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Babacan says Erdoğan’s coronavirus response falls short of protecting economy: report

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The man who’s widely credited with shepherding Turkey through its two biggest crises in as many decades is warning that the government’s response to the coronavirus pandemic is falling short of protecting the economy from lasting damage, Bloomberg reported.

Turkey needs a larger stimulus program that relies on fiscal spending instead of payment deferrals and a credit binge, said Ali Babacan, President Recep Tayyip Erdoğan’s former economy czar who has formed his own party to vie for power.

“There can be two kinds of mistakes in fiscal and monetary interventions: doing too little or too much,” Babacan told Bloomberg as he weighed in on government strategies to ride out the economic storm. “But we’re in such a period that the second kind of mistake is better. It’s not very difficult to hit the brakes later if too much is done. But if the response isn’t large and timely, the cost will probably be massive.”

Turkey’s timely social restrictions have for now allowed the country to escape the worst of the pandemic, while its modernized healthcare system managed to cope even at the peak of new infections.

But the harm to the economy has been much harder to deflect, with large export markets in Europe shutting down and badly needed dollars from tourism drying up virtually overnight. The government has said that its assistance to the real sector and the poor is well targeted and will allow the economy to keep growing without eroding Turkey’s macroeconomic fundamentals.

To Babacan, the government must unveil a significant fiscal intervention without running the risk of inflating prices while growth remains depressed — a toxic combination that would be difficult to escape with the government’s current stimulus program. Even Turkey’s low sovereign indebtedness compared with other developing nations — a key strength — has been on the rise in recent years.

The size of the “fiscal impulse” needed to be higher at least by half, at 3 percent of gross domestic product, and it shouldn’t have relied on payment deferrals and credit incentives to support businesses, Babacan said.

Turkey also needs a medium-term roadmap for returning public finances to normal following the COVID-19 response, Babacan added. Any success will depend on policymakers’ credibility, he said.

The International Monetary Fund will not be sufficient to meet Turkey’s foreign financing needs even if the government were to request assistance, making currency swap deals with other central banks a necessity, Babacan said. But Turkey’s increasingly bellicose foreign policy makes such an arrangement more difficult, he said.

“There is no such thing as exporting to countries we’re quarreling with and asking for swap deals like nothing happened,” he said.

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