It is needed to tighten the fiscal policy for the potential rainy days and finally not to categorically reject short term capital controls.

We had better examine the rapid credit expansion issue with the eyes of others. With "others", I will refer to the IMF and address the "World Economic Outlook" report published in April 2011.

Let me begin with a quote from the second chapter of the report: "the rapid recovery is projected to continue in Turkey, where robust private demand and buoyant credit growth are lifting economic activity above its potential level amid still-accommodative macroeconomic policies." Here, the report implies that the "still-accommodative macroeconomic policies" must not be employed to slow down or reverse the current course of the economy. 

Turkey ranks at the top

Now I will turn back to chapter one. Here, the report draws attention to the rapid credit expansion among emerging market economies. Turkey ranks at the "rapidest" group and in fact at the top of the list as the below paragraph suggests: "Brazil, Colombia, India, Indonesia, and Turkey have experienced a noticeable pickup in real credit growth, generally close to or well into a 10 to 20 percent range (more in the case of Turkey). Over the past five years, credit almost doubled in real per capita terms in these economies. Such expansions are close to those experienced before previous credit booms and busts".

Such an alarming quotation. Let me note something: I did not add the sentence about Turkey; it was in the original text. I will continue with quotations from the report. This time, there is a warning not for individual countries but for countries undergoing rapid credit expansion: "In many emerging market economies, monetary conditions appear very accommodative. A number of these economies have already hiked policy rates, increased cash reserve requirements, or restrained credit growth. However, real interest rates remain far below pre-crisis levels in many of these economies..." 

Loose fiscal policy
The same chapter also puts emphasis on the loose fiscal policies among the mentioned group of economies. It highlights that these countries might face rapid credit outflows depending particularly on the future policy preferences of the US and thus states that fiscal policies must be tightened further. It maintains that after tightening the fiscal policy and taking the necessary prudential measures, controls to reduce short term capital inflow (foreign exchange) can be introduced.

Let me conclude with a short summary of my commentaries on this subject: efforts of the Central Bank can yield results only if reserve requirements are increased to substantially high degrees. So it would be wise if the Banking Regulation and Supervision Agency steps in before that. For all these to work, it is needed to tighten the fiscal policy for the potential rainy days and finally not to categorically reject short term capital controls.

This commentary was published in Radikal daily on 10.05.2011