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OPINION: Turkey’s July fiscal performance speeds up deterioration

15 August 2019

The Ministry of Treasury and Finance announced the budget implementation results for July 2019.

According to this,

– In July budget revenues increased by 51.1 percent compared to the same month last year to TL 93.4 bn,

– Budget expenditures increased by 37.6 percent to TL 83.5 billion,

– In January-July period, budget revenues increased by 19.5 percent compared to the same period of the previous year and reached to TL 496.4 bn,

– January-July budget expenditures increased by 22.7 percent to TL 565.1 bn, 

– Thus, the central government budget in July posted TL 9.9 bn surplus pulling down the January-July budget deficit to TL68.7 bn. 

–  Compared to July 2018 primary surplus level of TL 9.3 bn this July the primary surplus was TL 17.6 bn.

At first glance, the figures seem to have miraculously improved on the revenue side, although in July the government did not slowdown its spending pace. Yet, is that really so? The details tell a very different story. 

Expense side: continue to spend at full throttle!

When the expenses were analyzed from the summary table, the first thing that catches the eye is the pace of overall spending at 37.6% for July 2019 which is more than double of the headline CPI inflation in Turkey. 

Since interest expenditures in July contracted by 5.2%, we immediately think that there should be a rather disturbing increase in current expenditures. As a matter of fact, staff expenses are as high as ever yet the 21.5% increase is not unusual compared to previous months. The problems in the social security system are known to everyone; it is therefore not surprising also that expenditures directed to financing the social security deficit increased by 20.5%.

One of the first surprising items in spending is the 27.2% increase in the  goods and services purchases. Since the elections are over, it would be wise to apply the brakes at least on this side; yet it seems to government has not refrained from buying. However what appears horrendously shocking  is the enormous 57.7% expansion in current transfers from July 2018 to July 2019 as the capital expenditures (+ 82.4%) and capital transfers (+ 286.3%) are equally surprising.

Budget Revenues: Central Bank Resources are tapped

The monthly increase in income performance compared to the same month of 2018, except for the month when the profit was transferred from the central bank, has been below inflation since the beginning of the year honey.

Yet in July, yoy revenue growth was remarkably high at 51.1%. We look at tax revenues; the monthly increase is only 7.3% which is even below the half of the inflation rate. Clearly, the state is unable to generate tax revenue in a shrinking economy while there problems related with collection as well.

As for the revenues generated from venture and property, the increase from July to July is 2,654.3%! As can bee seen from the spending side the government is making capital transfers to public institutions, many of which are now under the management of  Turkey’s debated Wealth Fund. So how come the state is able to make such a huge increase to a tune of 2,654.3%?  The answer is, of course, the transfer of central bank’s TL21 billion reserve funds to the Treasury completed on July 30.  With the regulation in the Income Tax Law and the Amendment of Certain Laws adopted at the General Assembly of the Turkish Grand National Assembly on 17 July, all of the contingency reserves allocated until the date of entry into force of the article and all of the accumulated extraordinary reserves are separated from the profit of the last year.  Thus, on July 30, TL21 billion was transferred to the Treasury from the central bank of Turkey’s accounts ate the Treasury; carving the way for the AKP government to spend more and more. 

If we look at the July budget performance with this detail at hand we clearly see how the government started to spend this money rapidly. Moreover, according to Cumhuriyet Newspaper dated July 30th, Berat Albayrak  who runs Turkey’s Treasury and Finance Ministry, the central bank money was directed to contractors working with the state.  According to the news, there are some state companies operating in the field of energy and the General Directorate of Highways who received part of their receivables from the central bank money.

With or without the central bank money…

In the January-July 2019 period, the budget deficit was TL 68 billion; increased by 46.7% compared to last year. If the central banks resources had not been confiscated, this deficit would have been at least TL 89 billion. The year-end budget deficit target is TL 80.6 billion according to the budget law; in fact, it has already been exceeded by 10% in the first seven months.  Such a trend does not seem to be sustainable.

If we combine what the government has done on the monetary policy front in order to pull down the interest rate with the escalated deterioration on the fiscal side, we can see how urgently the AKP wants to stimulate economic growth.  As it is known, the losses experienced by the AKP in local elections were the result of economic difficulties and economic contraction in Turkey. The electorate naturally blamed the AKP, the AKP’s undisputed decision-making unit President Erdogan and his team for the economic downturn, who had been in power for the past 17 years . Now the major risks taken both in fiscal policy and monetary policy by the AKP government which has four years of governing without elections; their manner to stimulate growth “immediately” at the cost of monetary and fiscal deterioration brings only one thing to mind.  That is, early election already appears on the horizon.

GA.


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