Turkey’s New Five-Year Development Plan Slashes Economic Expectations

The government’s recently published 11th Development Plan is particularly important, as it covers the goals for 2023 – a symbolic year, marking the centenary of the proclamation of the Turkish Republic in 1923. President Recep Tayyip Erdogan has designated 2023 as an important rallying point for the country’s diverse set of enterprises and policy, from defense and economy to education and agriculture. An overwhelming majority of the public and private sector enterprises have a “2023 Plan” that they seek to align with the government’s ambitious undertakings.

When the 10th Development Plan was proclaimed in 2013, it set out to initiate a 10-year growth process that would render the 2023 macroeconomic indicators particularly impressive. It forecasted 2023 GDP at $2tn, GDP per capita at $25,000, export volume at $500bn, unemployment at 5% and inflation reduced to single digits. However, as of Q2 2019, Turkey’s GDP sits at $784bn, GDP per capita at $9,632, export volume at $168bn, unemployment at 14.1% and inflation at 15.7%.

For Erdogan, the 2019 figures were acceptable setbacks. After all, since 2013, the spillover effects of the civil wars in Iraq and Syria have impaired the country’s economic growth, the refugee problem has strained the labor market, and worsening relations with the US and EU over geopolitical reasons have impaired investor confidence. Many presidential economic advisors thought that the situation could still be salvaged, however; they forecasted a tough financial recovery period from 2019-2023, owing to an absence of elections. However, this prediction took a major hit after Erdogan’s Justice and Development Party (AKP) lost the country’s three biggest cities – Istanbul, Ankara and Izmir – in the 31 March 2019 elections and then lost the Istanbul rerun on 23 June. Losing the majority of the party’s rent stream, Erdogan is now preparing to deal with fragmentation in his party and outright defections. It is unclear whether the road to 2023 will be as smooth as his economy advisors have predicted.

The 11th Development Plan was supposed to have been issued in mid-2018, but it was delayed until the aftermath of the 31 March 2019 elections (and later, the 23 June Istanbul rerun). The new development plan has almost halved the expectations outlined in 2013. The 2023 GDP is now forecast at $1.1tn, GDP per capita at $12,444, export volume at $226.6bn, unemployment at a symbolic 9.9%, and an inflation reduction “window” that will gradually stabilize at 5% before 2024. These figures are slightly lower than what was recorded in 2013, implying that the 2013-2023 period will likely mark a slight stagnation overall.

The burden of this economic malaise, however, has landed on the president’s son-in-law, Minister of Treasury and Finance Berat Albayrak. Most AKP voters blame Albayrak for the country’s economic woes, although conditions of stagnation have been in place long before he became a minister. Regardless, reliable public opinion surveys conducted shortly before and after the 23 June Istanbul rerun show that most voters highlight two major problems that have caused a backlash: Albayrak’s poor record as finance minister, and Syrian refugees. AKP insiders are voicing both problems to the president at increasingly louder and more frequent intervals, although Erdogan is reportedly not accepting the accusations against Albayrak’s handling of the economy.

In response to intra-party criticism and to affirm his support for his son-in-law, Erdogan dismissed Central Bank Governor Murat Cetinkaya on 7 July. This move has substantially impaired central bank independence, since its governors formally cannot be removed until their tenure is over. It followed an escalating disagreement between Cetinkaya and Erdogan over the latter’s insistence on tampering with interest rates. His dismissal and replacement with Murat Uysal led the lira to decline another 2% against the dollar. We also expect further damage to investor confidence in the coming weeks given that the new central bank governor’s graduate thesis has been exposed as heavily plagiarized.

Coupled with the scaled-back 11th Development Plan, the removal of the central bank governor reveals a greater mismatch between market conditions and presidential forecasts on the economy. In the coming weeks, Erdogan will try to arbitrarily lower interest rates, which he believes will reduce inflation – a notion that runs contrary to fundamental economic principles. Over the medium term, we expect sustained presidential intrusions into central bank decision-making.