MONETARY
POLICY AND EXCHANGE RATE POLICY IN 2002
1. In designing the monetary
policy and the exchange rate policy for the period ahead, it is assumed that (i)
a fiscal discipline based on a high primary surplus will be attained; (ii)
long-term commitments regarding fiscal discipline and public sector
restructuring will be tackled; (iii) banking sector, already strengthened by
additional measures taken in 2001, will be reinforced further; the banking
reform that was initiated by the Transition Program for Strengthening the
Turkish Economy will be completed; (iv) economic reforms boosting the economic
fundamentals and prospects of Turkish economy will persist; and (v) concerns on
short-term sustainability of government debts will be removed through official
external financing.
2. First, it must be underlined
that the likelihood of achieving this positive economic outlook is very high.
This judgment is based on the realizations in 2001. In 2001, (i) a series of
structural reforms was initiated; (ii) by international standards an ambitious
primary surplus target was announced and reached; (iii) a series of measures
was taken on banking area, state banks were returned to make profits for the
first time over the years. Moreover, the November 2000 and The February 2001
crises, and the economic developments during the Summer 2001 have clearly
showed to everyone what could be the consequences of a deviation from reform process
or, if this process is halted. Experiences in Argentina are full of lessons in
this respect. In short, the above-mentioned assumption for the economic
environment, which was an exogenous variable in designing monetary and exchange
rate policies, seems to be a realistic assumption in the light of experiences
in 2001.
3. Yet, the experience in 2001
has demonstrated once again that correcting economic fundamentals does not
always guarantee the success. In the period between the February 2001 crisis
and August, and the one-month period following the attacks on September 11,
interest rates remained high and the Turkish Lira continued to depreciate
despite improvements in the economic fundamentals. Thus, concerns were raised
about Turkey’s ability to roll over domestic debts. As a result, interest rate
went further up due to increased risk premium, and exchange rate was in an
upward trend. These dynamics have increased the concerns about the
sustainability of domestic debts even further. In other words, a self-fulfilling
process, feeding on itself, was observed.
4. For those
who monitor the latest theoretical studies in economic literature and the
country experiences it comes as no surprise that restoring economic
fundamentals alone does not suffice for reaching the targets. Therefore, we
announced on 17 August 2001 that similar economic fundamentals might generate
much different results. This stems from the expectations of economic agents.
Under similar economic fundamentals, optimistic expectations will direct the
economy towards lower interest rate and exchange rate equilibrium, while
pessimistic expectations will do the opposite. In technical terms, there can be
more than one equilibrium to be attained at any time in an economy.
5. The developments that started
in the second half of August and ended on 11 September 2001, and those
experienced since the mid-October 2001 were the most obvious evidence in this
regard. Particularly in this second period, the prospects of achieving fiscal
discipline in 2002, the persistence in structural reforms and the impending
supplemental reserve facility from the IMF have changed economic expectations
into positive. As a result of the change in expectations, interest rates
declined substantially and the bubble in the exchange rate exploded, to which
we have already drawn attention in our earlier press releases.
6. The second basic assumption
made in the design of Monetary and Exchange rate policies is that, in 2002, we
do not expect to experience any crisis situation in 2002, which distorted the
economic expectations despite the improvement in economic fundamentals. In
fact, the Central Bank has contingency plans at hand containing the policy
options to be used in case of emergency. However, there exist no such shocks in
the basic scenario for 2002. In particular, we would like to draw your
attention to two different shocks. The first one is the anxiety on the part of
the public concerning the doubt “whether the program is going to be shelved” by
the authorities responsible for it. We have been observing with pleasure since
August 2001 that these debates have come to an end. The second one is the
occurrence of a financial crisis in emerging market economies. We must
emphasize here that the Argentinean economy and the Turkish economy have turned
out to be dissimilar from the standpoint of fiscal and monetary policy
implementations.
7. In addition, the Central Bank
has important tasks for improving the economic expectations. This relates to
transparency, according to which a central bank should announce the framework
of prospective monetary policy, the changes in operational rules and the
rationale behind the decisions. That is why we are making this announcement.
II. SHAPING THE EXPECTATIONS
1. Decisions of economic agents
have largely to do with the future. Forecastibility of the future course of
interest rate, exchange rate, inflation and growth rate will reduce the
uncertainties and generate sound decisions. Based on this general opinion, we
may speak of an “ideal” equilibrium, in which interest rates, exchange rate,
general level prices, and the growth rate may remain stable for a long time. Is
it possible to reach such state of equilibrium?
2. It is clear that nobody will
object to achieving such equilibrium, apart from its repercussions on income
distribution. What is important is how to achieve it. No doubt, in real life,
economies do not run under “laboratory conditions”, and they are permanently
open to shocks to a lesser or greater extent. Therefore, it seems more reasonable
to ask the following question. To what extent can we come close to this state
of equilibrium?
3. The pre-condition for a
stable economy is to have sound economic fundamentals. In a country where
economic fundamentals are not correct, it will never be possible to create a
stable economic environment no matter what monetary policy or exchange rate
regime is pursued. Unfortunately, debates over the floating exchange rate
regime in 2001 have ignored this simple fact. Actually, as stated above, on the
one hand, while the basic economic fundamentals of the Turkish economy are
being put on a right track; on the other hand,
the poor structures that have led to a disorderly state in the past are being
transformed permanently in a positive direction.
4. Undoubtedly, we may not
attain the desired results by emphasizing only the tight monetary and fiscal
policies and the structural reforms. Expectations should not be ignored. One of
the main functions of monetary policy is to help shape the expectations. In
2002, we have three basic alternatives to be used for this purpose. These are:
exchange rate anchor, monetary targeting, and inflation targeting. Exchange
rate anchor suggests a fixed or a pre-determined exchange rate policy. In a
looser version of this kind of exchange rate regime, central banks try keeping
the exchange rate in a predictable range by frequent interventions, even though
exchange rate starts losing its function as an anchor. In the following
section, the exchange rate policy to be pursued in 2002 is presented. Later,
the monetary policy is explained along with monetary targeting and inflation
targeting.
1. In 2002, the Central Bank
will not implement a fixed or managed exchange rate regime, nor try to keep an
exchange rate level incompatible with economic fundamentals. First of all, this
is partly so, because it is unrealistic to insist on the currency peg regime
that was introduced in 2000 and collapsed in February 2001, and partly because
many countries have, in recent years, abandoned these kinds of exchange rate
regimes and switched to floating exchange rate regimes.
2. Moreover, we do not see any
benefit of pursuing the currency peg regime in Turkey under the present
conditions. In the first place why is a currency peg regime desired or
favoured? The answer is simple, but very important. Long-standing deficiencies
in the economic fundamentals have led the economic agents to hold foreign
currency, and thus the exchange rate has become a significant variable to be
taken into account in economic decisions. In an environment, where wages and
prices are indexed or even fixed to foreign currency, major part of savings are
held in foreign currency and assets and liabilities of balance sheets are
denominated in foreign currency, the economic structure will be deficient and
unsustainable. Such a fragile structure will make an economy extremely prone to
crises.
3. We must absolutely reverse
this trend. This cannot be realized by making the exchange rate “predictable”
through artificial and unsustainable methods. Restoring economic fundamentals
and achieving structural reforms is a pre-condition for changing this
mechanism. The floating exchange rate regime, which will continue to be
implemented in 2002, will help overturn this process. In 2002, the Central
Bank’s interventions will be kept at a minimum, just as it has been the case
since August 2001. The Central Bank will only intervene in excessive
fluctuations.
4. It should
be borne in mind that, the Treasury’s disbursement of financial support
extended by the IMF for financing budget deficit prompted the Central Bank to
give Turkish Lira liquidity to markets in a programmed manner in 2001. As
announced in May 2001, the Central Bank started the planned foreign exchange
sale tenders in order to mop up the excess TL liquidity. Therefore, the
liquidity created by the use of financial support of the IMF was withdrawn by
using the same support. The liquidity injected this way does not have to do
with a “monetization,” nor can this withdrawal be regarded as an intervention
to keep the exchange rate in a certain level. In other words, the IMF extended
significant amount of additional external financing in 2001 to cover budget
deficit. According to the IMF’s internal regulations, the Treasury was to
utilize this credit by way of the Central Bank. As a result, Turkish Lira
liquidity that was injected temporarily to the system was mopped up
immediately. Unfortunately, this simple fact was ignored sometimes and these
tenders were interpreted as intervention in the foreign exchange market. Having
terminated in December 2001, we may perform tenders again in 2002 if the same
conditions arise, by making a pre-announcement to the public.
5. It was rumoured just before
and after the Ramadan feast that the Central Bank had indirectly intervened in
the foreign exchange market by way of state banks to prevent a further drop in
exchange rates. However, this was not the case. Such indirect intervention
would have been in contradiction with the aim of getting economic agents to
fully accept the floating exchange rate system and ensuring its smooth
operation. As can be seen in the countries implementing floating
exchange-rate-based program, it is quite likely that an excess supply of
foreign exchange could materialize in the economy due to a prospective reverse
currency substitution and a strong balance of payments position, in contrast to
2001. If and when these conditions may prevail, the Central Bank will use
transparent methods destined to increasing foreign exchange reserves in
compliance with the floating exchange rate regime without distorting the
long-term trend of exchange rate and its natural equilibrium point. Whenever
the need to use these methods arises, the measures of the Central Bank will be
pre-announced simultaneously to the banks and the public pursuant to the
principle of transparency.
6. The following point must also
be underlined. To say that the economic structure based on foreign exchange
transactions and foreign exchange rate has to be changed does not mean that the
existing set up can be put aside or the desired change can be accomplished in a
day. On the contrary, the Central Bank must accelerate this transformation
process as much as possible and make some adjustments when needed.
7. To this end, we are in the
process of making a series of new arrangements in the interbank money, foreign
exchange and banknotes markets. The main purpose of these arrangements, details
of which are given in the section “Arrangements for the Operational Framework
of Monetary and Foreign Exchange Policies”, is to gradually strip the Central
Bank of its “intermediary” function that was undertaken in the earlier phase of
these markets. Thus, market participants will be able to better evaluate the
credit risks they are exposed to, and such risks will be reflected properly on
the prices by promoting the development of new financial instruments. The fact
that the intermediation by the Central Bank come to an end will not cause any
drop in the amount of liquidity available to the banks using these markets.
8. With the same purpose, we are
planning to initiate forward foreign exchange market, in which forward
contracts are to be traded. In addition, we deem it appropriate to introduce a
new market regarding forward transactions based on Turkish Lira interest rate.
Measures, envisaged for these markets that will lead to smooth operation of
floating exchange rate regime, are listed in the section “Arrangements for the
Operational Framework of Monetary and Foreign Exchange Policies”.
1. As explained above, there are
two nominal anchors to be used in 2002 in order to lessen the future
uncertainties and to influence the expectations. These are monetary targeting and
inflation targeting. In 2002, we will begin by monetary targeting and at the
same time implement a monetary policy focused on the “future inflation,”
details of which are given below. In other words, this is an “implicit
inflation targeting.” We will openly switch to official inflation targeting
when necessary conditions emerge later in the year.
2. Among the monetary
aggregates, it is the “monetary base” that we have chosen to target. We get the
monetary base from the Central Bank’s balance sheet. It accounts for the net
liabilities of the Central Bank toward the other institutions and economic
agents. Monetary base is the sum of three variables: banknotes issued, required
reserves denominated in Turkish Lira and free deposits. In 2002, monetary base is
targeted to increase as much as the growth rate of nominal national income.
Thus, the annual growth in monetary base will be realized at 40 percent at the
end of 2002. Moreover, the monetary base becomes a performance criterion in the
new Letter of Intent. As is known, an indicative ceiling was set for monetary
base in the program implemented in 2001. We made the monetary base a
performance criterion because we wanted to cast a stronger anchor against
inflation. “Net international reserves,” which is another performance
criterion, will not be allowed to fall below a certain limit. Another sub-item
on the balance sheet, “net domestic assets,” which reflects the money created
by the Central Bank through domestic credits, will be an indicative aggregate.
3.
Disbursements from the additional external financing to be extended by
international institutions to the Treasury under the new program will cause
injection of extra liquidity to the market. In view of the targeted inflation,
the Central Bank will mop up the excess liquidity in coordination with the
Treasury by using transparent methods based on market mechanism.
4. Obviously, there is a close
relationship between the target for monetary base and the forecast of money
demand for 2002. As is the case in all forecasts, our forecast also contains a
margin of error. Our Research Department has managed to minimize the margin of
error by using modern techniques. In particular, the range of forecasting error
may change according to the size of the reversal in currency substitution
expected in 2002. Therefore, we may have to revise the monetary base growth
target in line with the reversal in currency substitution in the future. At
first glance, the likelihood of a revision in an aggregate chosen as a nominal
anchor may seem as a paradox. However, we can easily demonstrate that there is
no such paradox when the following two points are taken into account:
5. First, with monetary
targeting we aim to create a monetary expansion consistent with the
macroeconomic targets, to convince the economic agents that we will never
surpass the limits set for monetary base. In other words, we will not create
excess money supply at all, and will persuade the economic agents that there
would not be any excess money supply. Reverse currency substitution means that
demand for Turkish Lira will increase against foreign exchange. In other words,
the money demand will go up under these conditions. Revising the monetary base
target in the light of increase in demand will not produce excess money supply.
There is no probability of generating a higher inflation level than the
projected one in the program due to this revision.
6. Second, the Central Bank will
use short-term interest rates against inflation before switching to inflation
targeting policy. In other words, although some problems might arise in
forecasting monetary base demand or the relationship between monetary base and
inflation may prove to be weak as observed in some countries, “implicit
inflation targeting” policy will minimize these setbacks and function as an
extra anchor. The Central Bank may alter short-term interest rate by
considering the future course of inflation. Not satisfied with a monetary base
anchor only, we commit ourselves to take additional measures in line with the projected
inflation.
7. We deem it
appropriate to highlight an important economic reality that is often ignored,
in view of the ability of the Central Bank to use short-term interest rates
more efficiently. In every economy, current inflation rate is the accumulation
of past experiences. Namely, current inflation rate is determined by recent
cost and demand dynamics along with the expectations of economic agents with a
time lag. If these factors determining the current inflation rate persist in
the future, it is no doubt that the future inflation will be no different from
the present and the past. In contrast, if there is a strong probability for the
reversal of these trends, then the likelihood for the future inflation to be
different from the previous one will be very high. For these reason, central
banks aiming to achieve price stability should evaluate the reasons behind the
past and current inflation, look into their validity in the future, and take
decisions in accordance with the results of this analysis.
8. To achieve
price stability, the Central Bank bases its monetary policy decisions on
looking ahead, not on recent developments in the factors determining inflation.
For this reason, it will be misleading for market participants to evaluate the
prospects of short-term interest rates of the Central Bank by considering the
current inflation rate only. For example, the inflation rate of a given month
may materialize at a high level due to temporary developments. However, the
movements in factors determining inflation may indicate that inflation would
enter into a downward trend and stay there permanently. So, trying to predict
the Central Bank’s attitude by evaluating the current inflation rate only will
lead to extremely wrong results.
9. With a monetary policy,
focused entirely on the inflation, the Central Bank’s opinions for the current
rate of inflation and its prospects for the future will bear significantly on
the public. These evaluations will be announced to the public opinion in
accordance with the principle of transparency. The Central Bank analysis on
monthly inflation rate, and its expectations, based on the Inflation
Expectation Survey and the Business Tendency Survey, will be made known to the
public. We expect that the risk of making wrong evaluations stated in the above
paragraph will be minimized.
10. We will openly initiate the
inflation targeting regime whenever the necessary conditions emerge. We had to
postpone the introduction of inflation targeting due to concerns about the
sustainability of domestic debt. Deepening concerns did not allow the
short-term interest rates to be used against inflation. As stated above, recent
positive developments have dropped the discussions on the sustainability of
domestic debt. With the realization of the economic environment envisaged for
2001, there will be no place for such discussions in 2002. Therefore, the
continuation of reform process in 2002 without interruption and the realization
of primary surplus will remove one of the obstacles in the way of inflation
targeting.
11. There are two more factors
why this regime has not yet been adopted.
The first one is the deep-rooted habit of price setting based on past
inflation. Instead of this backward indexation, when the price setting behaviour
based on the expected inflation becomes very prevalent among the economic
agents, the inflation targeting will deliver the result that is expected from
it. In this regard, it is utmost importance that the pricing mechanisms adopted
in some areas of the public sector must be reduced to a minimum. Undoubtedly,
one of the hurdles in front of the elimination of these mechanisms is, of
course, the income loss. However, schemes must be designed so that these losses
can be compensated. The second is the still strong relationship between the
inflation and the rate of exchange rate increase.
12. It is clear that our policy
of putting constraints on the growth rate of monetary base and “implicit
inflation targeting” aims not only to shape inflation expectations, but also to
try to control the factors affecting domestic demand and costs directly and in
a way to reduce inflation. Undoubtedly, it is not possible to fight inflation
by merely using monetary policy. The battle against inflation can only be won
by achieving fiscal discipline and by sticking to the reformation process with
determination. The new three-year program that will be initiated in 2002 is
comprehensive in this respect and aims to disinflate the economy.
V. ARRANGEMENTS FOR THE OPERATIONAL
FRAMEWORK OF MONETARY AND FOREIGN EXCHANGE POLICIES
1. These arrangements are set to determine
the Central Bank’s short-term interest rates, to regulate the Turkish Lira
liquidity and to phase out the Central Bank’s intermediation in the Interbank
Money Market, and the Foreign Exchange and Banknotes Markets. Main elements and
framework of these arrangements are given below.
2. With the instrument independence
introduced by the new legislation in May 2001, achieving price stability has
become the Central Bank’s primary objective. In this context, the main goal of
the monetary policy will be to reduce inflation in 2002. As mentioned above,
the Central Bank will start using short-term interest rates against inflation
before switching to inflation targeting policy. In other words, the Central
Bank will set the short-term interest rates in view of future movements of
inflation.
3. Success in disinflation efforts through
short-term interest rates can only be obtained if the volatility in short-term
interest rates is kept under within a narrow band control. To this end, the
Central Bank will efficiently manage the Turkish Lira liquidity by Open Market
Operations, and will regulate the Turkish Lira borrowing and lending rates.
4. Restructuring of the banking system has
been continuing. Substantial progress has been achieved in (i) strengthening
private banks; (ii) prompt liquidation or sale of the SDIF banks; (iii)
reformation of state banks; and (iv) supervision and regulation of the banking
sector. We believe that these efforts will keep up momentum in the period
ahead. It is expected in 2002 that the economic program, which is reinforced by
external financing, will preserve the recent improvement observed in financial
markets.
5. Pressure on the monetary
policy will be relieved with the continuation of strengthening the banking
system in 2002. With the participation of reinvigorated banks in the Turkish
Lira liquidity operations, the Central Bank will begin implementing “late
liquidity window” facility in the interbank money market between 04:00 pm and
04:30 pm within the framework of its function as the “lender of last resort.”
The Central Bank will provide funding to the banks without any limitation
against collateral through this facility. What this facility means in practice
is that, there will be an appropriate environment where a threat of any
liquidity squeeze spreading to the banking system would not cause a financial
instability. On the other hand, if it’s the liquidity need of a single bank
without being a systemic risk, it will enable the public authorities to get
informed by the situation earlier and take the necessary steps to cope with the
problem before spreading to the whole system.
6. Since February 2001, when floating
exchange rate regime was introduced, the volatility in interest rates has
diminished considerably. Therefore, the conditions for deepening the interbank
money market and for setting interbank “Turkish Lira reference interest rate”
have started to emerge. Setting the reference interest rate will play an important
role in the pricing of credits and other financial instruments, including
forward foreign exchange. Intensive works on reference interest rates are being
conducted in coordination with the Banks Association of Turkey. In addition, as
mentioned before, the measures that have been taken and to be taken in the near
future on the selling or liquidation of the bulk of SDIF banks, and the
strengthening of private banking system will enable the Central Bank to
gradually end up its intermediation function undertaken in the interbank money
and foreign exchange markets in 2002.
7. Bringing the Central Bank’s
intermediation function to an end gradually will not cause any decrease in the
amount of Turkish Lira or foreign currency liquidity provided to the banks via
these markets. In other words, the banks’ current borrowing limits will
continue to be valid. Moreover, as a new liquidity facility, banks will be able
to borrow unlimitedly from the “late liquidity window” being the Central Bank’s
most expensive funding. However, under normal conditions and when there is no
systemic problem, the “late liquidity window” is expected to be used rarely.
8. Successful implementation of a floating
exchange regime requires the forward markets, which lessen the future uncertainties.
Istanbul Stock Exchange introduced the foreign exchange futures market in
August 2001. Works are underway for removing the obstacles to deepening and
developing this market. Additionally, we will undertake works in the months to
come for setting up an organized market, in which interest rate futures
contracts will be traded.
9. We think that the interbank markets will
benefit from the Central Bank’s gradual phasing out of its intermediary role.
As can be seen in the following timetable for the interbank money and foreign
exchange markets, the preparations for a gradual transition to leaving the
intermediary operations are made with extreme care and prudence. Particularly,
we thought that the restructuring of the banking system and the improvement of
Turkish Lira money and foreign exchange markets would be realized in the first
half of 2002 and new arrangements are intensified in the second half of 2002.
10. As a matter of fact, the Central Bank acts
as an intermediary in the Turkish Lira and foreign exchange markets by assuming
the credit risks of market participants, due to particular conditions of the
period when these markets were established. This implementation no longer
contributes to the well markets, and creates distorted pricing mechanisms, in
which risk perceptions are not fully reflected.
11. Furthermore, markets may sometimes get the
wrong idea about transactions carried out among the market participants, as if
the Central Bank were the counterpart to thereof. This misunderstanding can
give rise to wrong or mixed signals about monetary and exchange rate policies.
Making the achievement of price stability its primary objective, the Central
Bank must also restructure its role in the Turkish Lira and foreign exchange
markets so that its monetary policy and exchange rate policy may be better
pursued and understood. In this context, workings of “Open Market Operations”,
“Interbank Money Market” and “Foreign Exchange and Banknotes Markets” at the
Central Bank are re-arranged as follows.
V.1 Open Market Operations
12. The Central Bank has long been managing the Turkish Lira
liquidity mainly through open market operations. Open market operations will
continue to play a key role in Turkish Lira liquidity operations in 2002.
13. In the banking system, the funding facility provided for the
state banks and SDIF banks through open market operations after the February
2001 crisis will continue in 2002 within the predetermined limits and as long
as it is needed. Therefore, the banks will not have to borrow from overnight
market, and they will not exert pressure over the short-term interest rates.
14. We will continue to withdraw the liquidity, given to the state
banks and the SDIF banks, by reverse repurchase agreements at the Istanbul
Stock Exchange and by borrowing from them in the interbank money market.
15. In 2002, it is expected that Turkish Lira market will have a
positive reserve for a long time. However, parallel to the Central Bank’s
balance sheet developments, when there is a need for Turkish Lira liquidity, it
will be provided through repurchase agreements.
16. The liquidity management via Open Market Operations will focus
on making interest rates in money markets converge on the short-term interest
rates to be set in line with inflation target.
17. The
Central Bank will gradually bring its intermediary role in the interbank money
market to an end starting from 1 July 2002 until 1 December 2002. However, the
Central Bank will continue to perform interbank money operations on its own behalf
and for its own account, during the conduct of the monetary policy.
18. Although the borrowing limits of the banks will be the same for
their transactions with the Central Bank, beginning from July 1, 2002, borrowing
limits for the transactions among banks will be phased out and will be zero as
of December 2, 2002 as illustrated in the table below.
Table
|
DATE |
BORROWING
LIMIT FOR TRANSACTIONS WITH THE CENTRAL BANK
(TRILLION TL) |
RATIO (%) TO BE USED FROM THE TOTAL LIMIT AVAILABLE TO
OPERATIONS AMONG BANKS |
LIMIT AVAILABLE TO OPERATIONS AMONG BANKS
(TRILLION TL) |
TOTAL BORROWING LIMIT (TRILLION TL.) |
|
01.07.2002 |
10.0 |
75 |
7.5 |
10.0 |
|
01.08.2002 |
10.0 |
60 |
6.0 |
10.0 |
|
02.09.2002 |
10.0 |
45 |
4.5 |
10.0 |
|
01.10.2002 |
10.0 |
30 |
3.0 |
10.0 |
|
01.11.2002 |
10.0 |
15 |
1.5 |
10.0 |
|
02.12.2002 |
10.0 |
0 |
0.0 |
10.0 |
As can be seen on the above table, a bank
having a borrowing limit of TL 10 trillion as of 1 August 2002 will be able to
use TL 6 trillion corresponding to maximum 60 percent of this limit for the
interbank operations among banks. In case a bank happens to use TL 6 trillion
out of TL 10 trillion exclusively for its interbank operations with other
banks, the borrowing limit for the operations with the Central Bank will be TL
4 trillion.
19. The Central Bank will continue to announce its bid rates for
liquidity sterilisation on the Reuters CBTC page between 10:00 am and 04:00 pm,
and offer rates in view of providing liquidity to the banks within the
borrowing limits.
20. The Central Bank will carry out “late liquidity window”
operations in the interbank money market between 04:00 pm and 04:30 pm within
the framework of its function as the “lender of last resort.” In this period,
the Central Bank will announce lower bid rates and higher offer rates in
comparison with those announced between 10:00 am and 04:00 pm. Maturity of bid
and offer rates in the “late liquidity window” will exclusively be overnight.
Starting from 1 July 2002, banks’ borrowings from the “late liquidity window”
will be limitless, provided that the operations are collateralised.
21. There will be no change in “Daylight
Overdraft Limit” facility. Banks will be able to continue using this facility
between 09:00 am and 03:00 pm within their borrowing limits.
22. In
the foreign exchange and banknotes markets, the Central Bank exercises two
functions. It acts as intermediary in foreign exchange transactions performed
among institutions, and makes transactions in view of exchange rate policy,
although it has not been utilized in recent months.
23. The Central Bank will stop its intermediary functions in the
foreign exchange and banknotes markets in accordance with the following
timetable in 2002.
MARKETS
|
DATE
|
|
FX deposits
against TL deposits (Swap) |
1 March 2002 |
|
Forward FX purchase/sale
against TL |
1 March 2002 |
|
Foreign
banknotes purchase/sale against TL |
1 July 2002 |
|
FX
purchase/sale against TL |
2 September
2002 |
|
FX deposits |
1 July 2002 - 2 December
2002 |
24. The Central Bank will carry out transactions with institutions
on its own behalf and for its own account in the markets above-mentioned, in
line with the exchange rate policy.
25. The Central Bank will phase out its intermediary role in the
foreign exchange deposits market starting from 1 July 2002 until 2 December
2002. However, the Central Bank will keep up its intermediary function for the
foreign exchange deposits of the state-owned banks that were transferred from
the SDIF banks in November 2001.
26. Although the Central Bank phases out its intermediary role in
foreign exchange deposits, the borrowing limits of the institutions will be
retained. However, The Central Bank would make some adjustments in the
borrowing limits as before, considering the developments in the banks’ balance
sheets and financial structures.
27. Within this framework, for the operations of the Central Bank,
the borrowing limits in the foreign exchange and banknotes markets will remain
the same. However, the limits for the operations exclusively among institutions
will gradually be reduced and zeroed as seen in the table given below, starting
from 1 July 2002 until 2 December 2002.
Table
|
DATE |
BORROWING LIMIT FOR TRANSACTIONS WITH THE CENTRAL BANK
(USD MILLION) |
RATIO (%) TO BE USED FROM THE TOTAL LIMIT
AVAILABLE TO TRANSACTIONS AMONG INSTITUTIONS |
LIMIT AVAILABLE TO TRANSACTIONS AMONG
INSTITUTIONS
(USD MILLION) |
TOTAL BORROWING LIMIT (USD MILLION) |
|
01.07.2002 |
10 |
75 |
7,5 |
10 |
|
01.08.2002 |
10 |
60 |
6,0 |
10 |
|
02.09.2002 |
10 |
45 |
4,5 |
10 |
|
01.10.2002 |
10 |
30 |
3,0 |
10 |
|
01.11.2002 |
10 |
15 |
1,5 |
10 |
|
02.12.2002 |
10 |
0 |
0,0 |
10 |
As it can be seen from the above
table, a bank that has a borrowing limit of USD 10 million as of 1 August 2002
will be able to use USD 6 million, corresponding to maximum 60 percent of this
limit for the transactions among institutions. In case an institution happens
to use USD 6 million out of USD 10 million exclusively for its transactions
with other institutions, the borrowing limit for the transactions with the
Central Bank will be USD 4 million.
28. Moreover, purchase/sale of
“foreign exchange against foreign exchange,” “foreign exchange against foreign
banknotes” and “foreign banknotes against foreign banknotes” realized in the
foreign exchange and banknotes markets are attributed as commercial banking
activities performed between the Central Bank and institutions operating in the
said markets. Although it is considered appropriate for the said markets to
continue activities within the Central Bank structure, our policy of
encouraging the institutions to organize these operations among themselves
outside of the Central Bank will continue in 2002, since, actually, such
activities belong to the commercial banking area.
29. On the other hand, monitoring financial markets is among the
Central Bank’s main duties by Law. In 2001, the Central Bank observed the
foreign exchange and banknotes markets carefully and took necessary measures
immediately to ensure the efficiency of the floating rate regime within the
framework of its Law. The Central Bank will continue to monitor closely the
foreign exchange markets in the period ahead. In this context, in order to
raise the operational efficiency of the foreign exchange markets, the Central
Bank will introduce a monitoring system aiming to better overseeing the volume
and quality of transactions, and the depth of the foreign exchange market. Once
effective results are obtained from the monitoring system, the information on
the depth of the foreign exchange markets will be announced regularly.
1. Realizing
the fact that there can be more than one equilibrium to be attained in an
economy depending on the expectations, as already stated above and in the
Central bank press release dated 17 August 2001, is a pre-condition for a better
understanding of the prospective macroeconomic developments in 2002. This is
not only a theoretical assumption but also an obvious reality, especially in
countries where domestic debt stock soars at high levels and concerns on
sustainability of domestic debt are widespread.
2. This is significant for 2002,
as expectations have already started turning into positive. Extra foreign
currency demand is disappearing at a time when expectations have become
optimistic and thus exchange rate has stopped going up continuously without any
economic fundamental, forming a gradually growing bubble. In other words,
besides the habit of holding financial assets in foreign currency due to
long-standing deficient economic structure, the extra dollarization created by
a bubble stemming from pessimistic expectations is expected to overturn, as
this bubble will burst with the positive expectations. As a matter of fact, the
positive developments in the last couple of months have burst the bubble, as we
had previously warned the public.
3. With the reverse trend of
extra dollarization, the residents will tend to hold more Turkish Lira
financial assets in their portfolios. In other words, the demand for Turkish
Lira and the supply of foreign currency are expected to increase in the next
period in comparison with 2001. Therefore, exchange rate will likely become
more stable. This stability is expected to strengthen reverse currency
substitution tendency. However, we should not be overoptimistic regarding the
extent of reverse currency substitution. It is clear that this process will
spread over time, and will develop only if the policies and reforms, which are
undertaken, are strictly implemented.
4. The main reasons behind the
optimistic expectations in the last couple of months of 2001 were; the
prospects of a higher primary surplus in 2002, the persistence in the
restructuring process and the strong likelihood of obtaining additional
external support. Keeping promises is the pre-condition for the continuation of
this positive climate. Furthermore, transparency in monetary policy will also
contribute to the encouraging atmosphere. Another condition is the
rehabilitation of the banking system. In this respect, an important step was
taken in 2001. The policies aiming to further strengthen the financial system
must be carried on also in 2002.
5. Under these circumstances, we
expect that four important developments will boost the economy. First, in 2001,
Turkey gained a competitive edge that will have a positive impact on exports.
Second, with the improving banking system, the balance sheets of banks will
grow more soundly and there will be a real growth in the credit volume over
time. Third, the reverse currency substitution, and especially the exchange
rate stabilization will stimulate domestic demand. Within this framework, we
presume that part of foreign currencies in the hands of the public will turn
into demand for goods. Fourth, stability in the financial markets is expected
to stimulate the postponed investment and consumption expenditures.
Accordingly, we expect that the Turkish economy will enter into a growth path
again. It can be noticed that there is a close relationship between the
realization of these developments and the rehabilitation of the banking sector.
The banking sector must certainly be strengthened in 2002.
6. At this stage, it will be
beneficial to briefly look into the discussions regarding the primary surplus
targets in 2002, which especially took place in fall of 2001. As is known, it
has often been asserted that a reduction would have to be made in the primary
surplus target to put our contracted economy back on the growth path.
Accordingly, the economy would be boosted by increasing somewhat public
expenditures and by reducing tax rates. However, it should be borne in mind
that in 2001, the main reason behind the increasing tendency in the interest
rates and exchange rates without any economic fundamental was the concerns
about the sustainability of domestic debt. The widespread concerns made the
economic environment very risky, expectations turned out to be more pessimistic
and caused economic agents to postpone their expenditures. Consequently, the
economic contraction, which started after the crises, has also been intensified
because of these factors.
7. On the other hand, the
increasing tendency of real domestic debt stock may raise concerns that the
sustainability of domestic debt might become less likely. As known, there are
three reasons for real domestic debt to increase: high domestic real interest
rate, primary budget deficit, and net external debt payment. Within this
framework, reducing the primary surplus will cause an increase in real domestic
debt stock. At a time when international and domestic markets are focused on
sustainability of government debt, suggesting a decrease in the primary surplus
will stimulate concerns over the ability of government to roll over its debt.
For this reason, a lesser primary surplus will give rise to a higher real
interest rate, and a lesser external financing. In other words, the three
factors that determine domestic debt dynamics will increase the domestic debt
stock in real terms under these circumstances. Undoubtedly, the exchange rate
will be higher because of the increased risk premium. Under these
circumstances, reducing the primary surplus will generate just the opposite of
what is expected from it originally, and will deepen the recession even
further, let alone reviving the economy. This might have been a remedy in
different economic conditions. However, at a time when the sustainability of
domestic debt and program is being questioned, adopting the policy of reducing
the primary surplus will aggravate the problem.
8. In 2002, we expect important
developments on the inflation front. The monetary base anchor will prevent
excess money supply, and avoid domestic demand pressure beyond the program
targets. Moreover, the policy of adjusting short-term interest rates in line
with the future inflation will help mitigate the inflationary pressures. We
believe that inflation expectations will turn into positive once the reasons
behind these policies and the evaluations of the Central Bank on inflation are
shared with the public.
9. For the actual inflation rate
to come close to the targeted inflation, the backward indexation habits and
behaviour, which are very common in all sections of the society should be
lessened or eliminated altogether. In this connection, the Economic and Social
Council and the public sector, due to pricing policy of the State Economic
Enterprises, have important obligations. Getting rid of backward indexation
habits and behaviour of corporates and households will be depended on the
success of the program, unless a specific incomes policy is implemented.
However, abandoning the backward indexation habits and behaviour in the public
sector is in the hand of the public sector itself. The more this behaviour is
abandoned, the closer we come to the targeted inflation.
10. As mentioned above, the
appropriate economic environment that starts the reverse currency substitution
process, and the process itself will bring stability in the exchange rate.
Especially in the beginning of this process, the Turkish Lira is expected to
appreciate in real terms. In fact, in the last quarter of 2001 the Turkish Lira
did appreciate in real terms. This event also is expected to bring the
inflation down. Here, with the “real appreciation of Turkish Lira”, it is meant
that Turkish Lira will move toward its long-term equilibrium level. In
considering the whole year 2001, we see that Turkey’s competitive edge has not
diminished. That is why we have included the external demand among the factors
enhancing the economic growth.
11. In 2002, significant
developments are expected in terms of exports while we will also see increases
in imports. There are two main reasons for this. First, there is a close
relationship between imports and the growth rate. Therefore, as the economy
begins to grow it is natural to expect an increase in the imports volume. The
second reason is the exchange rate stability. As a result of these
developments, the current account is expected to run into a slight deficit.