I do not know the subjects of the disputes with the IMF. I would like to select and comment on two subjects addressed by the media. I remember reading some texts that there exists a dispute on the issue of 'fiscal rule'. However, I do not think that introducing fiscal rules can be a subject of dispute; even it is so, it does not make sense.

The reason is not the fact that fiscal rules have been introduced recently in an increasing number of countries that I believe this does not make sense. Of course wide range acceptance of the practice and the way of thinking enabling the acceptance is important. However, the main reason is different. When examining how the crisis will affect Turkey, I always addressed four channels. The reason is that fiscal rules ensure the feasibility of introduction of measures to decrease the damage to reach Turkey trough these channels.

It was prospected that the banks will act reluctant in extending new credits and ask for additional guarantees for existing credits; and it is happening so. On the other hand, cash flows to the corporate sector are deteriorating due to many reasons linked to the crisis. Soon, some companies will start to have hard time in paying existing credits. Therefore, there exists a risk that a part of the existing credit stock turns into troubled credits. All of these imply a further contraction in the credit market and further deterioration of the cash flows of the corporate sector. In other words, there exists a self-feeding negative spiral.

This spiral shall be broken. It is necessary to design a mechanism to restructure credits before they turn into troubled credits. And this can be enabled by means of a system that will provide guarantees for the banking sector. Though not sufficient solely, guarantees are obligatory. To put it differently; there is a need for a mechanism that will provide payment guarantee for a part of the liabilities of the corporate sector towards banks.

To do this, it is necessary to allocate resources from the budget. The calculations we made as TEPAV indicate that resources equaling 0.3 to 0.8 percent of the national income will be enough to do this (unless the crisis deepens).

On the other hand, as we projected, domestic demand diminished sharply. I had mentioned measures that will not only invigorate domestic demand but also improve the social justice feeling: To increase the number of people benefiting from unemployment insurance and the amounts paid, granting one-time bonus payments to low-income retired, etc. Again, as calculations made at TEPAV show that allocation of resources amounting 0.9 percent of national income is enough to do this.

The cost of these recommendations for the 2009 budget is only 1.2 to 1.7 percent of the national income. If you can convince the public that in 2010 and 2011 you will introduce measures to compensate for this cost, there is no harm for markets and international credit note in introducing these measures in 2009.

The way to 'convince' the public in an universally accepted way as well supported by theoretical literature is this: You introduce medium-term fiscal rules meaning that you set multi-year targets for one or more dimensions of the budget such as the debt stock or budget expenditures. Therefore, the additional expenditures you are to make (you have to make) this year might increase your debt stock, however, in the following years, you ensure a downwards trend for the debt stock. Of course, fiscal rules do not solely mean announcing a couple of multi-year targets. It is also necessary to build the institutional mechanisms ensuring that the targets will be met.

Another reason why I believe that the subject of fiscal rules cannot be a subject of dispute is that both the Treasury and the SPO is conducting important studies to this end. For instance, on 1-2 December 2008, they held an international conference in Ankara to discuss the fiscal rule policy. The majority of the bureaucrats in these agencies find the policy beneficial.

In short, the subject of fiscal rule cannot or should not be a subject of dispute. However, there is a second subject that can be a subject of dispute: Designing a mechanism enabling that the IMF fund to be received can be also used by the corporate sector and banking sector. If this is the subject of dispute, the conditions change. It will be wise to insist on our current position.

This commentary was published in 05.02.2009