A criticism of the IMF's Turkey perspective
An International Monetary Fund (IMF) mission has prepared a report of its observations of Turkey after paying an official visit to the country for a regular revision last month. According to the report that was published on the IMF's website, IMF specialists estimate that the Turkish economy grew by 3.8 percent and the current account deficit reached 4.4 percent of the national income in 2015.
The estimation about the current account deficit is consistent with the first 11 months' data. However, it is hard to draw a consistency between its growth estimation and the Turkish Statistical Institute's (TurkStat) national income statistics for the period between January 2015 and September 2015. When gross domestic product (GDP) realizations in the first three quarters and growth estimations for the last quarter are considered, I think that GDP might have grown by 4 percent in 2015 compared to the previous year. Many specialists and relevant institutions in Turkey forecast that the ratio of the current account deficit to GDP will stand at 4.5 percent and at 5 percent when gold is excluded. So, the Turkish economy's trouble with the current account deficit will improve more rapidly than estimated by the IMF. As the Central Bank of the Republic of Turkey (CRBT) emphasized in its latest inflation report, the fall in basic commodity prices are giving Turkey a more advantageous position in terms of both inflation and current account deficit by making up for the rise in exchange rates. However, IMF specialists think that external imbalances are permanent. This idea stems from the fact that they establish a direct relationship between saving rates and current account deficit - which gives rise to the emergence of such a tautology: If savings increased as much as the current account deficit, there would not be a current account deficit. If we pursued this kind of logic, we could propose a nonsensical argument like, "If the dead had not died, they would be living now."
The IMF writes reports by overlooking Turkey's social and economic realities and gives advice accordingly. The majority of the savings of households in Turkey are not registered and the country's saving rates are much higher. Moreover, I think that the current account deficit as much as 5 percent in a dynamic economy like Turkey should not be exaggerated, as Turkey has taken and still takes major steps toward resolving its foreign trade deficit problem apart from energy. Moreover, the increase of saving rates cannot be achieved by restricting domestic demand. Quite the contrary, savings can be boosted through production-oriented and expansionary monetary and fiscal policies in countries like Turkey.
Another point that the IMF places emphasis on is the external debt of the Turkish private sector. The majority of Turkey's external debts belong to the private sector now and the share of the private sector in total external debts has gradually increased. It soared to 71 percent in September 2015 from 64 percent in 2007. Also, the share of banks in the private sector's external debts increased to 59 percent in September 2015 from 43 percent in 2007. Almost half of foreign currency-denominated debts of companies are borrowed from foreign countries and the rest of them are borrowed from Turkish banks. In other words, most private external debts belong to banks and most foreign currency debts belong to companies. A large part of these debts are loans that are collateralized by banks and the number of loans followed up is very low.
So, why is the IMF worried? When exchange rates rapidly increase, they will firstly shake companies with foreign currency-denominated debts. Moreover, they can also affect banks.
IMF specialists' warning about "banks' rising dependency on external indebtedness" has another aspect. A portion of banks' external debts is transferred to domestic companies and individuals as Turkish lira-denominated loans. The IMF regards the ratio between bank loans and deposits as an element of vulnerability. According to this view, bank loans must be essentially based on deposits and the conversion of external debts to loans is unhealthy. Let us take a look at Turkey. The ratio of bank loans to deposits surged to 140 percent in December 2015 from 43 percent in 2007. This might be considered a problem; however it cannot be resolved by restricting the loan demand of the real sector as opposed to what the IMF proposes. On the contrary, the resources of the banking system must be directed toward production-oriented loans, instead of consumer loans, and small- and medium-sized enterprises (SMEs) must be vitalized and their cash structures must be strengthened. This capital surplus in companies will consequently return to the banking system as deposits. Subjecting the deposit structure of the banking system merely to the high interest rate expectations of individual depositors means bringing an end to the banking system and killing the private sector and investments.
The IMF's perspective is also reflected in the savings-growth relationship and, therefore on its policy suggestions. Consequently, it suggests that capital movements must be absolutely free, however, there must be a covered exchange rate targeting through high interest rates, and stability must be ensured by controlling interest and exchange rates. We know that this is not possible both theoretically and practically today, as Canadian economist Robert Mundell suggests. In other words, the IMF proposes that firstly savings must be increased to achieve growth, suggesting that the rise of savings will ultimately bring growth. This is a perspective that mistakes causes for effects, as growth is a direct function of investments, not of savings. Moreover, the chain of savings, investments and growth is not more than a theoretical assumption under current market, crisis and monopoly conditions. What the IMF understands from the improvement and flexibility of the labor market is the reforms that ease job cuts - which will consequently shrink domestic demand and reduce growth. In other words, it recommends polices that will further escalate problems such as current account deficit, inflation and debts. The IMF has not abandoned Milton Friedman's idea that loans must be limited and interest rates must be increased, as inflation is a monetary phenomenon. However, the 2008 financial crisis taught us that such a perspective has come to an end.
On the other hand, IMF specialists think that external imbalances are the cause of vulnerabilities and it is essential to restrict them in the short term. This must be done by further tightening monetary and fiscal policies and curbing domestic demand. This fiscal policy is far from today's realities at least as much as the monetary policy I criticized above.
The IMF ignores structural factors that lead to an upward trend in external imbalances over the course of the time and does not recommend reforms that the Turkish economy requires in order to attract more foreign direct investments and make more investments. On the contrary, it proposes financial markets-oriented palliative measures that will lead to a vicious cycle. As I emphasized above, the IMF preaches that capital movements must be made absolutely free and exchange rate targeting must be prevented by pushing up policy interest rates. This is an inflation targeting program created by the IMF. As a country that has suffered from the distress of such fallacious approaches and polices for many years, Turkey questions these policies today.
The estimation about the current account deficit is consistent with the first 11 months' data. However, it is hard to draw a consistency between its growth estimation and the Turkish Statistical Institute's (TurkStat) national income statistics for the period between January 2015 and September 2015. When gross domestic product (GDP) realizations in the first three quarters and growth estimations for the last quarter are considered, I think that GDP might have grown by 4 percent in 2015 compared to the previous year. Many specialists and relevant institutions in Turkey forecast that the ratio of the current account deficit to GDP will stand at 4.5 percent and at 5 percent when gold is excluded. So, the Turkish economy's trouble with the current account deficit will improve more rapidly than estimated by the IMF. As the Central Bank of the Republic of Turkey (CRBT) emphasized in its latest inflation report, the fall in basic commodity prices are giving Turkey a more advantageous position in terms of both inflation and current account deficit by making up for the rise in exchange rates. However, IMF specialists think that external imbalances are permanent. This idea stems from the fact that they establish a direct relationship between saving rates and current account deficit - which gives rise to the emergence of such a tautology: If savings increased as much as the current account deficit, there would not be a current account deficit. If we pursued this kind of logic, we could propose a nonsensical argument like, "If the dead had not died, they would be living now."
The IMF writes reports by overlooking Turkey's social and economic realities and gives advice accordingly. The majority of the savings of households in Turkey are not registered and the country's saving rates are much higher. Moreover, I think that the current account deficit as much as 5 percent in a dynamic economy like Turkey should not be exaggerated, as Turkey has taken and still takes major steps toward resolving its foreign trade deficit problem apart from energy. Moreover, the increase of saving rates cannot be achieved by restricting domestic demand. Quite the contrary, savings can be boosted through production-oriented and expansionary monetary and fiscal policies in countries like Turkey.
Another point that the IMF places emphasis on is the external debt of the Turkish private sector. The majority of Turkey's external debts belong to the private sector now and the share of the private sector in total external debts has gradually increased. It soared to 71 percent in September 2015 from 64 percent in 2007. Also, the share of banks in the private sector's external debts increased to 59 percent in September 2015 from 43 percent in 2007. Almost half of foreign currency-denominated debts of companies are borrowed from foreign countries and the rest of them are borrowed from Turkish banks. In other words, most private external debts belong to banks and most foreign currency debts belong to companies. A large part of these debts are loans that are collateralized by banks and the number of loans followed up is very low.
So, why is the IMF worried? When exchange rates rapidly increase, they will firstly shake companies with foreign currency-denominated debts. Moreover, they can also affect banks.
IMF specialists' warning about "banks' rising dependency on external indebtedness" has another aspect. A portion of banks' external debts is transferred to domestic companies and individuals as Turkish lira-denominated loans. The IMF regards the ratio between bank loans and deposits as an element of vulnerability. According to this view, bank loans must be essentially based on deposits and the conversion of external debts to loans is unhealthy. Let us take a look at Turkey. The ratio of bank loans to deposits surged to 140 percent in December 2015 from 43 percent in 2007. This might be considered a problem; however it cannot be resolved by restricting the loan demand of the real sector as opposed to what the IMF proposes. On the contrary, the resources of the banking system must be directed toward production-oriented loans, instead of consumer loans, and small- and medium-sized enterprises (SMEs) must be vitalized and their cash structures must be strengthened. This capital surplus in companies will consequently return to the banking system as deposits. Subjecting the deposit structure of the banking system merely to the high interest rate expectations of individual depositors means bringing an end to the banking system and killing the private sector and investments.
The IMF's perspective is also reflected in the savings-growth relationship and, therefore on its policy suggestions. Consequently, it suggests that capital movements must be absolutely free, however, there must be a covered exchange rate targeting through high interest rates, and stability must be ensured by controlling interest and exchange rates. We know that this is not possible both theoretically and practically today, as Canadian economist Robert Mundell suggests. In other words, the IMF proposes that firstly savings must be increased to achieve growth, suggesting that the rise of savings will ultimately bring growth. This is a perspective that mistakes causes for effects, as growth is a direct function of investments, not of savings. Moreover, the chain of savings, investments and growth is not more than a theoretical assumption under current market, crisis and monopoly conditions. What the IMF understands from the improvement and flexibility of the labor market is the reforms that ease job cuts - which will consequently shrink domestic demand and reduce growth. In other words, it recommends polices that will further escalate problems such as current account deficit, inflation and debts. The IMF has not abandoned Milton Friedman's idea that loans must be limited and interest rates must be increased, as inflation is a monetary phenomenon. However, the 2008 financial crisis taught us that such a perspective has come to an end.
On the other hand, IMF specialists think that external imbalances are the cause of vulnerabilities and it is essential to restrict them in the short term. This must be done by further tightening monetary and fiscal policies and curbing domestic demand. This fiscal policy is far from today's realities at least as much as the monetary policy I criticized above.
The IMF ignores structural factors that lead to an upward trend in external imbalances over the course of the time and does not recommend reforms that the Turkish economy requires in order to attract more foreign direct investments and make more investments. On the contrary, it proposes financial markets-oriented palliative measures that will lead to a vicious cycle. As I emphasized above, the IMF preaches that capital movements must be made absolutely free and exchange rate targeting must be prevented by pushing up policy interest rates. This is an inflation targeting program created by the IMF. As a country that has suffered from the distress of such fallacious approaches and polices for many years, Turkey questions these policies today.