Turkey’s COVID-19 Response and Resilience of Authoritarianism
by Ali Rıza Güngen, Ph.D., Carnegie Mellon University Distance Fellow
Over the last couple of decades, financial sectors in the countries of the Global South have been increasingly engineered towards market-based finance. Despite comprehensive reforms to deepen financial markets and strengthen alternative means of financing in the Global South, public banks kept occupying a significant place. Recently founded multilateral public development banks and the use of public banks to implement mega projects are proof that they are being used by nation states in the Global South not only to sustain higher rates of growth, but also to increase financial influence in various regions.
Much ink was spilled to elaborate the uses of public banks by both authoritarian and democratic governments to derive further support in election cycles. During the great lockdown of 2020, however, public banks across the globe have been the major instruments to assume the financial risks of non-financial corporations. Turkey was no exception to this trend. Indeed, similar responses have been part and parcel of the AKP’s attempts to maintain the ruling bloc amidst the 2018-19 economic crisis and sustain the alliance that made authoritarianism in Turkey grow stronger. It is crucial to understand the ways in which public banks have been used during the COVID-19 pandemic. The emergency measures adopted were follow-ups to the previous crisis management techniques and end-results of the authoritarian mentality prevalent in Turkish policy circles. They also indicate the resilience of Turkish authoritarianism, systematizing transfer of risks to the future.
Swords and Shields
By financing military operations in Syria and Libya on the one hand, and intervening into the currency markets to slow down the depreciation of Turkish Lira (TRY) in the last couple of years on the other, Turkey found itself extremely vulnerable during the COVID-19 pandemic. Foreign exchange reserves of the Central Bank were already depleted by March. The new credit expansion wave in the first two months of 2020 was not enough to stimulate the economy to decrease the unemployment ratios from the historic heights rapidly. Despite the circumstances, the initial response of the Erdoğan administration, in the form of the Economic Stability Shield package announced on March 18th, was not sufficient.
The economic policy makers increased the Credit Guarantee Fund limit with 50 billion TRY to stimulate the credit market. The second biggest public bank postponed the loan payments of artisans and small shop owners for three months. Leaving aside a few measures to support low income families and pensioners, the package was mainly composed of credit opportunities and rested on the assumption that the economic decline would end in a few months. The package was explicitly prepared with the contributions of business associations and the ways in which public banks were employed differed very little from their uses amidst volatility and financial crises of the previous years. The most symbolic move was the new “opportunity” to provide cheaper loans to low-income groups. Under this new campaign labelled as “basic needs support,” citizens with lower credit scores were able to borrow from three public commercial banks without any collateral and with no payments for the first six months. Around 5 million households were each granted 140 USD as one-time income support in April-May. Yet, as of early June, around 7 million individuals applied to “basic needs credit” (with limits up to 1,400 USD). During the same time period, public banks were also used to extend credit to 190 thousand small and medium enterprises and 1.1 million shopkeepers.
Not only the central banks in the Global North, but also the monetary authorities in the Global South engaged in direct financing of government expenditures amidst the pandemic. Thirteen central banks in the Global South, purchased government debt instruments (or declared that they would do so) directly or indirectly, altering their previous regulations. Turkey’s Central Bank changed the open market operations limit to buy more government debt instruments in the secondary market. In doing so, the Central Bank, in the month of April, provided funds to the Unemployment Insurance Fund holding government debt as its assets and funded the Treasury, which set a new record of borrowing. Commercial banks were intermediaries in due course and were even encouraged to buy more government debt, with a revised asset ratio calculation.
The asset purchase program in Turkey was not something planned in detail, nor a program with defined nominal limits. Since such rapid monetary expansion would add to the pressure on Turkish Lira, policy makers continued to use public banks to intervene into the currency markets. We have no official data on the amount of USD sold by Turkish public banks, but each time the Lira was “under attack,” public banks were there to defend it, selling huge chunks of USD similar to the previous year, alongside the Central Bank.
Off-balance sheet policy making
Turkey’s state managers initiated a state-sponsored credit expansion, attempted to maintain currency stability and kept thousands of small firms afloat during the 2018-19 crisis. Public banks remained at the forefront of crisis management. The financial response to the COVID-19 pandemic, was simply a perpetuation of the Turkish strategy in this regard.
There was also a continuation in off-balance sheet policy making during the pandemic. The risks assumed by public banks cannot be followed easily as they are not inscribed in the balance sheets of the public banks. The implementation of campaigns and measures does not take place in an accountable framework. Materialization of the costs takes time and depends on future events, making an overall and timely discussion on the financing of the emergency support futile. Only if some ministers decide to give figures on the alleged inclusiveness of COVID-19 response, the public may learn about the possible results.
It is reasonable to suggest that the credit extension initiative replaced the initial income support to households and was used to prevent a public discussion on temporary basic income provision to workers and poor during the pandemic. The objectives of credit support to low-income groups, which increased their overall indebtedness was not debated in democratic bodies. The interest rates on basic need credit was less than half of the market rate, but it is not known why this has been the case and whether it could have been lower. Millions of people received less money than they applied for, but the criteria for giving, let’s say, one third of the loan required by an individual is not known. The volume of the economic stability shield, according to the official announcement was doubled in late April with further credit to be provided by Halkbank, but no one except the experts in the bank headquarters and a few technocrats in the Ministry of Treasury and Finance, know whether this was a response to meet the demands of small shop owners or an attempt to boost alleged support, which nonetheless remained miniscule in comparison to the relief and stimulus packages in other countries.
Overall, the responses during the COVID-19 collapse were not the end-result of democratic discussions. This was acknowledged and justified quite easily given the nature of the emergency. However, the Turkish response is a catch-22: the unwritten functioning and incalculable risks (both exemplified in the uses of public banks) exempts the decision makers from any responsibility whatsoever. It becomes valid to criticize policy makers in a rigorous manner, only after the risk actualizes and by then it is already too late. Newer risks emerge at the doorstep, which the state managers get busy transferring to the future, using similar methods. In that sense, responses are also designed to immunize policy-making against public criticism.
Authoritarianism is resilient
Turkey’s public banks fulfilled critical functions such as providing state-sponsored credit and reinforcing securitization during the country’s 2018-2019 crisis. They had also become the primary tools in slowing down the currency depreciation before the pandemic hit the Turkish economy. Still, through the off-balance sheet policy making associated with public banks, the Erdoğan administration and the state managers were able to intervene into the financial markets during the COVID-19 crisis, without public debate and accountability.
This form of intervention provides advantages, since it cannot be questioned by a large group of dissidents in order to show the insufficiency of the COVID-19 response. It was an effective way of repressing public discussion while unemployment was reaching the highest rate in the country’s history. Authoritarian statecraft finds ways to channel public discontent to invisible enemies. Even under recurrent shocks to the economy and increased economic vulnerability Turkish authoritarianism proves resilient. Public banks continue to operate in this social context, hardwired into the authoritarian crisis management system, and undergird the interests of social groups in league with the AKP (Turkey’s Justice and Development Party).
Ali Rıza Güngen is a political scientist and CHR/Carnegie Mellon University Distance Fellow. Dr. Güngen’s research currently focuses on dependent financialisation, financial inclusion, and sovereign debt management across the global South and public banks.
This piece was a contribution to the Democracy & the Pandemic Mini-Conference of the Democracy Seminar held on May 20-21, 2020.