The Turkish central bank governor has dramatically called on the government to shore up market confidence, either by establishing a new programme with the IMF or by instituting a fiscal responsibility law.
“We have to decide whether we are going to have an agreement or not, because the longer it takes, the more it irritates the markets,” Durmus Yilmaz told Emerging Markets in an interview in Washington yesterday. “The sooner we decide what to do, the better.”
A $10 billion three-year loan programme with the IMF expired in May, and Turkey is mulling the next stage in its relationship with the global lender. Post-programme monitoring by IMF officials is now underway. A new precautionary stand-by agreement would provide Ankara with fresh cash in any emergency.
Turkey is heavily dependent on external financing. Its current account deficit ballooned to 6.5% of GDP in the second quarter of this year.
The governor’s intervention is a dramatic indication of rising fears – both domestically and globally – that, unless the situation is urgently redressed, an abrupt cessation of capital flows could destabilize Turkey’s economy. Yilmaz urged politicians to reassure international financiers by immediately establishing an “anchor” to ensure responsible spending will be maintained.
“The anchor can be provided by the IMF, or internally, by setting up procedures such as a fiscal rule”, he said. “This will enable markets to take a view on the actions and intentions of the government on how it will organize the national finances”.
The government has cut its public primary surplus target to 3% of GDP in 2009, from 3.5% in 2008. By contrast, previous financing deals with the IMF mandated a 6.5% surplus. The national budget is further threatened by declining revenues as the economy is projected to slow to around 3% next year versus expansion of around 6.5% last year.
The government in Ankara is also under pressure to rack up spending to meet its 5% growth target next year, to increase infrastructure investment, and to reduce social security premiums. But local elections next year further heap on the risk of fiscal laxity.
Yilmaz stressed that he was not necessarily urging a surplus in his proposal. But it could be “a cap on expenditure – a rule related to the deficit, or the national budget position”.
He argued that any public assurances of fiscal prudence would not be enough in itself to ensure market confidence. Instead, an institutional guarantee would boost confidence about the country’s long-term economic prospects. “At the end of the day, it has to be legalized by parliament.”
In other comments, Yilmaz reassured markets that the central bank would use all available policy tools to boost dollar
liquidity. Lowering bank reserve requirements to reduce borrowing costs was not being considered at the moment, he added.