Weekly HDN column: The Admiral has sunk
Below is my Hurriyet Daily News column for this week, which you can also read at the Daily News website. No cheesy titles this time around; just a small joke by referring someone else who is called “the admiral” (check out the hyperlink). BTW, I broke my record of using the most graphs in a column (5), so I should thank my friends at Turkey Data Monitor to have made this great software to the use of unemployed Turkey economists who cannot afford Ecowin or Haver (I think I would have opted for TDM even if I could have afforded the big guys)…
I will have an addendum at the blog later today, as usual, so on to the column:
At a recent speech at the Association of Economy Journalists, Economy Minister Zafer Çağlayan called his ministry the “Admiral Ministry” of the government. I guess that would make him the admiral.
In his speech, Çağlayan once again took on the Central Bank, blaming the current account deficit on the Bank’s policies. As loyal readers know, I am a staunch critic of the Bank’s policy stance. But the minister’s accusations are so baseless that I felt the need to defend the Bank, just as I am supporting archrivals Fenerbahçe in the match-fixing probe.
The minister continues to lay the blame on the exchange rate by noting that the appreciated lira is one of the main reasons for the current account deficit. But when you look at the exchange rate, you see that this is not the case.
For one thing, the exchange rate we should be looking is the real one, which takes into consideration inflation differentials between countries. And against developing countries, which are Turkey’s main competitors in exports markets, you see depreciation over the long run.
Even during the appreciation episode of 2009 and 2010, and other similar periods in the past for that matter, inflation was at least as important as the nominal exchange rate in accounting for appreciation. By undermining the Central Bank’s inflation-fighting efforts, Çağlayan is in fact shooting himself in the foot.
Finally, according to a recent survey, most sectors import inputs because local versions are unavailable or of insufficient quality, not because they are cheaper. Therefore, concentrating on six key sectors as part of the new “Import Supply Strategy”, or GITES, is a step in the right direction. Besides, these efforts are, unlike the exchange rate, permanent fixes.
The minister’s stance on the Bank’s recent policy mix is even more absurd. Çağlayan 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 hikes had prevented funding of energy investments.
I have no idea why consumption would be brought forward because of the hikes. Besides, the Central Bank decreased interest rates while increasing reserve requirements. The net effect of this policy mix was not tight at all, contrary to what the minister implicitly claims. Moreover, the Central Bank has been providing liquidity to the banking sector with the weekly auctions, so funding was not an issue.
In fact, you could argue 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. And when you think about it, these measures came at a time when Turkey’s terms of trade, i.e. the price of its exports over imports, was already deteriorating.
So one could say that the current account deficit seems to have jumped to a new plateau, of around 9 percent of GDP, because of loose, not tight, monetary policy.
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