Strong domestic demand in August has continued to fuel inflation in Turkey, but business and industry leaders are warning against any fiscal tightening since September trends are expected to be a major test of the government's anti-inflation measures.
Month-on-month inflation was 0.9 percent on the wholesale prices index (WPI), and 2.2 percent on the consumer prices index (CPI), the State Institute of Statistics announced yesterday, as compared to 3.3 percent and 4.2 percent respectively in August 1999. CPI inflation was pushed up mainly by seasonal price increases in the education sector.
The indexes are not expected to upset markets as the WPI figure in particular was at the lower end of market expectations and below a consensus forecast of 1.2 percent, while the CPI forecasts had averaged 2.2 percent.
Nevertheless, the latter could provide a further excuse for the government and the International Monetary Fund (IMF) to worry about growing domestic demand and look for fiscal tightening measures to cool the economy and avoid inflationary pressures, economists argued. The July CPI was also seen at 2.2 percent.
The August figures sent eight-month inflation to 20.9 percent on the WPI, already above a year-end target of 20 percent and to 23.1 percent on the CPI, only slightly below the government's 25 percent year-end target. But officials earlier said a revision on targets was not being
considered. Year-on-year inflation continued to slow down and was at 48 percent on the WPI and 53.2 percent on the CPI.
A pent-up consumer demand and falling interest rates have boosted consumption in the first six months of the International Monetary Fund (IMF)-sponsored anti-inflation program. Turkey posted a gross domestic product (GDP) growth of 5.7 percent in the first half of the year.
Reacting to the figures, IMF Turkey desk chief Carlo Cottarelli said that August consumer inflation shows that fine tuning is imperative to curb strong domestic demand.
“Wholesale prices and core inflation look relatively good, but the consumer prices index (CPI) shows consumption is rising at a strong pace," Cottarelli said.
Inflation in September and October is also seasonally high and will be a harder test on the program, economists have argued. Monthly inflation has averaged about 6 percent in September in recent years. As regards the WPI, private sector manufacturing inflation, the best proxy for core inflation, slipped encouragingly from July's 1.9 percent to 1.7 percent but was still above the monthly lira depreciation rate of 1.3 percent. Analysts say the two should be parallel because lira depreciation against foreign currencies directly affects manufacturing costs.
Agricultural prices dropped 0.3 percent in August, which also contributed to a lower WPI inflation. However, agricultural prices are unlikely to stay below zero during the coming months since the seasonal effects will disappear.
The August inflation put the government and business at odds again, while the private sector was seen concerned about a possible fiscal tightening to defy inflationary pressures. Commenting on August inflation data, Prime Minister Bulent Ecevit held the private sector responsible for the widening gap between the WPI and the CPI. "The gap shows that not enough effort is being directed against inflation," Ecevit told reporters in Ankara.
He added, however, that the month-on-month inflation figures were the lowest for August in the past decade. "This is solid evidence of the government's determination to stabilize. It has managed to achieve economic stabilization and growth at the same time.
To achieve the targets, however, Istanbul Chamber of Industry Chairman
Husamettin Kavi countered that state spending should be curbed and
productivity increased.
State consumption rose by 6.9 percent in the first six months against a 5.8 percent increase in the private sector, recent economic growth figures have revealed.
Kavi suggested that measures be introduced to support exports, particularly to overcome difficulties concerning the euro, which has been losing ground against the dollar, thereby pushing down Turkey's export prices.
"No one should fear production. Production is the most effective weapon against inflation," he said in response to the reports that the government was preparing for some fine-tuning. State Minister Tunca Toskay had also suggested that some fine-tuning could be used to cool growth, which analysts say might exceed the government's 5.5 percent year-end target.
"If the government tries to cool economic growth at this stage, the cost will be high," the chairman of the Turkish Confederation of Employers Unions (TISK), Refik Baydur, agreed.
"Small and medium-scale enterprises account for 98 percent of the overall industry even in the United States and Germany. Cooling growth
would mean more shutdowns. If this ratio falls to 90 percent, we would
lose a lot, particularly on the employment side."
Baydur noted that August inflation figures were normal, suggesting a
year-end inflation of 30-35 percent, "which is what we have expected to see all along."
"On the other hand, looking at shutdowns, I wonder if it is worth the
loss," he added. "Meanwhile, the government continues to raise the
prices of its own goods and services."
Ankara Chamber of Commerce Chairman Sinan Aygun also said it would be a
wrong move to slash domestic demand to curb inflation. "If fine tuning
is needed, it should aim at increasing exports and production instead."
Aygun further called on the government to lessen the tax burden,
particularly that of value added tax, on businesses.
He, too, predicted a higher September inflation figure and a year-end
inflation not below 35 percent, urging the government to convene the
Economic and Social Council to discuss the defects of the andi-inflation
program. Ankara Chamber of Industry Chairman Zafer Caglayan argued that the state should not only curb its own expenditure, but allow public access to
information about how it spends its money. "The public sector should discipline itself. The state should become electronic, thus eliminating extravagance in the public," he said.
Representatives of both the Turkish Union of Chambers and Commodities
Exchanges (TOBB) and the Turkish Exporters' Assembly (TIM) noted that
further anti-inflationary gains would be difficult to achieve without
structural reforms, although the downward trend in inflation is good
news. The two anti-inflation campaigners said in a statement that the decline
in wholesale and core inflation would pull down consumer inflation as
well in the coming months.
They, too, supported disciplining state spending. "Extra emission resulting from public sector deficits prevents a sharp plunge in inflation. It is not realistic to expect lower inflation without structural reforms, privatization and public spending discipline." The Treasury, in a separate statement, said the last three months' decline in manufacturing industry inflation was an important indicator that inflation is going down.
Commenting on the August figures, it said the first eight months' inflation, both on the WPI and the CPI, was the lowest since 1988. "Industry trend surveys also show a decline in future inflationary expectations," it said. Apart from education, August consumer inflation, it noted, was fueled mainly by price increases in housing, household durables, health and entertainment.
"Anti-inflation policies are being conducted with determination. Budget balances, which are the most crucial criteria in the program, have shown a better than expected performance in the first seven [eight?-ea] months according to August provisional figures."
Monetary and exchange rate policies are proceeding without deviation from the program. Nor will implementation of the anti-inflation and structural adjustment program be compromised in the coming period," it said. – (Albawaba – MEBG)
© 2000 Mena Report (www.menareport.com)
