Turkey’s state-run banks may be misallocating their resources by increasing lending to areas that support the governing Justice and Development Party (AKP), the European Bank for Reconstruction and Development (EBRD) said.
State lenders Halkbank, Ziraat Bank and Vakıfbank have boosted their financing to the economy this year, contributing to a borrowing boom aimed at reducing the economic impact of the COVID-19 pandemic. The banks are controlled by the Turkey Wealth Fund, chaired by President Recep Tayyip Erdoğan.
“Over the last 15 years, state banks across Turkey have significantly increased their presence in government strongholds (defined as provinces that have been governed by the party controlling the central government throughout that period), expanding their operations far more strongly in those areas than in other regions,” the EBRD said in a report published on Tuesday.
Recent economic troubles in Turkey have exacerbated problems associated with partisan lending by the banks, the EBRD said in the 128-page document entitled ‘Transition Report 2020-21. The State Strikes Back’.
“As otherwise efficient industries respond to the tightening of financial constraints by shedding employment and assets, politically motivated bank lending may have long-lasting adverse effects on the allocation of capital, aggregate productivity and growth in regions that experience political lending cycles,” it said.
“The existence of political lending cycles implies that the newly available credit was not always allocated to the most deserving companies. Overall, the evidence so far suggests that productivity losses stemming from the misallocation of credit outweigh potential gains from the increased availability of credit,” the financial institution said.
The EBRD is the leading international lender to Turkey with 6.83 billion euros ($8.06 billion) of current projects and 12.7 billion euros of cumulative investment. The projects include $150 million allocated to building a tunnel under the Bosporus waterway in Istanbul. This week, the institution announced a 21 million euros joint loan with a local development bank to help Turkish wet wipes producer Sapro grow its business.