The growth rates of 10 percent in 2010 and more than 8 percent in 2011 are quite promising, too. The annual budget ran a 1.2 percent primary surplus and a deficit of some 1.5 percent of the gross domestic product (GDP) after adding interest payments. Also, the debt-to-GDP ratio dropped below 40 percent.
But when you read the report thoroughly, you'll easily see the concerns of the IMF and their wariness of the prospects of the Turkish economy. As an example, the fiscal policy section can be a good start. Every instance of praise in the report is coupled by a concern regarding that particular issue. At one point it was the one-time tax amnesty and the success of the amnesty program, while at another it was indirect taxation. However, political stability and the continuity in the budget-making process make it easier to manage short-term fluctuations and abide by the principles of a “first collect, then spend” policy.
There are a couple of concerns in the latest IMF report: the unconventional monetary policy implemented by the Central Bank of Turkey, inflation, the widening current account deficit (CAD) and the structural problems that cause this gap such as high energy imports, the widening trade gap due to exchange rate misalignments and, finally, the strong domestic demand and low private saving. The banking sector -- despite some footnotes, the fiscal stance of the current government and the strong macroeconomic performance are praised in this report.
Let's say a few words on the monetary policy and the subsequent results of the coordinated policy actions of the central bank and other regulatory bodies. I have on a number of occasions written that the only quick way to control short-term capital flows that come as loans to local consumers is to control credit expansion because tightening the fiscal policy by increasing interest rates will increase the interest burden on the budget and on the highly indebted corporate sector. This is a problem that may increase the vulnerability of the private sector, which is the last thing the public sector wants in an unstable market environment. Instead, they tried to implement different sets of policies like an interest corridor, foreign reserve auctions, public statements on exchange rates and other types of instruments to control credit expansion and short-term funds flowing into the market.
International investors and capital holders reacted and resisted this policy, and tested the seriousness of the central bank in recent months. But then, after realizing that they would move forward, the investors adapted accordingly and the credit expansion is under control.
On the other hand, controlled lira depreciation also supports the control of the output gap in the short term and buys the central bank some time for long-term structural reforms. The short-term cost of this policy action is, of course, inflation, but next year inflation is expected to decrease to the levels we sat in the first half of last year.
The trade deficit and the CAD are the main structural problems in Turkey's economy, the IMF emphasized in its report. However, on this front we only see slow progress and even some reluctance. International investors and the private sector, who need to take the lead in minimizing the CAD and trade deficit, are in slow motion and this slows down the process. Labor market flexibility, energy sector investments, tax code reform and judicial reforms as part of recent constitutional changes are all interdependent problems that make it hard to make progress towards a mature economy in the short term. Do we have time to wait for all these processes to reach their conclusion? This all depends not only on how Europe will handle its own crisis but also on how the administrators of the Turkish economy handle their problems.
