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    IMF marches to a different tune regarding the monetary policy

    Fatih Özatay, PhD24 September 2011 - Okunma Sayısı: 1307

    The IMF does not agree with the CBT though its gives their due.

    The IMF announced the preliminary conclusions of the 2011 Article IV Consultation report on Turkey on Thursday. The report is composed of three sections. The first section reviews the period after the global crisis and the second section highlights the challenges created by the post-crisis developments. The last section sets forth the economic policies recommended by the IMF. The main topic of today’s commentary will be those monetary and fiscal policy recommendations the IMF made.

    Reducing vulnerabilities

    The main direction of the IMF's policy recommendations appears to be reducing Turkey’s propensity for volatile short-term foreign exchange inflows. In other words, the IMF is aware of the fact that short-term capital inflows can halt as quickly as they began. The recommendations are mainly focuses on preventing the damage this sharp return might cause. Of course, to what degree those measures can be implemented in the current phase of the global crisis is debatable. But it is evident that the delay is not the IMF’s fault given the fact that some of these recommendations – particularly those on the fiscal policy – had already been voiced quite long ago by some economists in Turkey and most probably been stressed by the IMF before closed doors. Similarly and naturally, some will most likely disagree with a large part of these recommendations. Today let me not comment on the recommendations but just enumerate them. A chief recommendation by the IMF for fiscal policy is targeting a strong primary surplus without taking transient revenues into account. In this context, the IMF states that a primary surplus around the level recorded in 2007 will be appropriate. Please take note the timing: the IMF recommends Turkey to achieve a primary surplus around the level that was achieved in a period when the global crisis had emerged in the US but had not spread to the whole world. This might give an idea about the “feasibility” of this recommendation.

    The IMF does not agree with the CBT

    The IMF believes that this would disburden the monetary policy. While accepting that the Central Bank of Turkey (CBT) adopted an innovative approach for the new monetary policy framework, the IMF implies in between the lines that it does not agree with it. The section about the monetary policy is quite polite and explicit: “Monetary policy should restore its focus on price stability within a transparent and consistent operating framework.” Full stop! The paragraph continues as follows: “Faced with unprecedented monetary easing in advanced economies, the CBRT adopted an innovative approach that simultaneously sought to contain inflation and credit growth, and avoid exchange rate misalignment through a combination of policy instruments. More recently, given concerns about financial contagion from the euro area and slowing domestic activity, the CBRT adopted various measures to avoid currency overshooting, while also lowering the policy rate.” The IMF is of the opinion that these objectives might not be reconciled under the current circumstances, or more explicitly, these objectives are inconsistent. The IMF frankly attracts attention to four points: First, the tolerance band of ±2 percent for the inflation target is considerably wide and should be narrowed. Second, the targets are significantly higher than in peer economies and might be reduced supported by a tighter fiscal policy framework. Third, it would be feasible to increase the policy rate to avoid inflation differentials. In other words, the IMF implies that otherwise the credibility of the target will be damaged. Fourth, given the current milieu, efforts to reduce the exchange rate are useless and thus the CBT must avoid spending its FX reserves in vain.

    Do I agree with the IMF? I will not be commenting for now, as I said before. But I have a couple of words to say both to the IMF and the CBT, though none will be new. But nothing is new under heaven, right!

     

    This commentary was published in Radikal daily on 24.09.2011

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