Turkey has chosen to implement a "loose" fiscal policy in 2010 taking into account the general elections ahead.

Turkey's economy grew impressively by 8.9 percent in 2010. The economy had overcome the "v" shaped trough hit during the crisis in the third quarter. The gross domestic product (GDP) attained in the fourth quarter certified the turning around of the economy. The peak level of GDP before the crisis was recorded in the first quarter of 2008. The GDP in the last quarter of 2010 is 5.4 percent higher than the peak level before the crisis.

Given that Turkey's potential growth rate is 4.5 percent, it is evident that the growth rate high above the potential will give way to certain problems. In fact, it already has. The recently announced balance of payments figures reveal that the mentioned problems prevailed also in the first quarter of 2011. The deterioration in current accounts continues. In my last commentary I stated that the method of finance of the high current account deficit demonstrated a certain improvement in the first two months of 2011. But in this argument I ignored the net errors and omissions item which had a quite high value. 

The CBT is concerned about the current account deficit
However, high (positive) level of net errors and omissions in the first two months of 2011 in a way shows that there exists a foreign exchange inflow the origin of which is could not be identified. Taking this into account, we have to stress that the deterioration with respect to the method of finance of the current account deficit prevails. But it is not certain whether or not we will take it into account: one has to be cautious when interpreting the net errors and omissions account. Therefore, we have to wait for the figures to be declared in the following months to decide whether the method of finance has improved or not.

We have to assess the high current account phenomenon also with reference to the fiscal policy framework. Currently, the only institution that seems to be concerned with the current account deficit problem is the Central Bank of Turkey (CBT). Unfortunately, the fiscal policy is not involved in the struggle.

On the other hand, it is evident that monetary measures alone cannot solve the current account deficit problem. The issue has a structural dimension, too: in periods of rapid growth, we fail to save enough to finance the rapid growth performance. Thus, we borrow to benefit from others' savings. This structural challenge can be framed in another way: If a country's investments are higher than its savings, the country will have current account deficit.

It is not easy to make the private sector increase its savings. It is not clear which type of structural reforms will be launched to fulfill this objective. Even if relevant reforms are designed, we have to wait for years to see those pay. However, it is in our discretion to increase the public sector savings; it only requires a political decision. 

We could not save
Unfortunately; we could not save some proportion of the public revenues in 2010 which increased thanks to high growth. Yes, the budget deficit does not seem to have grown; but this is only a superficial outlook. In periods where growth rate stands above or below the normal, developed countries assess the budget performance differently than they do in normal times. They rearrange the budget expenditure and saving items in tandem with the abnormal growth trends.

The relevant figures are not disclosed in Turkey. Still, there are some indicators to refer to. For instance, in periods of rapid growth, revenue from taxes imposed on exports and imports increases. Therefore, budget revenues can be interpreted after deducting the revenue from import tax. In that case, it is observed that the budget performance in 2010 is not at all pleasant. In short, Turkey has chosen to implement a "loose" fiscal policy in 2010 in order to overcome the crisis as soon as possible and taking into account the general elections ahead.

This commentary was published in Radikal daily on 14.04.2011