The Central Bank has achieved an outcome that could have been ensured simply by saying “I am increasing the policy interest rate,” and has confused everyone.

Recently a friend of mine said, “See the outcomes, now. The interest on loans from my own bank has increased by 50%, from 9.5% to 14% since February. This is the case with Turkish Lira loans, whereas the rate of increase for foreign exchange loans has reached as high as 100%. Both the input cost and opportunity cost have increased, no matter what the reason. Thing have not worked out as we calculated.”

We were talking about Central Bank policies. The things I was saying sounded to him as if I were talking about the gender of the angels that had dropped out of the sky into Istanbul. He cared about results. He was right on his side, but I am of the opinion that the process is as important as the outcome, taking into account possible developments ahead as well as the developments so far. By “process,” I refer to the policy framework that has caused today’s outcomes. I am talking about the current economic policy framework with its haves and have-nots. Today, let me give you a short list at least to share with you the issues that occupy my mind.

Let me start with the Central Bank policies. Let’s cut to the point and skip the details. If the Central Bank had aimed to slow down the economy –this is what they argue now; but they were talking about different objectives some time ago – the interest rates imposed by banks that have increased substantially during 2011 are in line with the target. The issue here is this: The Central Bank has achieved this outcome, which could have been ensured simply by saying “I am increasing the policy interest rate,” by confusing everyone via a series of complex dance figures, making everyone ask “What the hell is the Central Bank doing?” The Central Bank, instead of saying, “I am raising the policy rate in order to slow down the pace of economic recovery,” chose to reach the same outcome by destroying the credibility of the Bank in the eyes of markets and increasing their risk perception of the policies of the Bank. Is it a good or a bad thing? It seems to me that this is bad. What is the point of cutting off your arm during a procedure when there is the chance to save it? There is none. This is the first thing to state.

The second point is related directly to the first one. Is it because of the zigzagging appearance of the global crisis that the economic management team preferred to deliver its dual messages clairvoyantly instead of in clear and easy-to-understand statements? The erratic behavior of the global crisis is clearly one reason for the confusion among the economic management team. It is apparent that we are going through tough times and everyone is confused. But the core of today’s problems is not the global crisis directly, but the uncontrolled recovery during 2010. The historic high current account deficit and its financing are Turkey’s debt stock problems. In this current period, when all countries are dealing with debt management, this is Turkey’s debt management problem. At the heart of these risks to be managed lays once again the mismatch between the total domestic demand and volume of domestic savings. If the foreign exchange generating capacity of a country is limited, you need to reduce the need for foreign exchange. You need to avoid confusion. However, the confusion reflected in the official rhetoric makes it difficult for Turkey to adjust to the new period shaped by the deepening of the crisis in Europe.

And the third point: Turkey’s short-term vulnerabilities are the current account deficit and its management. This also has to do with debt management. The credibility of the Central Bank is more important than ever for the management of this debt. Why? Along with the deepening of the crisis in Europe, it will be more difficult for Turkey to obtain funds from the long-term fund market. This means that it will be more difficult for Turkey to access medium and long-term funds to re-finance the current account deficit. It will be even harder to access this market from which we already have been excluded. The recapitalization of European banks will put Turkey in greater need of “hot money.” In this period, the credibility of the Central Bank will be of great importance in terms of the new debt management problem; however, the Bank has destroyed its credibility. What will this lead to? It waill lead to a larger interest rate adjustment and larger exchange rate adjustment. This will be the outcome.

What the business world cares about is the outcome. But we are living in a period in which estimating future outcomes is of greater importance. The best way to estimate future outcomes is to focus on the ongoing process. When I talk like this, I sense people looking me as if to ask,  “So, what do you see as the outcome?” I tell them: “A quite bright future is ahead for Turkey. Fix your eyes on the horizon, just as our raider ancestors did; but beware the pothole right in front of you.”

This commentary was published in Radikal daily on 18.11.2011