Today I want to do an overview of these issues, which will merit concern from now on.Turkish Central Bank head Durmuş Yılmaz has invited columnists from major national newspapers to a dinner in İstanbul on Monday in order to introduce the central bank perspective on emerging issues concerning consumer price inflation (CPI). I must begin by saying that CPI is one of Turkey’s greatest weaknesses and therefore must be fixed as soon as possible, as the international environment worsens. In fact, as the disinflation path is currently consistent with the intended target, the central bank is quite confident on its recent interest rate cut. As far as I understand it is ready to continue the same process hereafter, provided domestic as well as external progress supports it.
The second issue I want to bring into the agenda is that, parallel to negative developments in the US economy -- like its twin deficits, threat of economic stagnation, rising unemployment, liquidity pressures and danger of insolvency related to the recently erupted mortgage and credit crunch problems -- the value of the US dollar is rapidly declining all over the world. This process is even more dramatic in Turkey due to our high potential in both the real economy and finance industry, primarily due to high real interest rate yields -- two dynamics that are creating a big demand for the Turkish lira. That is why people have recently started to believe in the possibility of a “$1 = YTL 1” equilibrium.
However, as the economy once again starts growing parallel to the easing of inflationary pressures, this “high interest rate and extremely low currency” paradigm will create harmful effects on the real economy, and imported goods could take the place of local ones. In other words, Turkey would import further unemployment from the world. It seems that the central bank does not feel any responsibility for that, since price stability is its only priority.
But there is a contradictory situation here. Even though there is not direct intervention in the forex markets due to the existing floating exchange rate regime, the central bank continues accumulating reserve since supply conditions suggest to do that. In an environment where we are dedicated to a floating exchange rate regime, accumulation of national reserve should, then, be seen quite strange.
After the dramatic deviation of CPI from the target rate of 5 percent in 2006, the central bank began to implement a tight monetary policy. Parallel to the contractionary policies, the growth rate of the gross domestic product (GDP) declined to 3.9 percent in the second quarter. Recent data on economic activity underlines an even greater slowdown in overall economic activity. Therefore the annual growth rate may even decline below 5 percent. On the positive side, as the economy slows, the chance to reach the inflation target and the pressure on the current account deficit weakens.
On the fiscal side it seems that budget performance would also weaken both in terms of expenditures and revenues. A rising budget deficit, in turn, would create upward pressures on treasury borrowing rates, provided that deficits increase public sector borrowing requirements significantly. Furthermore, as a result of a slowing economy and productivity pressures, the unemployment rate, which is still around 9.7 percent, would once again turn upward.
Having considered all these factors together, we can conclude that the Turkish economy will for some time follow a path of slower growth, as a result of which CPI targets would be hit and the current account deficit could be controlled at around 6 percent of GDP. However, the same process would create some side-effects on the remaining macroeconomic factors, as explained above.
The clearest message is that the global paradigm, which was positive for the last five years for Turkey’s big push, began changing in the opposite direction and therefore will create negative repercussions on Turkey’s economy. Therefore attention should be focused on this fact and possible measures should be taken to strengthen and isolate the economy from these possible dangers. For that a new constitution and continuous reforms in both the economy and politics have become quite urgent.
