2009 will be year different from those we are used to. Before 2009, it was easier to understand which was a right step and which was a wrong step. The economy was operating within the framework we are familiar with. This year, however, things are different. The changes in indicators, which we would deem as favorable in the past, do not point a favorable state of affairs now. Therefore, confusion is inevitable. We are in a period where we have to look back on the things we know. The economy is shifting from one phase to another and in the meanwhile, main problem of the economy is changing. Set of concepts and indicators valid back then do not mean anything today.  Let us see towards what direction the binding constraints of yesterday move and what does this mean for the economy.

If it were yesterday, we would have come to a mutual agreement on the meaning of the recent downwards trend in inflation. In this context, we would consider the interest rate cut by the Central Bank as a favorable development and underline that the Central Bank is fulfilling its duties perfectly. We would even consider the fall in the Treasury bill interest rate as an indicator for the appropriateness of central bank's decision. However, today, no indicator has the meaning it used to have yesterday. It is important to note this when making analysis.

As the economy slows down, inflation rate falls. As the confidence of the banks in the companies falls, the banks invest in Treasury bills. The share of credits in the balance sheets of the banks decreases while that of treasury bills increases. Interest rate of Treasury bills decrease as the demand for them increases. The indicative interest rate cut introduced by the central bank does not and will not have a meaning for the corporate sector. If there existed a commercial paper or private sector bond market in Turkey, we would most likely see an upwards trend in the interest rate for those markets. It does not seem like the interest rate the banks set for the corporate sector credits follows the interest rate cut by the Central Bank.

If so, what shall be done? First of all, the binding constraint, i.e. the main problem of the economy shall be identified correctly. Today, the main problem of the Turkish economy in the broadest sense is that individual companies refrain from engaging in commercial activities with other companies due to lack of confidence. This reciprocal lack of confidence is the main reason behind the "there is no money circulation in the market" conclusion. This is the first point. This reciprocal lack of confidence leads to an environment where people do not engage in forward sales and diminishes the transaction volume. Credit channel is starting to get blocked. This is the second point. The third, it will not be possible to ensure the functioning of the credit channel and preserve the production capacity unless confidence among the companies is reestablished. This brings us to the fourth point: The government has not taken any measures with this respect yet. And the fifth is obvious: The problem cannot be solved unless the credit channel is opened.

What measures shall be taken, then? It is obvious, though different from the conventional measures. Let us check out our to-do list for today. First, it is not possible to overcome this period with minimum employment loss and minimum damage in the banking system unless an enlarged version of the Istanbul Approach Code of 2001 is introduced. If the banks restructure credits, mutual confidence can be reestablished by the market itself. It will be wise not to depend on the IMF agreement alone to establish confidence. Second, support criteria of the Unemployment Insurance Fund shall be enlarged temporarily to support the unemployed. By this way, it will be possible to design the healthiest support mechanism for those who will become unemployed in the upcoming period. Third, a certain amount of public funds shall be allocated for the support to be provided for banks or the unemployed, in advance. The fund to be used for credit restructuring shall be provided under warranty that no employers will be fired. Fourth, a multi-year fiscal discipline approach consistent with the multi-year budget perspective shall be adopted instead of single-year fiscal discipline approach. Rules concerning how to compensate for this year' fiscal expansion in the next year shall be set in advance. Fifth, of course, foreign exchange reserve shall be strengthened through the IMF agreement.

These are roughly what shall be done. The problem is obvious, and the steps to take are obvious. The dilemma is apparent: We will either spend public funds to take these measures before we face any damages or we will spend much more after we face the damage to remove the wreckage.

Submitted to the information of decision makers.

This commentary was published in Referans daily on 06.01.2009