its blasting development, rising foreign trade, high local demand, and the most secure business environment in the region. Today, the nation is confronting serious local and worldwide difficulties. The vulnerabilities in world economies; for example, Fed’s rate hike vagueness are concurring with sovereign political and financial turbulences and additionally interior and local security concerns. Encompassed by this environment where shoppers’ and financial specialists’ confidences are falling apart, the current government has reexamined down the macroeconomic focuses for 2015 and the next three years. In the Medium-term Economic Program (OVP for 2016-2018), which was pronounced in October 2015, development rates were decreased while open debts and budget plans deficits and in addition inflation estimates were expanded. Dissimilar to regular practice, the strategy for computing per capital wage was additionally changed (by buying power equality) to cover declining salary as far as present prices. In spite of genuine changes in targets and coherence, the OVP has still been discovered optimistic by the financial circles (Turkey economic Report 12).
4.3 What is causing this situation?
- Slowing Economy
In 2014, the Turkish economy grew 2.9%, which was above expectations yet missed the mark concerning meeting the changed official target, which was lessened by 4% to 3.3%. The development of the past year, for the most part, relied upon an expansion of net exports, the backing of public spending, and stock build-up. Investments share was negative and the commitment of local utilization, which was the heart of the development in the early years, diminished to 1% from 5.1% in 2013. In the first half of 2015, Turkish economy grew by 3.1%. In October 2015, the government reexamined down the development rate of the entire year from 4% to 3%, specifically as an outcome of the economic slowdown in Turkey’s fundamental export markets and persevering political uncertainty. In 2015, the unemployment rate additionally stayed high at around 10% in parallel to slowing economic activities (Turkey Economic Report, 3)
- Rising Inflation
Turkey failed to cut the inflation down to 5% as targeted. The annual consumer inflation stood at 8.2% in end-2014, after hovering above 9% for most of the year, thanks to the fall in transportation due to the declining oil prices and clothing prices. In the first ten months of 2015, however, inflation remained high (7.6%) by the rising pressure of the weak lira. The Central Bank has also revised up its inflation targets for 2015 (from 6.9% to 7.9%) and for the following years.
Inflation ascended by 0.6 pps, to around 8.8% over the span of 2015 as the Turkish lira devalued altogether against significant global currencies. The conversion scale goes through, together with firmly rising food costs, has more than balanced the disinflationary impact from the lower oil prices. Disregarding overshooting the official 5% expansion focus by a wide edge, the central bank has kept its primary strategy rate unaltered at 7.5% since February 2015. The forecast projects consumer cost inflation to increase further and to stay in the high-single digits all through the determining period on the premise of the current monetary policy approach position, the latest increments in government-controlled wages, and ingrained inflation prospects (Turkey Economic Report, 8)
- Violence
Terrorism has noteworthy monetary repercussions all of which decrease financial welfare: Terrorist assaults diminish the human and physical capital stock; present large amounts of vulnerability; build military consumptions and shift assets from beneficial segments to the defense industry; and greatly influence particular commercial ventures, for example, aircraft or tourism. In spite of the fact that these impacts might be purported for any type of terrorist movement, including local, transnational, separatist, or radical Islamist, nature, and foundations of an armed clash. It is significant in comprehending the direction of causality in the middle of terrorism and financial pointers and consequently in planning viable policies to battle terrorism (Harun and Elekdag, 14)
- Government Role
The monetary policy actualized by the Central Bank of the Republic of Turkey (CBRT) reduced the effect of the worldwide financial crisis. In particular, the discoveries, according to Alp and Elekdag propose that without key changes—including the selection of an inflation-focusing framework supported by an adaptable conversion rate regime—the worldwide financial emergency would have been connected with a much more profound financial contraction. Turkey is an interesting case study since it was one of the hardest hit nations of the crisis, with a year-over-year constriction of 14.7 percent amid the principal quarter of 2009. In the meantime, reckoning the aftermath of the crisis, the CBRT diminished policy rates by a surprising 1025 basis points over the November 2008 to November 2009 period. On the off chance that an inflation focusing on a system supported by an adaptable exchange rate regime had not been embraced, the recession would have been significantly more severe (54).
- Conclusion
Moderate output development is set to proceed in view of the low oil value, an accommodative monetary policy, and increase in government-controlled wages. Net exports will subtract from development, partly because of Russian sanctions and the insecure security situation locally and in the close abroad. Inflation is set to approach twofold digits concerning pass-through from the past year’s devaluation and domestic inflationary pressure. The current account benefits with low oil costs while the public debt proportion keeps declining. The Turkish economy has been widely tipped to be a big hit in the future, but it is being impeded mostly by inflation and terrorism attacks. Formulation of the right policies and more government intervention could go a long way in realizing Turkey’s economic vision.
Works Cited
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URL http://jme.mbri.ac.ir/browse.php?a_code=A-10-25-49&slc_lang=en&sid=1
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