Mustafa DURMUŞ

International reports about the possible economic effects of the Ukraine war on the countries in the region and on Turkey continue to come.

Following the World Bank's report on the region, the IMF also cut its global economic growth forecast for this year to 3.6 percent in its report. While the organization reduced the growth of the Turkish economy to 2.7 percent this year (the World Bank had reduced its rate from 2 percent to 1.4 percent at the beginning of the month), it predicts the Russian economy to shrink by 8.5 percent.

This year (and partly next year) will be a dark year not only for the two warring countries, but also for the economies and therefore the peoples of almost all developed and underdeveloped countries.

The Turkish economy is one of the economies most affected by this war. According to the latest report of Danske Bank, Turkey comes first among the countries affected by the war, followed by Poland, where the majority of Ukrainian refugees turn.

CAPITAL OUTPUTS FROM TURKEY MAY INCREASED

In the report, it is emphasized that the monetary tightening policy of the US Federal Reserve (Fed) will continue to be tougher and that the interest rates will be increased by 250 basis points until the end of this year.

Undoubtedly, the rise in inflation rates approaching 8 percent annually in the USA is the reason, but it is obvious that this will trigger capital outflows, especially from underdeveloped economies (including Turkey). In addition, with the increasing sanctions on Russia, energy prices are expected to increase even more in the world.

It is clear that both developments will slow the growth of foreign-dependent and extremely fragile economies such as Turkey, further increase the current high inflation rate, and inflate their debt stocks and expose them to the risk of default.

HIGH RISK OF DEBT

As a matter of fact, UNDP's Debt Vulnerability Report shows that the solvency of 72 countries is currently at risk, and 19 of these countries may default or fall at any time. Turkey is also in the 'highly speculative' category of the list.

In addition, it may be possible for the Turkish economy to enter a balance of payments or currency crisis, as experienced in 2018. Because since the Ukraine war, the Turkish lira is the second currency that has lost the most value (15 percent) against the US dollar, after the Egyptian lira.

INCREASED INSURANCE FURTHER

Meanwhile, under the Currency Protected Deposit application, a resource of nearly 25 billion TL was transferred to the wealthy in just 3 months, in the form of exchange rate difference payments, in order to prevent the exchange rate from rising. Thus, the Treasury, and therefore those of us who pay taxes, were harmed.

Another dimension of this resource transfer is that it further increases income inequality. Because at a time when life is getting more expensive, the political power limits the holiday bonus of 13.6 million retirees to 1,100 TL. It is known that the cost of this is approximately 25 billion TL. The government, which did not increase the holiday bonus of the retiree even at the rate of inflation, did not see any harm in transferring tens of billions of TL to the wealthy one-tenth of the number of retirees.

More importantly, since the CBT's foreign exchange reserves have been eroded, the ruling bloc seems determined to try every possible way to find foreign currency from now on, and to make the people pay for the damage they will cause.

Despite all this, it seems difficult to put out the fire of the currency. As a matter of fact, Danske Bank predicts the dollar rate to be 17.0 in the next 6 months and 19.0 in a year.

IMPACT ON INFLATION, COST INCREASE, FAST PUBLIC EXPENDITURE AND INCREASED EMISSIONS

Another problem is high inflation in the country (over 61% per year even officially). As can be seen from the chart below, Turkey is by far the inflation champion in the world. Moreover, there is no effective monetary policy that it can use, because the most important tool of this policy, the interest policy, has become a "lick".

In the first quarter of this year, the difference between the initial budget appropriations and the total appropriations of some General Budget organizations is striking.

For example, the appropriation of the Ministry of Treasury and Finance, which was 775 billion TL, was increased by 80.3 billion TL. The institution used 40 percent of the initial allowance in the first three months. The initial appropriation of the Strategy and Budget Department under the Presidency, which was 27.7 billion TL, was increased to 130 billion TL with an increase of 369%. Similarly, the allowance of the Ministry of National Defence, which was 80.4 billion TL, was increased to 95 billion TL (18 percent increase). Finally, the appropriation of the Presidency was increased from 3.9 billion TL to 4.3 billion TL. The appropriation of the Ministry of National Education was reduced by 117.1 billion TL (62 percent).

In order to transfer cash to the rich and to meet these increase in allowances, it is not overlooked that the Central Bank is used for emission, as well as the way of collecting more taxes from the people with taxes such as VAT and SCT.

If the military operation in Northern Iraq continues by expanding, both these taxes and emissions will increase even more.

TURKISH ECONOMY IS AT THE FIRST RANK OF THE “20 MOST VULNERABLE ECONOMIES”

To sum up, Turkey is at the top of the "20 most fragile economies" whose economy was most affected by the Russia-Ukraine war.

This vulnerability is mainly due to the fact that it is dependent on Russia and Ukraine at a rate of 75 percent for wheat imports, and inflation is out of control by following a completely wrong monetary policy.

The fact that Turkey has two red areas corresponding to these problems in the table below, while not having a single green area that can be a good performance indicator, is an indicator of this.

TURKISH ECONOMY IS NOT BETTER THAN THE RUSSIA ECONOMY

According to the World Bank's latest April report (pages 97-98); Russia in war is expected to shrink by 11.2% this year, while the Turkish economy is expected to grow by 1.4% this year.

However, Turkey's total external debt stock (2020) is 62.5%; on the other hand, Russia's 32.6%. In other words, Turkey's external debt stock is seriously high. More than half of this is short-term debt, and Turkey is the country with the highest risk in the war zone in this regard.

In other words, if Turkey enters into a new war, as it is generally experienced in wars, it will be inevitable that these debts will increase (as it will increase the country's risk and foreign borrowing interests) and the TL equivalent of the debts will increase as the exchange rate will increase.

Moreover, even according to TUIK data, inflation (CPI) in Turkey is currently over 61%. In contrast, according to the World Bank report, inflation in Russia is only 22%, one-third of that in Turkey.

The Russian economy is expected to have a current account surplus of +9.8% and a budget deficit of -1.8% this year. In Turkey, these data are respectively; -6.4% current account deficit and -5.2% budget deficit.

In short, this year, perhaps the highest deficits of the last 18 years will be given. These will bring along new austerity measures for the public. If there is a new war, people's poverty will increase further with massive unemployment and inflation, as well as tighter austerity policies on the horizon.

AS A RESULT

By starting a war, the Putin administration has not only set fire to Ukraine with its own country, but also left many countries, including Turkey, with problems such as energy, food supply and economic recession, foreign debt default and high inflation.

On the other hand, when the data on the Turkish economy are compared with Russia, it is seen that the Turkish economy is not in a better position than Russia. Moreover, the Turkish economy is dependent on foreign sources in terms of energy-oil and food/grains, which are the basic inputs.

A possible war, which may turn into a much larger war by involving other actors in the Middle East, may make the problems of the fragile economy inextricable.

How can one explain the fact that a state whose economy was so heavily affected even by the Ukraine war, which it was not included in, took part in a new war?

Historically, we have witnessed wars being used as a means of covering up domestic economic and political problems and maintaining power at all costs.

However, isn't another witness of us the fact that wars deepen these problems and drag humanity into great disasters?