The COVID-19 crisis has hit Turkey’s people and economy hard,
accentuating pre-existing challenges such as the low share of workers in
formal employment and obstacles to firm expansion. Well-designed
support to households and firms that is aligned with a return to
macroeconomic stability, and reforms to improve competition and labour
laws, institutions and business would help to build a lasting recovery,
according to a new OECD report.
The latest OECD
Economic Survey of Turkey says a full recovery from the COVID-19 crisis
will take time, given the blow from the drop in tourism and uncertainty
over the future evolution of the pandemic, as well as Turkey’s limited
welfare provisions and high levels of corporate and household debt. The
crisis has put pressure on the viability of many businesses and on
social cohesion, hitting informal workers, women, refugees and youths
particularly hard. While a one-size-fits-all support strategy was
justified during the first phase of confinements, policy support in the
second wave of the pandemic should now be adapted to the varying
conditions of sectors, workers, households and companies.
The pandemic has also amplified monetary policy
challenges, with inflation surging further to well above Turkey’s 5%
official target following interventions to shore up economic activity,
bank liquidity and the Lira currency. Support to people and firms should
be provided in a transparent and stable way to build investor
confidence and reduce the risk of abrupt movements of capital. For
example, targeted allowances for a stated period can be more effective
than concessional loans and one-off transfers. Turkey should also seek
to replenish foreign reserves and restore the independence of the
Central Bank, the Survey says.
In parallel to the
pandemic, Turkey remains exposed to geopolitical and trade risks,
including the effect of the United Kingdom’s exit from the EU. As things
stand, and factoring in headwinds from the second wave of the pandemic,
the Survey projects Turkey’s GDP rebounding by 2.6% in 2021 and 3.5% in
2020.
“Turkey is looking at a gradual recovery from the
COVID-19 crisis and risks persist for growth and well-being,” said
Alvaro Pereira, OECD Director of Economic Country Studies. “The focus
should be on restoring macroeconomic stability and seeing the
post-crisis period as an opportunity to encourage foreign and domestic
investment through stronger public governance, and to use market and
labour reforms to empower businesses to grow and create quality jobs.”
Once
a recovery is under way and investor confidence restored, the Survey
estimates that a combination of market, institutional and education
reforms could lift GDP per capita by 1% per year over the coming years.
Market liberalisation reforms should include removing anticompetitive
regulatory barriers in product markets, increasing labour market
flexibility and reducing corporate income tax, while institutional
reforms should improve public governance and the formalisation of
business activities.
While the dynamism
of Turkey’s business sector, and the country’s strong entrepreneurial
spirit and youthful workforce, have been an asset through the COVID-19
pandemic, the majority of Turkish firms are very small and have limited
capacity to weather a protracted slowdown. Significant parts of the
business sector rely on informal or semi-formal practices in employment,
corporate governance, financial transparency and tax compliance. Easing
overly stringent regulations on product and labour markets and
simplifying business and tax systems would make it easier for young
firms to grow and move to the formal sector. A modernized and more
efficient business sector would also help firms to emerge stronger from
the crisis.
In terms of labour reforms, cutting
non-wage labour costs, shifting part of the cost of social protection
to sources other than payroll contributions, making statutory minimum
wages affordable for low-productivity firms, and modernising regulations
for temporary as well as permanent contracts would stimulate the
creation of formal jobs once the recovery takes hold.
Education
reforms should seek to enhance adult skills in a country which ranks
among the highest in the OECD for qualification mismatch, with 43% of
the working population either over-qualified (29%) or underqualified
(14%) for their job. Investing more in Research & Development and in
digital technology and infrastructure would also raise growth
prospects.
