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    Degree of naivety...

    Fatih Özatay, PhD08 February 2009 - Okunma Sayısı: 1372


    I really cannot believe some certain things. I have worked as a bureaucrat for many years. And I have been living in Ankara and smelling the bureaucracy for many more.

    On my last article in this column, I referred to technical reasons while I was speaking about what cannot be the subject of dispute between Turkey and the IMF. However, I see I missed the probability that in Ankara, 'technical' reasons might not be valid every time due to obvious 'technical reasons'.

    I had said that the subject of dispute cannot be medium-term fiscal rules. And the technical reason was obvious: Fiscal loosening was necessary to limit the rate of economic contraction even slightly. However, in countries like Turkey, there was a prerequisite to carrying out fiscal loosening without any accident, i.e. without leading to rapid increases in risks and thus reaching the desired outcome of stimulating growth: To prove that the loosening will not be permanent and put on the shoulder of masses in form of the burden of increasing public debt, the measures that will compensate for the loosening should have been announced simultaneously.

    In short, fiscal rule proposed that 'loosening' would take place in 2009 while 'tightening' will be observed in 2010 and 2011. Of course the issue was not that simple; fiscal rule also included certain institutional regulations that will ensure the credibility of the 'tightening' phase. And the practice was adopted in many countries around the world.

    However, I missed that 2011 was election year. Therefore, it was easy for me to conclude, applying a rational lens, that the issue of fiscal rule cannot be a subject of conflict. However, things change when the intention to introduce populist policies to gain votes is considered.

    But, despite all, I will go on with my naïve attitude following two paths: First, if the subject of dispute is really the fiscal rule, 'may God save us'. It means that we will talk about 'macro stability' till the end of our lives. In other words, we will not be able to comment on or discuss second generation (micro) reforms that will increase the potential growth rate and decrease natural unemployment rate. It is really an exhausting and boring situation!

    Second, I would like to touch upon the subject, which in my last article I said could be the subject of dispute and about which we have to be careful in the negotiations. This is the subject on how the IMF fund will be used. In general, the fund received is either deposited in the Central Bank account of the Treasury to be used by the latter or directly deposited to the Central Bank. Therefore, the fund is used for repayment of foreign debt of the public sector. If the fund is directly given to the Central Bank, it can partially be transferred to the banking sector through some certain transactions made by the central bank (for instance, releasing required reserves in foreign currency). Funds can also be transferred to the banking sector by using the funds deposited in the Treasury account for early repayment of domestic debt in foreign currency.

    Apart from these technical details, the fund to be received from the IMF will firstly and predominantly be used for the repayment of the foreign debt of public sector. And second, it will be beneficial for transferring a certain amount of liquidity to the banking sector.

    However, everybody knows that the real problem of 2009 is the due foreign debts of the corporate sector. The amount is quite high, while the external borrowing opportunities from the global market are really low. If we want to prevent the contraction of the corporate sector and the increase in unemployment, we have to design a mechanism that will transfer the IMF fund also to the corporate sector.

    I believed that this issue might be a subject of dispute between Turkey and the IMF; because such mechanisms are not seen in conventional IMF agreements. However, we are in an extraordinary period requiring extraordinary measures. And the offered mechanism is among extraordinary measures.

    Months ago, when the IMF agreement was not on the agenda, I stated that worker remittances deposited in the Central Bank might be used to build the recommended mechanism. I suggested that those funds (amounted 14 billion dollars back then) might be transferred to a newly-established fund to provide credit guarantee. Then the recommendation was altered in another form: the deposits would be transferred to the banking sector together with attached liabilities and then would be used by the Central Bank to extend rediscount credit.

    These different forms have drawbacks and as well advantages before the other. However, the important point is the IMF fund (of course if received) will facilitate the realization of one of the recommendations. Therefore, the thing I was trying to say was that if this is the subject of dispute, we shall convey the problems of the corporate sector as well as possible and haggle with the IMF with this respect in the negotiations.


    This commentary was published in Radikal daily on 08.02.2009l