The Economic Aftermath of the February 6th Earthquake in Türkiye

On February 6, 2023, two catastrophic earthquakes of magnitude 7.7 and 7.6 struck the regions of Kahramanmaraş-Pazarcık and Elbistan, as well as ten other cities in Türkiye, including Gaziantep, Şanlıurfa, Diyarbakır, Adana, Adıyaman, Osmaniye, Hatay, Kilis, Malatya, and Elazığ. These seismic events were also felt in northwestern Syria and claimed the lives of 5,800 people. The twin earthquakes have claimed a total of 40,689 lives in Türkiye (as of February 19, 2023), and more casualties are expected in the region. It is noteworthy to mention that the second deadliest earthquake in the history of the Turkish Republic occurred in Erzincan in 1939 and claimed 32,962 lives and  the third one in  the Kocaeli/Gölcük in 1999 and claimed 17,480 lives[1].

After the earthquake, both Turkish citizens and the international community responded to rescue the victims and provide them with basic necessities of food, clothing, and shelter. Turkish citizens offered financial and non-financial assistance to support the recovery of those affected by the disaster and showed great commitment to rescue efforts. However, opposition leaders, academics, media, and the public criticized the government’s delayed response and inability to reach all victims immediately. Although the government declared the highest alert level “four” immediately after the earthquake and requested international assistance, it failed to initiate all rescue efforts within the crucial first 48 hours. The accusation of not having conducted thorough building inspections, as well as the amnesty for older substandard buildings and the legalization of them also seem to be on the agenda of political parties in the coming days.

Numerous countries around the world have joined the rescue efforts in Türkiye by mobilizing their own rescue teams and providing crucial humanitarian assistance. Major donors include the United States, the United Kingdom, France, Italy, Germany, Israel, Greece, Poland, Austria, Romania, South Korea, Japan, Pakistan, India, Indonesia, China, and Qatar. In addition, international institutions such as the World Bank and the United Nations have begun to  provide funding for reconstruction in the region. Specifically, the World Bank has pledged $1.78[2] billion and the United Nations has launched an appeal for $1 billion[3].

As part of the humanitarian campaign entitled “Türkiye One Heart,” a total of TL 115 billion ($5.3 billion)[4] was collected on February 15 for the victims of the earthquake. The Central Bank contributed TL 30 billion ($1.4 billion), public banks contributed TL 37 billion ($1.7 billion)[5]. However, it is clear that this amount is not enough to cover the entire cost of the earthquake, and that financial support for the region will not be limited to the aid achieved through this campaign. This event is of significant importance because it highlights the need for further clarification on the role of the Central Bank and public financial institutions in such cases. The Governor of the Central Bank has recently announced that the sum in question is part of the 2022 profit of the Bank^[6]. This profit was initially intended to be distributed to shareholders in April 2023, including the Treasury, which is the major shareholder with more than 50% stake. However, instead of being transferred to the shareholders, the profit was redirected to a fund. Likewise, given that some of the operations of public banks are backed by the government through “duty losses,” the contributions of the Central Bank and public banks should be reevaluated as “budgetary contributions”. This diversification is essential to accurately analyze the cost of the earthquake on the budget deficit, which is projected to be 3.5% of the Gross Domestic Product in 2023 according to the medium-term program.^[7]

The estimated cost of the earthquake has not been officially announced and has not yet been determined. Numerous estimates have been proposed by national and international academic institutions and nongovernmental organizations. However, the accuracy of these predictions depends on the underlying assumptions on which the analysis is based. There are two important categorizations that should be considered. The first refers to the impact on changes in economic growth, inflation, budget deficit, trade deficit, and domestic and foreign borrowing in 2023, and the second refers to the loss of wealth that will affect the economy in the medium and long term.

Gross Domestic Product (GDP) is expected to reach TL 18.6 trillion, or $867 billion, according to the medium-term economic program announced on September 4, 2022. The program foresees a growth rate of 5% in 2023, while the estimates of international organizations are less optimistic. The International Monetary Fund (IMF)[8], the Organization for Economic Cooperation and Development (OECD) [9]and the European Bank for Reconstruction and Development (EBRD)[10] expect a growth rate of 3%, while the World Bank[11] expects growth of about 2.7%. The Central Bank of Türkiye’s February Expectations Survey[12], which summarizes the expectations of experts from financial and non-financial companies, points to GDP growth of 3.6% by 2023. Overall, even before the earthquake, expectations for economic growth were below the projections of the medium-term economic program. Moreover, due to the negative impact of the destructive earthquake on the economy, a further downward revision of the growth rate is to be expected.

The EBRD[13] notes that the decline in GDP growth would be limited to one percentage point as post-earthquake reconstruction efforts offset some of the loss of income due to the cessation of economic activity in the region. While the contribution of 11 cities to GDP is 9.8 % (Table 1), the most affected cities of Adıyaman, Kahramanmaraş, and Hatay, which are home to 3.5 million people, contribute 2.6 % to GDP in 2021. For these cities, the return to normalcy seems to take more time than for the others, and eventually their contribution to GDP is expected to be lower than 2.6 %.

For the analysis of the impact of the earthquake on wealth, reference is often made to the study carried out by TURKONFED[14]. It shows that the economic cost of the destruction amounts to $84 billion, equivalent to 9.7 % of the country’s gross domestic product (GDP). The breakdown of the costs shows that housing accounts for the largest share $71 billion, equivalent to 8.2 % of GDP, followed by income losses of $10 billion, equivalent to 1.2 % of GDP, and labor losses of $3 billion, equivalent to 0.3 % of GDP.

While the loss of housing, physical capital, and infrastructure is expected to be recovered in the medium to long term, the government will need to allocate funds to rebuild the destroyed cities and provide subsidies to support the resumption of economic activity in the region until it returns to normal levels. This will require additional budgetary spending in the coming years and necessitates a revision of the medium-term economic program for 2023-2025. In this context, the projected fiscal deficit of 3.5 % of GDP for 2023 would increase unless the government decides to finance the additional spending through tax increases. If additional taxes are considered, depending on the nature (consumption, income, or wealth) of the taxes, an economic recession is likely. If the additional costs are financed by borrowing in domestic and international markets, further credit constraints, rising interest rates and exchange rates are likely. It is clear that borrowing from external markets is expensive for Türkiye compared to other countries, as investor confidence has been lost in recent years. The coupon on 10-year Eurobonds rose to 10.76 % and 5 year Credit Default Swap value showed an upward trend in early February, reaching 557.75 on Feb. 17 with implied probability of default 9.3%[15] Therefore, the demand for external capital at high cost would create further pressure on the exchange rate. Türkiye’s monetary policy is already controversial with negative real interest rates and certain capital account restrictions, creating uncertainty among financial investors. It is crucial that market confidence needs to be restored through sound economic and financial policies to avoid further financial risks in such an economic environment.

With inflation being one of the biggest problems of the Turkish economy, it is projected that inflation and inflation expectations would increase in 2023. While CBRT expects consumer inflation to fall to 22.3% after rising to 64% in 2022, the February CBRT Expectations Survey shows that inflation will reach 35.76% by the end of the year. The risk of persistent inflation remains on the agenda after the earthquake. The government needs to find a balance between the policy of fighting inflation and the uncontrolled use of central bank money, as was on the agenda after the earthquake when TL 30 billion of central bank money went directly into the earthquake relief funds. Under these circumstances, it is crucial to carefully allocate the budget for the reconstruction of the region and support all activities without compromising budgetary principles and monetary prudence in order to improve the sustainability of fiscal and monetary balances.

The impact of the catastrophic earthquake on the Turkish economy will be more accurately assessed once the full extent of the destruction is known. So far, there is great uncertainty about the total number of fatalities and the extent of damage to infrastructure and homes in the affected region. Therefore, the impact of the earthquake on the Turkish economy will continue to be assessed as more information becomes available.

Before concluding, I would like to mention that it is important to acknowledge the immense psychological pain of the survivors, the injured, and those who lost loved ones. The weight of their trauma weighs heavily on the hearts of the Turkish people.

Gülsüm Akbulut

20 February 2023

Table 1: Cities affected from 6 February 2023 Earthquake

[1] https://www.ngdc.noaa.gov/hazel/view/hazards/earthquake/event-data?minYear=1920&minEqMagnitude=7&minDeathsTotal=1000

[2] https://www.worldbank.org/en/news/press-release/2023/02/09/world-bank-announces-initial-1-78-billion-for-turkiye-recovery-reconstruction-efforts-after-earthquake-disaster

[3] https://www.aljazeera.com/news/2023/2/16/un-launches-appeal-for-1-billion-in-aid-for-Türkiye-quake-victims

[4] Converted by estimated average exchange rate 22.52

[5] https://www.gazeteduvar.com.tr/merkez-bankasi-kamu-bankalari-bagis-yapabilir-mi-algi-yonetimi-ve-sov-haber-1604025

[6] https://www.dunya.com/ekonomi/merkez-bankasi-baskani-sahap-kavcioglundan-deprem-bagisi-aciklamasi-haberi-685953

[7] https://www.sbb.gov.tr/orta-vadeli-program-2023-2025-aciklandi/

[8] https://www.imf.org/en/Publications/WEO/Issues/2023/01/31/world-economic-outlook-update-january-2023

[9] https://www.oecd.org/economy/turkiye-economic-snapshot/#:~:text=Economic%20Outlook%20Note%20%2D%20T%C3%BCrkiye,slow%20as%20external%20demand%20weakens.

[10] https://www.ebrd.com/news/2023/high-gas-prices-and-inflation-dampen-growth-in-ebrd-regions-.html

[11] https://www.worldbank.org/en/publication/global-economic-prospects

[12] https://www.tcmb.gov.tr/wps/wcm/connect/7d0b1e66-2858-4b82-80fe-78592a41945f/SMP_Report.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-7d0b1e66-2858-4b82-80fe-78592a41945f-o7sCY77

[13] https://www.ebrd.com/news/2023/high-gas-prices-and-inflation-dampen-growth-in-ebrd-regions-.html

[14] https://turkonfed.org/tr/detay/3937/2023-kahramanmaras-depremi-afet-on-degerlendirme-durum-raporu

[15] http://www.worldgovernmentbonds.com/country/turkey/