It is yet too early to talk about the other dimension of the issue; that is, whether the credit expansion has been halted. If the objective is to be met, the signals of a slowdown in the credit expansion must become visible soon.

Recently the economy pages of the newspapers have been featuring the Central Bank's new policy framework. The monetary policy framework of the Central Bank for 2011 ­generally is considered well-intentioned and proper. However, there appears to be deep concern as to whether the current policy can fulfill its objective. I think the current situation of the Central Bank is similar to that in the 1990s. In those times of instability, someone had to step in and take responsibility since the others did not fulfill their part. Back then, too, the Central Bank and the Treasury would do whatever was necessary so that no quarrels would be provoked. I think this is the case also today. I personally am not at all worried about the steps the Central Bank has been taking. I get the purpose. I believe that in such a milieu, creating uncertainty can be used as an economic policy instrument. Why are the banks distressed, then? Why do they keep on complaining? I know this is an overly discussed issue, but if you want to hear my story, please read on.

Turkey's economy went through a dangerous recovery process last year. The recovery objective was fulfilled, but in exchange for the current account deficit hiking rapidly compared to the capacity to generate foreign exchange. What is more, the rapidly rising deficit was financed increasingly with short-term funds. Over the same period, the volume of personal loans in the banks' balance sheets grew steeply. In the past, foreign fund inflows had not made such rapid contributions to the domestic consumption channel. This time, however, the said channel came to the very fore since mechanisms regarding consumer finance are much more developed now. Another issue was the strong appetite of banks for extending long-term credits in lira terms financed by short-term foreign exchange inflows. If left alone, the balance sheets of the banks on the solidity of which we trust  most likely would be damaged.

What could be done? Things definitely would have been better if a tax reform and tax administration reform that increased public savings had been implemented to reduce the current account deficit. In that case, the ratio of interest expenditures to budget revenues would not have been higher than even those of Greece. It would have been better if the fiscal role had been put into effect. But none of these were or could have been done. The policy makers could have introduced permanent measures that would have encouraged the financing of current account deficits with long-term funds or discourage financing with short-term funds. Meanwhile, different measures from improving the investment climate to imposing capital controls could have been given a shot. These were or could not have been done, either. While other countries were receiving foreign direct investments, we ended up with short-term, head-in-the-lion's-mouth funds. What happened to Turkey was what happens when the country in question is risky. The capital adequacy ratio could have been increased to affect the behaviors of the banks and to discourage the extension of long-term credits with short-term funds. This was or could not been done, either. In that case, the Central Bank stepped in alone to create a process of what Henry Kissenger calls, "constructive uncertainty." This process is not an economic one, but it can prove successful in the current situation. Unprecedented circumstances require unprecedented measures, particularly given that no one else is doing their part.

What has been done? The rules and procedures for purchasing foreign exchange have been changed. The Bank has ceased paying high interest for short-term funds and started to fund the markets at lower interest rates. The Turkish lira has depreciated and a certain proportion of the short-term funds has flowed out. Rising uncertainty has had adverse effects ­­ on short-term fund inflows to a certain extent. It has not been bad. It is yet too early to talk about the other dimension of the issue; that is, whether the credit expansion has been halted. If the objective is to be met, the signals of a slowdown in the credit expansion must become visible soon. Otherwise, the balance sheets of the banks will be disturbed one way or another, which would not be good. Most likely the banking regulation authority would not remain silent in that case.

Despite the tranquility of the government, the Central Bank brings dynamism to Ankara.

This commentary was published in Radikal daily on 04.02.2011