Fatih Özatay, PhD - [Archive]

The pursuit of transparency (2) 20/11/2012 - Viewed 1885 times

Yes, the Central Bank of Turkey has multiple objectives. Does it have any list of priorities? Do circumstances affect the priorities?

The high current account deficit financed predominantly with short-term borrowings threatened Turkey’s financial stability. Counter measures eased the current account deficit to a certain extent. Yes, even the possibility of having the current level of current account deficit would give us the shivers in 2007 or 2005. But measures enabled a drop in the deficit, anyways. The level of current account deficit today is lower than what it was in 2011.

There are a bunch of strategies that will help reduce the current account deficit. The best option is to ensure a permanent drop, by enhancing domestic savings so that the economy does not have to operate on foreign savings, for instance. Or by a technological leap that will enhance the sophistication level of exports. Since these were hard to achieve in the short-term, however, Turkey chose an “easier” strategy.

Rapid credit growth

Rapid growth triggered by rapid credit expansion was one reason for the hike in the current account deficit. Between the late 2010 and the early 2011, year-on-year credit growth rate floated around 40 percent.

It was proven by experience that rapid credit growth augurs bad as it is one of the precursors of a financial crisis. Turkey therefore took measures to lower the rate to reasonable levels. With the help of the ongoing uncertainty across the world, credit growth rate decreased to 15 percent.

As a result of the downfall in investment appetite due to the global uncertainties and the engineered drop in credit growth, Turkey’s unsustainably high growth rate eased down. Until recently, Turkey had unsustainably high growth rates around 8 and 9 percent. Today, the rate is slightly below 3 percent. Yes, Turkey put an end to the unsustainable; but this time the rate is considerably below the long-term average growth rate of the Turkish economy.

Now, we are concerned if low growth rates will be persistent, in the case of which unemployment rate may rise above the present 9-9.3 percent interval. Hence, we now seek to improve the growth rate.

Rapid appreciation of the lira starting with the late 2010 was assessed to be another cause of high current account deficit. Measures were taken to lower the value of the lira, which was achieved in 2011. By the end of the year, however, rapid depreciation set off the alarm bells. Today, we are at the point where we started: the possibility of lira appreciating against FX has raised concerns and it was declared that all necessary steps will be taken to prevent such movement.

Multi-objective framework

Inflation targets for 2011 and 2012 were 5.5 percent and 5 percent, respectively. However, inflation rate was realized at 10.4 percent in 2011 and is expected to stand between 7 and 7.5 percent by the end of 2012. By the end of 2011, when it became clear that inflation will go beyond the target also in 2012, the monetary authority declared that they will concentrate on anti-inflationary measures. Later, it was announced, “Inflation rate will be lowered to 5.3 percent by the end of 2013.” At the present, there appears to be a shift of agenda towards growth performance.

One day we heard about the risks of rapid credit growth; the day after concerns about inflation rate escalated. Later we were told that policy should focus on growth perspectives. Were these issues raised by different bodies or officials? No. All of the above were compiled from Central Bank reports and statements. Yes, the Central Bank has multiple objectives. Does it have any list of priorities? Do circumstances affect the priorities? Which objectives come to the fore under which circumstances? We need some light over here.

This commentary was published in Radikal daily on 20.11.2012