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Turkish government is finally moving in the right direction
Finally, news stating that a set of steps considering the troubled sectors will be taken has been spreading around. In fact, we do not know what is going on exactly since there is no official statement yet. However, as the items leaking of the package are considered, it seems that the denial period ended. The government now gives the impression that it is moving in the right direction. However, finally starting to move in the right direction does not necessarily mean reaching the targeted destination. The crisis is still present and it is certainly the crisis of Turkey now. What is pleasing is that the "deeply sleeping beauty" has finally waked up. At this point, this is what we must feel happy about. The crisis, has taken the attention of the Turkish government for the first time since September 2008 when its impacts have become concrete in Turkey. The government paid regard to the impacts of the crisis at the seventh month after beginning and said "there exists a crisis" and introduced a measure. Period of denial ended, and this is a favorable development.
Finding the right direction to move never mean completing the task. There are a lot of tasks to accomplish and a series of measures to introduce. Cutting down three tax rates does not automatically stimulate economic activity or preserve production capacity of the country. This crisis requires simultaneous measures in different policy areas. And the extent to which each measure introduced hits the bull's eye is another subject of matter. Today, let us provide a "what must be done" scale for those who wants to evaluate this measure package as well as upcoming ones. This way, you can evaluate the performance of the government alone.
This crisis requires introduction of a series of measures in different policy areas simultaneously. It is crucial to acknowledge the dimensions of the issue at hand. Simultaneous measure series must be introduced in four policy areas.
First is the set of measures aiming to stimulate the economy. These include improving the income level of consumers, limiting losses in employment and reducing tax burden. Here, it is wise to devise measures devoted not only to employers but also to employees and in particular to unemployed people. But, it is obvious that, the measures under this policy area require an increase in public spending.
Second is restructuring the contracts of the pre-crisis period, which reflect yesterday's cash flow dynamics. The aim here is to restructure the contracts that made cash outflow decisions relying on the cash inflow dynamics of the past, in line with current cash flow dynamics. This is the only way to survive your business. If you signed a contract assuming that you will sell 100 cars per month and your sales fell down to 15 cars due to exogenous reasons, that contract shall be restructured. If you lost your working capital when raw material prices fell down steeply, you cannot continue in business unless you make additional borrowing. Measures shall be taken to protect the business. Credit contracts, tax payments and natural gas payments can be considered with this respect. Where is the difference? Here, tax rate is not cut down; but the amount at the old rate is split into installments. Credit debts are deferred by extensions. It is obvious that, the measures under this policy area require an increase in public spending.
Third is the set of financial measures aiming to generate external funding, capital and liquidity. The measures listed under the previous two paragraphs are rather related to the non-financial companies and employee, i.e. the real sector. The stimulation in the real sector depends on the healthy functioning of the financial sector. In the crisis periods, providing banks with liquidity support, and even capital support, if necessary, is quite important. The Central Bank fulfills its duty in particular by providing liquidity. Provision of external funding, on the other hand, is closely related to the IMF. However, as evident from the G-20 discussions, the issue is now over the head of the IMF. Thus, it is obvious that, the measures under this policy area require an increase in public spending.
The fourth set is directly related to public finance and fiscal discipline. Each set of measures listed above requires increase in public spending in different quantities. However, the rise in spending will not lead to a one-to-one rise in budget deficit. As the measures succeed, economic growth will be improved; and as the contraction is limited, budget deficit will be limited. The process shall be followed under a dynamic lens. This is the first point. And the second point which is currently of importance is that 2009 has to be a wasted year in terms of fiscal discipline. And it seems that 2010 will also be so. Now, we need a reliable plan determining how the spending today will be compensated for in 2011 and 2012. Turkey needs an intertemporal fiscal discipline framework.
These four areas complement each other. The necessary measures shall involve such coherence. Consumption, production-employment, fund requirement and fiscal discipline shall be addressed simultaneously. As the leaked information is considered, measures are more related with the first policy area. Turkey needs to introduce measures separately in each of four areas. Furthermore, measures in each area shall be designed to hit the decided target. This is basically what we understand from "Crisis Measures Package".
It is pleasing that the government has started to move in the right direction. Nevertheless, there is a long path ahead.
This commentary was published in Referans daily on 17.03.2009