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Turkey 2014 | FINANCE | INTERVIEW

TBY talks to Mehmet Şimşek, Minister of Finance, on what is in store for Turkish growth in 2014.

Mehmet Şimşek
BIOGRAPHY
Mehmet Şimşek earned his BSc in Economics from Ankara University and earned his M.Phil in Finance and Investments from the University of Exeter. He previously worked as the Chief Economist and Strategist for the Emerging Europe, Middle East, and Africa Region at Merrill Lynch in London. He also served as Senior Economist and Bank Analyst for Deutsche-Bender Securities from 1998 until 2000. He is currently the Minister of Finance after having served as State Minister for Economic Affairs.

As the Finance Minister of the Year for Emerging Europe in 2013, what accomplishments were you most proud of?

First of all, policymaking is a team sport. Therefore, I am proud to accept this award on behalf of all of those who have worked hard along with me on moving Turkey forward through structural and macroeconomic reforms. As a team, we have managed to make our nation's economy far more inclusive and take the country to a higher level of development. Our reforms also provide a great pathway for sustainable growth over the coming decade. In our success story, fiscal discipline has played a great role. Historically, Turkey has suffered chronically from high budget deficits and debt-to-GDP ratios. Our general government deficit, which stood at 10.8% of GDP when we took office in 2002, declined to just 1% in 2013. Turkey's fiscal deficit in 2013 was just one-fifth of the average deficit recorded by OECD member countries. As a result, our public sector debt fell from 74% in 2002 to 36.3% of GDP in 2013. If you look at that performance in the context of the Maastricht Criteria that apply to the countries in the eurozone, our debt-to-GDP ratio is just over half of the eurozone's 60% target set in the treaty. In fact, in the eurozone itself, only three small economies—Estonia, Luxembourg, and Latvia—perform better on that score than Turkey.

What is the Ministry of Finance's strategy to fight against Turkey's informal economy, which stands at roughly 26.5% of GDP?

Significantly reducing the size of the shadow economy is of great importance to me. An informal economy leads to unfair competition, limits economies of scale, and, hence, hinders innovation and economic development. It also stands in the way of a properly functioning social security system. Since we took office in 2002, we have made great strides in reducing the size of the informal economy. Strengthening our country's tax audit capacity and increasing voluntary tax compliance are among our top priorities. I also believe the new Income Tax Law that I submitted to the Parliament in 2013 will be instrumental in incentivizing a switch to the formal economy. With the new law, we have combined the Income Tax Law and Corporate Tax Law into a single piece of legislation. This will enhance the simplicity, clarity, and the efficiency of revenue collection. It will also help to improve voluntary compliance. Through our investments into human resources and technology our tax audit capacity can now identify taxpayers and activities that are subject to tax by means of on-the-spot electronic inspection and audit. All of these measures boil down to one truly significant number. We have managed to reduce the share of informal employment within total employment from 52.1% in 2002 to 33.6% in January 2014, an 18.5% decline. However, more needs to be done. At 26.5% of GDP, our informal economy is still larger than the average 18.4% in the EU. Our main goal is to reduce informality to converge to the EU average over the medium term. In the long term, we aim to have an informal sector that accounts for a low share of GDP, similar to countries such as Germany. The Ministry of Finance is very pro-active on this front.

What income tax reforms are priorities for the short term, and how will they affect Turkey's economy?

We intend to simplify our tax code and create greater transparency and equity, while at the same time protecting taxpayers' rights and broadening the tax base. Therefore, our first priority is the approval of the new Income Tax Law, which was drafted with these objectives in mind. We submitted it to our parliament, the Grand National Assembly, in 2013. I expect the Draft Law to be ratified by the end of 2014. Additionally, we are now revising the Tax Procedure Law to harmonize it with our economic and social policies to make its provisions clearer and easier to implement. In addition to that, these reforms will lay the foundation for an effective, simple, and fair tax system to adequately fund our national priorities. These goals include sustainable development, an increase in our domestic savings rate, a reduction in the informal economy, and a lessening of regional disparities.

“ At the end of 2002, Turkish inflation stood at 68.4%, while by the end of 2013, the inflation rate had fallen to 7.4%. "

How will Turkey's macroeconomic fundamentals prepare the economy for any shocks that the country may experience in 2014?

There is no doubt that 2014 is shaping up to be a more complicated year for many emerging economies than most people expected. The combination of a reduction in market liquidity due to tapering by the US Federal Reserve and the simultaneous slowdown of the Chinese economy, the second-largest economy in the world, creates different challenges. Turkey's soft spot is its current account deficit (CAD). However, even there I expect significant adjustments in 2014. Surely, a major part of it will be because of the slowdown in domestic demand. Some of this was due to political uncertainty preceding local elections, some are due to tighter financial conditions, and others are due to the recent macro-prudential measures restricting credit growth. However, we expect that external demand will help lower our CAD with the recovery of the EU. The depreciation of the Turkish lira enhances the competitiveness of our exports. This comes at a good time, given a pickup of growth in the EU. The MENA region overall is also more stable now. Furthermore, gold imports are likely to fall and Turkey's tourism revenues will increase. With all these factors combined, the CAD will become more manageable. Furthermore, our flexible exchange rate and independent monetary policy will serve as automatic stabilizers. The depreciation of the lira reduces imports and makes exports more competitive, while higher interest rates increase savings, all leading to a lower CAD. Managing in a more crisis-prone global environment, we are also greatly helped by past reforms that have resulted in a sound and strong Turkish banking sector. It will cushion, rather than amplify, the external challenges that we are facing. For example, the capital adequacy ratio (CAR) of our banking system stood at 15.5% in February 2014. This ratio is nearly twice the required ratio of 8%. Finally, our strong fiscal position allows for room to counteract external shocks.

Beyond the expected 4% growth rate, what other goals or targets does the Ministry of Finance have for 2014?

In an environment of global volatility, contraction in global liquidity, and political tensions in some of our neighboring countries, preserving macroeconomic stability may be even more important than achieving our growth target. What is important is to reduce the CAD to manageable levels, keep the inflation rate at low levels (and in single digits), sustain the strong fiscal position, and raise savings. Combating inflation has been among our government's greatest success stories. At the end of 2002, Turkish inflation stood at 68.4%, while by the end of 2013, the rate had fallen to 7.4%. Our goal is to reduce it to the low-single digits. With fiscal discipline, we are giving leeway to the Central Bank of Turkey (CBRT) in its mandate to ensure price stability.