Central Bank of Turkey Governor Erdem Başçı has reacted against a line of thinking that sacrifices financial stability in favor of economic growth.
Speaking at the Forum İstanbul 2012 conference on Friday, the top banker said governments should not let their country’s public debt pile up to unsustainable levels by resorting to lower taxes and higher spending from the national budget to create temporary relief for economic growth. “We have this problem in many countries today. There are well known examples. There are, however, both discussed and non-discussed examples in Europe. Saying ‘I am going to support the economy, let me increase public spending and decrease taxes a little” may create an impact only in the very short term. But nobody should forget such an approach’s long-term consequences on public debt stock and financial stability,” he said.
Başçı’s predecessor Durmuş Yılmaz initiated a ‘lower policy interest rate and higher required reserve ratios for banks’ strategy in late 2010 to consolidate financial stability in Turkey while helping economic growth. Continuing Yılmaz’s legacy as the new head of the central bank a few months later, Başçı has kept Turkish monetary policy loose for some time, recently beginning to tighten it when the risk of inflation emerged hand-in-hand with rapid economic growth. Most observers credit both Yılmaz and Başçı for successfully harnessing the country’s economic growth potential to the farthest possible extent while taking care of risks.
National gross domestic product (GDP) grew by 8.9 percent in 2010 and by another 8.5 percent last year, making Turkey one of the fastest growing economies worldwide in the past two years. Yet public spending accounted for less than 5 percent of all that economic growth, whereas the main contributors were domestic consumption and private investments. This explains why Turkey managed to slash both the public debt to GDP ratio and the budget deficit while its economy showed an impressive expansion. The central bank’s policies for this period aimed at slowing the growth of the current account deficit (CAD) and ensuring price stability.
The Turkish economy actually moved from bust to boom between the early 2000s and the present. Following two financial crises in 2000 and 2001, Turkey’s GDP declined to $148 billion at the end of 2001, whereas its public debt pile overtook its national output with $159 billion. According to the latest available figures, however, its GDP increased more than four-fold to $772 billion at the end of 2011 and the public debt-to-GDP ratio nosedived from over 100 percent in 2001 to some 40 percent last year. “If our public debt-to-GDP ratio stood at where it was more than 10 years ago, we would have had a GDP of not $772 billion, but around $700 billion,” Başçı said, drawing attention to the importance of order in a country’s financial house. “If we had not attained financial stability, calculations show figures would have become very different,” he added.