I was concerned about what Turkey can do to improve its export performance taking departure from the risk that the developments in the European Union affects Turkey's exports negatively. It will be wise to examine the monetary policy and exchange rate policy first being the tools that comes to mind first. As a result, I would like to address the steps that can be taken in the short term to begin with.

It is a commonly known fact that Turkish lira is quite valuable in the face of foreign currencies. So I believe there is nothing to discuss with this respect. Exchange rate is one of the important indicators having an effect on export performance. A country's currency being valuable implies that the goods to be exported become more expensive in the eyes of the trading partners. Therefore, a valuable currency is not a gift considering exports. I believe there is nothing to argue here, too.

And we now are faced with another phenomenon: Euro's depreciation in the face of other currencies. This makes Turkish lira against Euro even more valuable. So, Turkey's exports to Eurozone deteriorate even further for this reason. This also is commonly accepted.

It is evident that we have nothing to do to prevent the depreciation of Euro. But can we do something to prevent the appreciation of Turkish lira? Economists that reach a consensus on the issues mentioned above differ significantly in their answers to this question. This is what I see from my window:

It is not feasible to narrow the floating interval of the lira in order to ensure a higher predictability for the exchange rate. Of course it is a good thing for the exchange rate to be predictable provided that this can be made sustainable. We are going through an unsteady period considering the financial markets. And this turbulence seems to last quite long. In such a milieu it would be a mistake to change the exchange rate policy especially in the direction of reducing flexibility.

In this context, recommendations reading 'exchange rate could be raised to and kept at that level' could not be considered among the feasible policy alternatives. Steps that could be taken in the short term might be paving the way for a more flexible inflation targeting by the Central Bank by putting forth a credible roadmap for fiscal policy which emphasizes long term discipline. To put it differently, if the Central Bank is convinced that inflation rate will stand at some point around 5 percent, it can implement an inflation targeting regime that also accounts Turkey's competitiveness (real exchange rate). The cost of this policy might be an increased volatility in interest rates; but this is another matter of question.

Being certain that fiscal discipline will be secured is not the only precondition for the Central Bank to implement such a regime. How discipline will be maintained is also important. For instance, will indirect taxes and prices of some important goods and services be raised when problems emerge? It must be ensured that it is not likely to initiate such attempts that will discomfort the Central Bank. In this respect, 'fiscal rule' is an important step to take. However, the Fiscal Rule must be strengthened. At TEPAV's web site you can find two policy notes on this issue. First was written by Ümit Özlale and second by Emin Dedeoğlu. I believe that these notes must be taken into account. In this context, two important recommendations by Faik Öztrak, Member of Parliament from CHP (Republican People's Party) was addressed by Seyfettin Gürsel in Referans daily on Tuesday: First, the audits for the Fiscal Rule shall not be made by the Court of Accounts since the progress will be too slow. Öztrak recommends that a follow-up committee in the parliament can be established instead. Second, Öztrak requests that accounts of TOKİ (Public Housing Administration) to be covered by the fiscal rule. Therefore, the main opposition party supports the fiscal rule with two important and constructive recommendations. So, there exists a ground for consensus. If this opportunity is utilized in the right direction, the Central Bank can be relieved to a certain extent.

What can we say about the recommendation that the Central Bank purchases more foreign exchange to strengthen the reserves? I would like to offer a few 'answers': Until when?  What will happen if the Central Bank tries to withdraw the liquidity in the market as increased due to purchase of foreign exchange? Of course regular purchase of foreign exchange can be increased when circumstances allow. However this will be kept at minimum in order not to cause other problems. And this will not make a difference alone; it can find a small place in the policy basket. I will talk about this in more detail.

This commentary was published in Radikal daily on 17.06.2010