Mahfi Eğilmez comments on IMF's Turkey forecast: 'They're reading tea leaves'

Mahfi Eğilmez wrote an article on his personal blog titled, "My thoughts on the IMF's 2024 fortune-telling for the Turkish economy." Pointing out that the IMF's forecasts suggest an annual per capita income of 460,000 lira and a monthly income of 38,333 lira in Turkey, Eğilmez asked, "Would you believe this?"

Mahfi Eğilmez stated the following in his article:

"I used the word 'fortune-telling' in the title intentionally. Because the period we are in does not allow for accurate forecasting. Problems arise somewhere at any moment, waves of war flare up; in addition to these, the Eurozone, one of the world's four major economies, is struggling with stagnation this year, China, another one, continues having lost its former momentum, and Japan is giving extremely weak signals on the path to exiting its long-standing stagnation. Although the US economy appears to be in the best shape among the four major economies, the fact that there are elections there this year makes the situation uncertain. These developments cause fluctuations in oil, natural gas, gold, and commodity prices. When Turkey's own unique uncertainties and difficulties are added to all of this, the work being done turns largely into fortune-telling rather than forecasting.

Below are the IMF's new forecasts regarding the Turkish economy. Although the IMF's forecasts extend to 2028, I have not included anything beyond 2024 here. Since even the forecasts made for 2024 stand between forecasting and fortune-telling, I did not include anything beyond that as it fully enters the realm of fortune-telling. Let me first share the table and then try to interpret it (source for the data in the table: IMF, World Economic Outlook Database, April 2024.)

I expect growth to be higher than the IMF's forecast

The IMF expects Turkey to grow by 3 percent in 2024. My expectation is slightly higher. The reason I expect higher growth is that Turkey has not yet entered into sufficient monetary tightening and continues to follow a loose fiscal policy. In a year where the budget deficit has doubled, I do not think it is correct to expect growth to fall significantly. Consumption continues at full speed, and since growth is primarily consumption-based, and earthquake-related expenditures must also accelerate this year, I estimate that growth will materialize between 3.5 and 4 percent.

GDP at current prices is expected to rise to 40.113 trillion TL. As you know, the expression 'at current prices' means GDP that includes inflation, i.e., it is not adjusted. In other words, the sales prices of goods and services are collected from the market, added up, and GDP at current prices is obtained. Therefore, price increases for that year (inflation) are also included in these prices. According to the IMF's forecast, the equivalent of this in dollars is 1.341 trillion USD. Here, we calculate the annual average USD/TL exchange rate as 29.92. When we calculate based on IMF data, the annual average exchange rate for 2023 appears to be 21.77. Accordingly, the IMF estimates that the TL will lose 37.4 percent of its value against the dollar in 2024. If we apply this forecast exactly to year-end exchange rates, we can conclude that the IMF estimates the 2024 year-end USD/TL exchange rate at 40.6. Although the decline seen in imports and consequently in the current account deficit in the first two months strengthens the possibility of this forecast coming true, it should not be overlooked that the decline in imports is largely due to the restrictions imposed on gold imports.

If these forecasts come true, it means that per capita income in Turkey will approach 460,000 lira annually in 2024. The dollar equivalent of this is 15,368 USD. In other words, according to this calculation, the average monthly income in Turkey is 38,000 lira or 1,280 dollars. If we look at the calculations using purchasing power parity, per capita income appears to be 43,624 USD for 2024. The monthly equivalent of this is 3,635 dollars. Let me write it again: When we look at it with purchasing power parity, per capita income in Turkey comes out to 3,635 dollars per month. I am not saying this; this is how the calculation made with purchasing power parity turns out. I see that my view that purchasing power parity is a completely wrong measure and a measure invented by developed countries to prevent developing countries from waking up and rebelling against this system is being proven right every day. On the other hand, GDP accounts also continue to be problematic as long as they are taken at current prices. First of all, GDP at current prices contains price increases, meaning these accounts are not adjusted for inflation.

Secondly, GDP calculated in TL and containing inflation is divided by the annual average USD/TL exchange rate to find GDP in dollar terms (GDP at current prices in USD = GDP at current prices in TL / Annual average dollar exchange rate.) In this case, the lower the dollar exchange rate, the higher the GDP in dollar terms. One of the important reasons for the Central Bank's attempt to suppress the dollar exchange rate is to make GDP appear higher in dollar terms and to show per capita income as more than it is: This is the most important reason for spending billions of dollars in foreign exchange reserves. To these, one must add the situation of refugees. The contributions of refugees to production are included in the total in GDP accounts, but they are not counted in the population when switching to per capita income, i.e., when GDP at current prices is divided by the population. Thus, our per capita income also appears much higher than it is. If you ignore all these illusions, you might be happy when it is said that the average per capita income in Turkey is 38,000 lira per month according to purchasing power parity.

According to IMF forecasts, investments and savings in Turkey are falling rapidly in 2024. I estimate that the decline in savings is based on the expectation that real interest rates will continue to be negative. People reduce their savings and increase their spending where they obtain negative real interest rates. In contrast, in an environment where interest rates remain low relative to inflation, investments should increase. Despite this fact, the only explanation for the decline in investments is that the environment of trust necessary for investment has not been provided.

The IMF has calculated the unemployment rate for 2023 as 9.9. This shows the annual average unemployment rate. The year-end unemployment rate of the Turkish Statistical Institute (TÜİK) was 8.8 percent, and the annual average unemployment rate was 9.4 percent. There is a 0.5-point difference between them (negligible.) For 2024, the IMF makes an annual unemployment rate forecast of 10.1 percent: An increase consistent with the forecast that growth will decline to 3 percent.

The IMF estimates that annual average inflation will be 62.5 percent in 2024 and 54.3 percent at the end of the year. The 54.3 percent rate for the year-end points to an expectation 18.3 points above the Central Bank's expectation. If the IMF forecast turns out to be correct, inflation will have fallen from 64 percent (2023 year-end value) to 54.3 percent in one year. A significant portion of this decline will not have occurred due to the effect of the monetary policy being implemented and claimed to be tight, but entirely as a result of the high inflation rates in July and August (the total of the two months is more than 18%) dropping out of the calculation.

According to the IMF's forecasts, the rate of increase in imports seems to be on par with the rate of increase in exports. I do not know whether the restriction imposed on gold imports is included in these forecasts or not, but I estimate that the increase in imports will remain slightly lower than exports.

The public sector gross debt stock seems to have settled at a level around 30 percent: This is a good indicator. Turkey has a burden lower than the public sector debt burden of many countries.

The current account balance, which pushed for a 50 billion dollar deficit in the last two years, seems to be falling to the 40 billion dollar level in 2024, which is 3 percent of GDP. A current account deficit of 3 percent can be considered a normal level for a country like Turkey that has to import oil and natural gas.

Since this article is an economic evaluation piece, I did not address financial values here. However, an evaluation made without addressing the Central Bank's reserves, the external debt burden of the private sector and the central bank, the credit and deposit relationship of banks, and the status of the currency-protected deposit scheme would be incomplete. Therefore, this article of mine should be accepted only as a detection piece."

News Source: 12punto