Turkish Monetary Policy: You reap what you sow
We have had quite a few comic developments in the economy landscape for the past week, such as Minister Simsek stating, with great pride, that the first half budget surplus was a historical record, in nominal terms and PM Erdogan’s bold claim that unemployment would be in single digits finally getting realized, albeit a bit later than he envisaged.
But the highlight of the week was, at least in my IMHO, Economy Minister Zafer Caglayan hitting at the Central Bank. Speaking at the the Association of Economic Journalists, the Minister claimed that Central Bank policy had driven the current account deficit: “As the Central Bank hiked reserve requirements, domestic demand has been drawn forth, which [encouraged consumption and thus] increased imports,”. He also noted that the RRR hikes had prevented funding from energy investments.
I am perplexed: He is accusing the same Central Bank that decreased interest rates while increasing reserve requirements. The net effect of policy was not tight at all, contrary to what Caglayan claims. Besides, the Central Bank has been providing liquidity to the banking sector with the weekly auctions.
In fact, you could claim that the Bank’s policies contributed to the deficit because they were expansionary, or at least not-contractionary enough to curb credit and import growth (at least initially, we are seeing a slowdown of credit of late). And when you think about it, the Bank’s policies came at a time when Turkey’s terms of trade, i.e. the price of exports over imports, was already deteriorating:
So you could make an argument that the current account deficit jumped to a new plateau, of around 9% of GDP because of loose, not tight, monetary policy.
As for reaping what you sow, it is really tragic that even those policies were not enough to please the Economy Minister. Anyway, I am planning to write on this for my Hurriyet Daily News column next week, so you’ll be able to read the details there.
Comments are closed.
