Currency in Turkey
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).
2.1 Labor Market
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).
2.1.1 Female Involvement in Turkish Labor Market
Female participation in the Turkish labor market has been under the spotlight for quite some time. A crucial aspect that has recently been unveiled with respect to the female workforce is part time employment. Over the course of 2005, 2008, and 2011, female part time employment progressed from 13%, 22% to 27% respectively (Oncel and Dereli 16). This has brought about a number of implications for Turkish policies given that female employment is a controversial issue in Turkey. A study by Oncel and Dereli provided crucial information on the nature of female part time employment in Turkey. There was an overall increase in part time employment for both males and females, although there was a higher increase in females. It was also discovered that the composition of part time employed females involved more of older females living in rural areas and with a relatively low level of education. In addition, they were mostly involved in the agricultural sector, the informal sector, and a range of other blue-collar occupations. In fact, around half of this group included unpaid family workers. The average pay and number of working hours were found to be lower in females compared to males and different aspects of female employment hugely varied depending on the geographical distribution (17).
In order to find out the reasons behind the increase in female part time employment, the study estimated two specifications. The first one analyses the chances of part time employment in relation to full time employment, while the second study analyzed the chances of part time employment in relation to being unemployed. The results showed that the chances of part time employment in relation to full time employment reduced with age. Therefore, lower educated females have a higher chance of part time employment. 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).
The figure above shows the status of employment in turkey from1988-2013. Major differences in the number of paid employees compared to other categories are evident in this period. In essence, the results showed that there was an eventual negative relationship between unemployment and self-employment for the period between 1970 and 2013. Besides a long run connection between them, there is a relationship between cause and effect between the self-employment rates to the unemployment rates. However, in the analysis, the refugee effect was not considered in Turkey over the period. Thus, according to the results the unemployment rate is not related to the self-employment rate in a positive nature. The experiential evidence showing that fluctuations in the rate of self-employment have a negative influence on forthcoming unemployment rates show the existence of an entrepreneurial effect (Ozerkek and Dogruel 8).
2.2 Future of the Turkish Economy
Despite all the challenges that might be facing Turkey, global economic power is changing, and Turkey could be among the countries that gain the most from this change. The Turkish labor market shows a potential improvement, which will improve the Turkey’s economy. It is expected that Turkey’s population will grow by approximately a fifth, which will move the population to 90 million by 2040. It is also expected that Turkey’s population will be young and educated. Indeed, more than half of Turkey’s population in 2040 is expected to be less than 40 years compared to 40% in China. Chinas population, on the other hand, is expected to grow by a mere percentage of over 1 % (PwC. Turkey 1). Developing a good university system would prepare the coming generation for high skill jobs in future. Labor market developments directed towards the right direction would encourage the addition of high value industries, providing room for the development of valuable organizations by 2041. The government can go a long way in making this happen and is already implementing reforms to help with the transition. Efficiency and productivity could be enhanced to significant levels by the privatization of utility, infrastructure and energy sectors. Comparing GDP per capita for different countries provides a collation of income levels for the countries.
Using a similar approach in GDP, Turkeys GDP per capita is projected to be more than double of the current GDP to over US$35, 000 by 2041. It is projected that income levels in Turkey are set to grow from 25% to 45% in 2041 even though some countries like China are projected to experience a better improvement (PwC. Turkey 1). If Turkey is to unleash its full potential, it will have to overcome some major economic challenges like focusing on exports to reduce account deficits and having a more rigid structure that is less susceptible to inflation. In fact, improving the infrastructure and ensuring an efficient tax collection system should be top of the “governments to do list” to have long-term sustainable growth. The success of the Turkey’s industries also has an important role in long-term development (National Security Program 1). Five industries with the potential to push this ambition include food and beverage processing by exporting to the southern and western countries bordering Turkey, and hosting foreign investors, Agricultural R&D and services, Automobile production, and alternative energy, as well as tourism (PwC. Turkey 1).
- 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).