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Hand in hand against the crisis
The economic program that has to be designed to tackle the crisis must involve many measures. A part of the measures are related to credit guarantee system which is required to ensure the operation of both foreign exchange and TL credits, which are currently blocked. Since the end of October, I have written several columns on how the system can work. In addition, the think-tank I work at, TEPAV published several notes on this issue. I observe that, in the recent period, some columnists as well as prominent names of political parties, for instance such as CHP leader Deniz Baykal, are considering the system as an important solution advisories. And this makes me really happy as the ultimate aim of the recommendations involved in this column is initiating an important discussion on the recommended issue. If the discussions can be located at the right platform, it will be easier to develop proper solutions.
There are two more points to be discussed considering the credit guarantee systems. First is related to measuring the resources to be allocated for the system right. And second, the question how much economic growth and employment increase will be ensured via the public resources allocated shall be answered.
The answer to the second question shall be addressed in a broader lens: It is necessary to focus on the macroeconomic consequences of the whole economic measure program to be developed to tackle the crisis rather than on individual measures. And this requires to study on comprehensive models. TEPAV has carried out such a study and will make important announcements to the public within the week. After noting that this is the first comprehensive study carried out in Turkey against the crisis (at least announced to the public), I will proceed with the first discussion topic; i.e. calculation of the impact on the budget right.
When measuring the burden of the credit guarantee systems on the budget, the following points shall be focused on: First, a credit guarantee fund (let us call it CGF) shall be established. The Treasury invests capital in the CGF. Therefore, budget deficit increases by the amount of the capital invested. Let us call this 'instant budget effect'.
Second effect is the 'short term effect': As the system begins functioning, budget deficit decreases as the credit market will be stimulated to a certain extend if the system is made work properly. Because of this reason, after a certain time, domestic demand recovers and consumption and investment level increases (relative to the case where the system is absent). National income level rises as compared to the level to be achieved when the system is absent. A significant part of the tax revenue is determined by the national income of the pertaining year. Therefore, higher tax revenues might be attained.
Third effect is the 'long term effect'. The increase in the consumption and investment spending triggered by the system is extended over a certain period. For instance, if the system begins operating right away, it will have a positive impact on the national income level for 2010. In this context, long term tax revenue will be higher than short term revenue.
There is another reason that will have a downwards effect on the budget deficit (liquidation effect). The recommended system will be in effect for a certain period of time, let us say for three years. At the end of this period (of course if desired) the CGA (credit guarantee agency) will be liquidated. The start-up capital less the net losses will be retransferred to the Treasury. The determinants of the net loss are the following: First, some of the credits guaranteed by the CGA will become non-performing and losses will occur. Second, the GCA will receive commissions from the companies in exchange of the guarantee provided. Third, the CGA will keep its capital as deposit and gain interest revenue. Fourth, some companies will be asked to provide collaterals to be converted into cash in case loans become non-performing.
Instant, short term and long term effects must be summed, and then the burden of the recommended system on the budget shall be assessed. In this context, the burden of the system on the budget appears much lower than the instant effect. Furthermore, net effect in the long run might even lead to budget surplus. In short, it seems that the system can work if it is designed as an autonomous structure to operate isolated from political pressures.
This commentary was published in Radikal daily on 01.03.2009