The Chairman's Speech at the Assembly / 23 March 2011
Mr. Chairman, Distinguished Members of the Assembly and of the Press:
On behalf of the Board of Directors I would like to welcome you to our March assembly meeting. I would like to thank our distinguished guest, Finance Minister Mehmet Şimşek, for accepting our invitation and joining us today along with his colleagues. Welcome, Mr. Minister! It gives us pleasure to have you with us, and we also welcome our distinguished bureaucrats.
Distinguished guests,
Esteemed members of the assembly:
Before turning to the main item on our agenda, I would like to share with you a few points regarding two important developments beyond our borders.
As you know, following a very powerful earthquake and ensuing tsunami, Japan has suffered a major disaster that also involves a nuclear threat. I would like first of all to say that we share with all our heart the pain of the Japanese people and their sorrow for the great loss of life. This tragedy has reminded us once again of something we should never forget, namely the reality of an earthquake. Without a doubt there are many lessons for us to learn from this catastrophe, most notably that of being prepared for an earthquake.
At the same time, popular movements have been under way in the Middle Eastern countries for some time now. And during this process, the country where they are most complex is Libya. Our government has evacuated Turkish citizens in Libya in an operation that has won admiration around the world. Most recently, when the clashes continued, the coalition forces mounted an air and sea operation. Here too I would like to express our profound sorrow at the loss of civilian lives and our hope that this operation does not turn into an occupation. Any process that paves the way to a new Iraq or Afghanistan will only be extremely damaging for the peoples of the region and will bring no benefit to the West.
Mr. Chairman,
Distinguished guests,
Esteemed members of the assembly:
In 2008 and 2009 when we felt the negative effects of the global crisis most strongly, our industrial production contracted at an annual rate of 0.6% in 2008 and 9.9% in 2009.
Following those two difficult years, 2010, happily, was a year of strong recovery for our economy and our industry, and we closed the year with 13.1% growth in industrial output.
According to the figures that have been released, we have also made a very good start in 2011 with 18.9% growth in January.
Counting January, production in our industry has been on the rise for fourteen consecutive months, which is both significant and encouraging.
Another point worth nothing is an increase far above the usual average of 34.9% in the production of capital goods. This too is good news in terms of investment trends.
Growth in industrial production in 2010 spurred movement in the domestic market but its impact on exports remained relatively limited. As of 2011 we see that our exports are now on the rise as well. According to TİM (Turkish Exporters? Association) figures, Turkey?s exports in the first two months of the year rose by 22.6% on the same period last year to 19.7 billion dollars.
The relative improvement in unemployment is continuing apace.
And we can see that the increase in production in our industry also being reflected in jobs. In the last year, employment in the industrial sector was up by 7.9% with 340,000 people finding jobs.
Another area of the Turkish economy that has done well in recent years is budgetary performance. While public deficits were the biggest problem in the economy throughout the 1990?s and the early 2000?s, this problem has virtually disappeared in recent years as a result of strict fiscal discipline. As you know, the budget deficit is not supposed to exceed 3% of GDP under the Maastricht criteria. In the recent period, in 2008 for example, Turkey succeeded in bringing the ratio down to 1.7%.
While, many countries, primarily the European countries, wrestled with high public deficits during the global crisis, Turkey experienced no such difficulties. There is no doubt that the key factors at work here were our government?s strong will and strenuous efforts to maintain fiscal discipline.
Mr. Minister:
According to the figures that have been released, budgetary performance is following a positive curve in the first two months of 2011. Although a budget surplus is not often seen early in the year, Turkey?s budget showed a surplus of 2 billion liras in the first two months of 2011.
We hope this improvement in the budget will continue for the rest of the year. For 2011 is an election year, and it is important that an election year close with improvement in the budget as an indication in particular that we are getting away from populism in our economic policy. Furthermore, as you yourself know very well, any improvement will further strengthen confidence in Turkey and the Turkish economy.
Mr. Minister:
Besides all these positive pictures and optimistic expectations, however, there is still no amelioration in either the foreign trade deficit or the current account deficit, the two other ?black holes? in the Turkish economy. In 2009 when we contracted by 4.7%, our current account deficit was 14 billion dollars.
Then, in 2010, when the economy started to recover, we closed the year with a record high current account deficit of 48.6 billion dollars. Looking at January, we can already foresee that our current account deficit in 2011 is going to be around 50 billion dollars.
When we examine the indicators, we see that there is a direct correlation between rapid growth and the current account deficit. Therefore, it would not be wrong, I believe, to define the current account deficit as a structural problem in the Turkish economy. With inadequate domestic savings, Turkey needs foreign funds to be able to grow, and this in turn swells the current account deficit.
It is clear that a structural problem like this is not going to be solved easily or overnight. One of the fundamental issues at this point is how to boost our domestic savings. This of course is a big and important topic with many sub-topics. If we leave aside the question of how to boost savings in the private sector and focus on the public sector, the first way that comes to mind to increase public savings is to cut spending, which, as we saw just a little while ago in connection with budgetary performance, is something Turkey is trying to do already.
At the same time, one of the most basic problems of our economy is the high level of unrecorded economic activity. Turkey is still one of the countries with the highest share of indirect taxes among its income taxes. In our view, what actually must be done to boost public savings is to bring the black economy onto the books, in other words, to eliminate the flaws in our tax system through a comprehensive reform.
As we have always emphasized, black economic activities constitute an element of unfair competition that works against enterprises that make a point of fulfilling their obligations. Furthermore, the black economy also makes it more difficult for our enterprises to institutionalize, modernize, and restructure as demanded by the global competition. For enterprises that don?t report their operations are unable to take advantage of incentives, financial support mechanisms, capital markets and other opportunities. Unrecorded activities and flaws in the tax system rank first among our country?s and our industry?s basic problems that are awaiting solution.
In the results for the second half of 2010 of the survey of the Current State of the Economy carried out twice yearly by our Chamber, enterprises were asked to rank our country?s basic problems as well as the problems they themselves face in terms of competitiveness. Our findings show that among the problems encountered in terms of competitiveness, ?the black economy and the climate of unfair competition to which it gives rise? ranked first, followed by ?the high cost of raw materials? in second place and ?the high cost of energy? in third. Among Turkey?s most pressing problems meanwhile ?unemployment? ranked first, followed by ?the black economy and the unfair competition to which it gives rise? in second and ?the high rate of taxes? in third. In our view, our survey makes abundantly clear our industry?s legitimate grievances regarding the black economy and how little attention is being paid to them.
If Turkey took steps to eliminate black economic activities and the flaws in the tax system, we believe this would crown the gains already made in the economy and transform it into an economy that can compete in the first league. We have expressed this view urgently and insistently in all our contacts with the government, and have always said in all sincerity that we would give all the support we can to combat the black economy. We would like to reiterate that offer with equal sincerity here today.
Mr. Minister,
In recent years some positive steps have been taken and some important work done by your ministry in support of Turkish industry and its competitiveness. In the area of corporation tax, for example, VAT rates were lowered in certain sectors during the crisis period and fiscal supports introduced under the law governing subsidies of research and development activities.
At the same time, certain technological conveniences have made it much easier for tax-payers to submit their declarations and make their payments. We thank you for all these things, Mr. Minister, but we would like to bring to your attention, and underscore, that we are still waiting for a comprehensive arrangement that will put an end to black economic activity, and that will effect a permanent and radical solution to the problems in our tax system and endow that system with a just structure that is effective in both implementation and auditing.
While we were waiting for such a reform, the most comprehensive restructuring in the history of the Republic was introduced in parliament in a bill known as the omnibus bill. There is no doubt that the restructuring outlined in this bill is an important opportunity for businesses that are having difficulty paying their taxes and premiums due to the economic crisis. It will give them a modicum of breathing space. Furthermore, the omnibus bill has introduced important and positive provisions from the standpoint of job incentives. We appreciate and are grateful for these.
However, as we have said from the very beginning, in the case of any restructuring, tax-payers who meet their obligations on time should not be forgotten and some reward mechanisms absolutely must be put in place for them at the same time. An enterprise that fulfills its obligations to the government on time, by going into debt if necessary, is in principle simply doing what is required of it. In practice in Turkey, however, this is deserving of a reward. As far as that reward is concerned, even a symbolic reduction would boost morale and therefore encourage tax-payers to pay on time and make them psychologically more receptive to the law, as well as going some way towards eliminating the impression that it is not the legitimate tax-payer but the tax evader who is being rewarded.
Mr. Minister:
Earlier, when you and I spoke personally on this issue, you said that the government would incur no loss due to the law being passed and would in the end collect the amount of tax that is due. You are the person with the highest competence and authority on this matter. It is therefore unthinkable that we might have any objections when it comes to arithmetic calculations. I would however like to say that, as you yourself will appreciate very well, taxes are not simply a matter of arithmetic. The relationship between the state and its citizens is the most fundamental of all! It has political and social dimensions. Even if there is no arithmetic loss, lapses of conscience can occur during any restructuring, and confidence can be damaged. Moreover, even if tax collection rises in years when restructuring is in the works, it can always fall again in times when a tax amnesty is expected. An amnesty in one area engenders an amnesty in another. What we are expecting is a permanent solution!
We have wiped the slate clean many times before. Our hope this time is that this most recent ?clean slate? created by the omnibus bill will finally be the preliminary step to the kind of tax reform we have been awaiting for years, the basis for an initiative aimed at bringing black economic activity onto the records at last.
Mr. Minister:
I would like to take the opportunity of your presence here today to express some further demands we have. It is essential that investment be increased to make the economic recovery sustainable. For this, work should continue on a new system of incentives, and there should be even more implementations that encourage investment. In this connection, the current 1% VAT leasing model should be revamped and put back in effect. In addition, Eximbank?s funds should be increased and some degree of flexibility introduced in the area of guarantees.
We frequently bring up our demands for micro reforms to boost competitiveness. One of these involves the Research Utilization Support Fund (KKDF), which has been tossed back and forth between us and the Finance Ministry since the days of Mr. Unakıtan. Our demand, which we have been making for years, is that, leaving consumer goods aside, the KKDF be lifted completely on imports of investment goods and the raw materials specified in capacity reports, and that our industrialists, depending on capacity certificates, be given a chance to make imports without paying KKDF. Granting this opportunity would be a significant expression of support for our industrialists, who are struggling to compete by narrow margins. The fact is however that our demands have met with no response for years.
You know that one of our industrialists? most pressing problems is that their energy costs are high by comparison with those of our competitors, and they are continuing to rise. To alleviate this onerous burden to some extent, we have been recommending for years that the hypothecated TRT tax on power bills in Turkey also be eliminated. This issue came up in our contacts as well, and you personally expressed the difficulty of translating that recommendation into reality. I of course do not want to bring up the same subject again now. But, Mr. Minister, it is our job to pass along demands. At the risk of being misunderstood from time to time, we are going to persist in bringing up the problems we expect to be solved. Otherwise we will not be doing our job properly.
Furthermore, as the indicators clearly show with no need for words, our industrialists are waging a successful struggle to boost their contribution to jobs and growth. To some degree we can succeed in this without the support of our government and managers of the economy. Yes, what is most expected of governments in that sense is that a proper macro economic structure and climate be created that will support investment, production and competitiveness. It is also true that in the recent period Turkey has taken important steps and secured major gains in that area.
We see and we speak up about what is being done. But, Mr. Minister, in addition to all the steps and all the gains, we also feel the need to say that there are still a lot of things to be done.
Yes, the Turkish economy is strong now, our budget is more sound and expectations are high. Under the circumstances, we also say that measures to shore up the competitiveness of our industry need to be implemented far more rapidly. Our goal should be to ensure that the positive momentum in industrial production, exports and jobs is definitely sustained during the process ahead so that we, as industrialists, can, as always, continue our struggle with all our might and determination from here on out. Our expectation is that our government and managers of the economy will continue, indeed increase, their support for our struggle.
Mr. Chairman,
Mr. Minister,
Esteemed Members of the Assembly:
Yes, there are problems and uncertainties in the world, but as long as we monitor the risks carefully and, most importantly of all, as long as adequate support is given to our industry, we believe that our economy is going to continue to recover rapidly in 2011.
Closing with these thoughts in mind, I salute you all once again on behalf of the board of directors.
C. Tanıl KÜÇÜK
Istanbul Chamber of Industry
Chairman of the Board of Directors