On the other hand, the government had already provided details of its medium-term fiscal program. In this program, although the priorities for the disinflation program were retained, other priorities were also put forward. It is safe to argue that the government is in search of a smooth departure from the long-lasting International Monetary Fund (IMF)-based stabilization program and wants to shift to a new structure in which development priorities rather than only stabilization measures are the focus.
In our view, this new perspective is both possible and necessary, provided that Turkey continues with a post-program monitoring agreement with the IMF in order to maintain Turkey's international creditworthiness and to continue presenting positive messages for the coming reform schedule. However, unlike the previous programs in which the IMF dictated its conditions to create an environment where growth was promoted, which improved fiscal balances and price stability, in the new "soft" program the key elements will be defined by the government on the basis of the real economy, employment, and job and income creation. As a matter of fact, one may have observed that the Turkish government was quite successful in explaining Turkey's new agenda to IMF officials. Therefore the executive board of the IMF convened and completed the seventh review of the stand-by agreement. With the completion of the review, a loan tranche amounting to SDR 2,248 million (approximately $3.64 billion) was disbursed. Thus the stand-by agreement that was approved back on May 11, 2005 was successfully completed.
Despite this positive environment with the IMF, one may observe that there are some concerns in the public that the government will follow an irresponsible expansionary fiscal policy with rising expenditures that would feed inflationary pressures even further. In that case, one would expect the central bank to start interest rate hikes once again in order to at least balance the government's actions. In our view, there is no room for the central bank to raise interest rates because domestic consumption demand has been quite weak, industrial production figures are declining and the capacity utilization rate has also been dropping.
Moreover, it is not fair to accuse the government of following irresponsible expansionary fiscal policies. Although the government has tried new approaches to deal with the worsening domestic as well as international economic environment, the government is not going to finance the new development projects either by monetization or by further borrowing. As a matter of fact, the government has maintained its focus on fiscal discipline. The budget deficit has even been kept below the rate of 2007 (1.6 percent of gross domestic product [GDP]) this year (1.4 percent of GDP). In addition, the government, in explaining its medium-term fiscal program, has noted that the ratio of public sector debt stock to GDP will continue to be reduced in the coming years. Finally, the government has made efforts to finance new expenditures by reducing the primary surplus to 3.5 percent of GDP and by utilizing resources accumulated in the unemployment fund.
To sum up, we are not in a position to say that the central bank is pursuing a tight monetary policy but that the government is following an irresponsible fiscal policy. While true that due to domestic and external conditions, the government has followed some Keynesian-oriented policies in order to improve Turkey's comparative advantages and investment climate and to undertake second generation reform measures, the sources of financing are not consumption-oriented and are not directly inflationary.
