Monday, February 21, 2011

Weekly Hurriyet Column: ‘Ay Aman Of’ on monetary, fiscal policies

Below is  my Hurriyet Daily News & Economic Review column for this week, which you can also read at the Daily News website. As for the title, it cheesy as usual, but no movie reference this week.

I will have an addendum as usual, where I will detail the Fund's "reporting process" as well as well expand on some of the views in the article. That's all I have to say until then, so on to the column:

The International Monetary Fund, or IMF, was half-jokingly called “ay aman of” by many Turks after the 2001 crisis.

This Turkish expression, which would roughly translate as “ouch ow oof” into English, was referring to the fiscal austerity of the Stand-by Arrangement, which laid the foundation for the country’s strong macroeconomic fundamentals today. No pain no gain, as Ahnold would say.

Turning to the present day, “ay aman of” was my first reaction as I read the public information notice regarding the IMF Executive Board’s conclusion of the Second Post-Program Monitoring Discussions with Turkey.

An avid reader of the Turkish press would have been surprised by my worries. All the dailies were in total agreement that the Fund had commended Turkey on its successful management of the economy. I would argue that the two-pager would make for a mixed reading at best.

The IMF surely congratulates Turkey on the robust economic recovery and has in fact raised its 2010 growth forecast to 8.2 percent. The Fund also notes that output is above pre-crisis levels, although it does not take a stand on the controversial issue of whether the output gap has closed. But the IMF makes subtle critiques on fiscal and monetary policy as well.

The Fund’s main worry is the “sharply-widening current account deficit” and the possibility of a “sudden capital flow reversal”. Moreover, the high import content of consumption, investment and even exports as well as growth’s dependence on capital inflows are symptomatic of weak external competitiveness.

After having diagnosed the disease, the Fund recommends “a combination of fiscal and macroprudential tightening, more restrictive liquidity conditions, and competitiveness-enhancing structural reforms” as the cure.

With respect to these measures, the Fund praises the existing macroprudential measures and slowdown in liquidity growth, while at the same time acknowledging that more could be needed. But I feel that the Fund has given the Central Bank of Turkey, or CBT, a gentleman’s C on liquidity.
For one thing, the CBT has been reluctant to offset the extra liquidity from its foreign currency-buying efforts and the decline in Treasury deposits with its open-market operations, as doing so would have increased money market rates.
The decline in deposits also reflects the deterioration in the fiscal position, where the Fund is most vocal: The IMF agrees with your friendly neighborhood economist that once the soaring tax revenues induced by the import boom are excluded, fiscal balance actually declined last year. Therefore, the Fund is calling for “fiscal tightening to restrain domestic demand and rein in the current account deficit”.

While the Fund does not state it explicitly, I see the loose liquidity management and fiscal policy as the main culprits behind the resistible rise of the current account deficit. I say resistible because although Turkey’s savings investment gap remains as a fact, the current account deficit would not have spiraled out of control without fiscal accommodation or base money expansion.

As for monetary policy, the Fund sympathizes with the Central Bank’s unconventional approach, but also emphasizes that monetary policy should continue to focus on price stability. After all, Turkey’s competitiveness gap stems more from inflation differentials with the developed world and peers than from the nominal exchange rate, so bringing inflation under control would be “essential for durably strengthening competitiveness”.

But my biggest worry is that monetary and fiscal policies are not working in tandem, to quote fellow Daily News columnist Haluk Bürümcekçi. They are looking more and more like Beşiktaş’s central defenders.

Emre Deliveli is a freelance consultant and columnist for Hürriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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