This week minimum wage has increased by 26 percent while household natural gas and electricity prices have declined 10 percent. The President himself has made the announcement. These can be thought kind of a new year’s present for the nation. Turkey is going to have its municipal election in March 2019. You may say that it is just another election season in Turkey? I tend to disagree. This time is different.
This election season comes true within the balance of payments crisis. Despite the serious situation, the economy and politics will continue to collide in the coming two months. Still there are two months to come to its senses for Turkey. This period looks too much for me.
Why the rise in minimum wage and the decline in electricity and natural gas prices? The most significant economic event of 2018 in Turkey is the balance of payments crisis that has led to a rapid depreciation of the Turkish Lira against the American Dollar. Lira has depreciated more than 40 percent in 2018 leading to a 22 percent surge in consumer prices and 39 percent increase in producers prices. Why the rise in consumer prices has still been limited? It’s all about a rapid contraction of domestic demand.
You may say that the decision to raise the minimum wage of around 26 percent is understandable considering the welfare of the working population. Not so fast. The rise in the number of applications to get unemployment benefit had risen around 50 percent from October 2017 to October. The same indicator had declined 8 percent from October to October during 2016-2017. Let me give you another sign of deep contraction: The rapid decline in import bill has reached around 24 percent from October 2017 to October 2018. October to October rise in imports from 2016 to 2017 was around 25 percent, mind you.
In this setting, is an increase in the minimum wage going to be useful for those who are losing their jobs due to contraction? No. Is it going to help insolvent corporate sector? No. The government has kindly lowered social security taxes effectively to cope with the rising cost of labour coming from the minimum wage increase. Around 25 percent of the rising cost of labour is going to be compensated by the government. It’s bad for the future contingent liabilities of the social security system.
The government is doing its utmost to improve the welfare of its citizens. Just look at the drop in heating and electricity prices in this cold winter period. For an economist, it might look absurd yet good for politics. That’s where those two collide.
Measures to treat the symptoms, to ease the pain is understandable only in an election season. The dire economic situation of the corporate sector is also waiting for answers. Turkey is taking measures to ease the pain, Turkey is generously taking measures to limit its fiscal space which is needed to complete the real operation in the bank and corporate balance sheets. Bad decision
Insolvency produces more insolvency, not jobs and prosperity. 2019 is going to be a tumultuous year for the Turkish economy. Just fasten your seat belts.
This commentary was published in Hürriyet Daily News on 29.12.2018
