During these tortuous negotiations we had witnessed a heated debate in Turkey over whether the country still needed the IMF for financial support and as an anchor for economic stability. Last Tuesday, the Turkish government and the IMF announced that they had decided that there would be no SBA deal -- at least for now -- and that they would shift their attention to the mundane business of the annual Article IV consultations in May. During these consultations the two sides will review developments in the Turkish economy, exchanging views on the economic outlook and government policies. Turkey’s last Article IV consultation, required routinely of all IMF members, was in March 2007, with the publication of the IMF Staff Report in November 2007.
Many in Turkey have marked the announcement, as noted by Today’s Zaman, as a breakthrough and the beginning of a new era for the Turkish economy. They have celebrated the end of the decades-long IMF tutelage, gloating that, unlike Greece, Turkey, which weathered the global financial crisis not only without IMF support but with upgraded sovereign credit ratings, can now stand on its own two feet. Others, however, have argued that the Turkish government has chosen a risky path by ditching the IMF not only as a source of external finance but also as an external force to provide economic discipline and the push for structural reforms for the country to move forward on a steady path, in favor of its still murky fiscal rule as an anchor for economic stability. The muted reactions of financial markets to the no-SBA-deal announcement as well as two successful Turkish Treasury bond sales were interpreted by anti-SBA observers as evidence that Turkey did not need an SBA but by pro-SBA observers as proof that the markets had already discounted the deal over the course of two years.
My readers would recall that I have repeatedly urged the Justice and Development Party (AK Party) government, since the end of the last SBA in May 2008, to seek, if not a new SBA, at least a precautionary SBA as an external anchor. My argument has been that Turkey still needs the IMF not only for security cushion financing in a crisis but particularly for the IMF-provided discipline and the “Good Housekeeping Seal of Approval” for its economic policies that would reassure international investors about Turkey’s trajectory. I have stressed that the IMF is not merely a source of finance for a country with a chronic savings deficiency such as Turkey; it also provides technical expertise, policy discipline and performance surveillance to borrowing governments. Its monitoring of borrowers’ progress also informs and reassures private creditors in international capital markets. The counter argument has been that Turkey is capable of self-discipline and does not need the IMF crutch.
Of course, the AK Party government, which has preserved the option to ask the IMF for support in an emergency, can always go back to the IMF in the event of another global or home-grown crisis, but the conditions for an IMF bailout would then be even less politically palatable than they would have been for an SBA concluded before the crisis. This is the political risk, which would put the IMF in the driver’s seat during the crisis, the government is taking. The more serious risk for the economy, however, is that IMF support in an emergency might be too late and too costly.
I will not offer a postmortem of the failed negotiations for a new SBA. Whether the government was genuinely interested in a new SBA but could not for political reasons accept some of the IMF’s tough conditions, such as an autonomous income tax authority, or whether it was merely flirting with the IMF, cunningly using the prospect of a new SBA to calm jittery financial markets, is a question whose answer requires insider knowledge. Instead, I will focus on the argument that Turkey can achieve economic stability through self-discipline, fortified by a fiscal rule associated with the Medium-term Economic Program (2010-2012) announced last September. The government had pledged that legislation would be enacted in this year’s first quarter to apply the fiscal rule to the 2011 budget. We still do not know what the parameters of the fiscal rule will be and how it will be enforced. The government is believed to be considering a fiscal rule law to set the annual budget balance and public debt to GDP targets. It is unclear whether this fiscal rule has been studied and is endorsed by the IMF. Even a well-formulated and realistic fiscal rule, with which Turkey has no experience, cannot guarantee success, especially in the shadow of the looming general elections to be held by July 2011, which could tempt the government toward fiscal incontinence.
Politicians love to spend but hate to tax. The resulting budget deficits are either monetized by central banks, causing inflation or financed by government borrowing that swells public debt. Fiscal rules are enacted by parliaments as a set of permanent explicit and verifiable, either annual or cyclically adjusted numerical constraints on budgetary aggregates such as revenues, expenditures, balances or debts, to ensure the credibility and stability of public finances. They are the counterpart of inflation targeting in monetary policy to ensure price stability. Fiscal rules provide the sustainable framework for annual budgeting by binding politicians to actions in the long-term national interest but not always in their own short-term interests. They address the time-inconsistency problem, i.e., priorities and preferred policies of governments change over time. Together, if applied credibly and harmoniously, fiscal rules and inflation targeting are expected to result in overall economic stability. Many countries and supranational entities such as the Eurozone have tried to design and apply different numerical fiscal rules over several decades with mixed success. The consensus is that fiscal rules by themselves do not guarantee budgetary discipline. The most striking example is the dismal failure of the Eurozone fiscal rules in Greece. They require institutional reforms to support them in a positive political environment based on the consensus that fiscal stability is a long-term national objective. The question now is whether Turkey’s yet-to-crystallize fiscal rule will eventually justify ditching the IMF as a critical and often controversial agent in the country’s economic development. Although I am skeptical, I hope it will.
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