IBRAHIM – Another brief

Another briefTurkish Central Bank Governor Erdem BaII spent two hours on Wednesday night lecturing President Recep Tayyip ErdoIan and his aisers on the fundamentals of economics.A softcopy of the presentation was published on the website of the central bank minutes after BaII left the presidential palace in Ankara I scanned through the 130-page document and was surprised to see that the presentation was andquotEcon 101andquot lecture notes.

In essence, the governor was underlining how important it was to eradicate ambiguities to shore up confidence in the economy and how structural reforms are imperative to paving the way for a natural reduction in interest costs.No matter how the atmosphere in the meeting was, the markets took the relative calm and silence of the participants as a sign that ErdoIan received the message well and that he would refrain from intervening in the operation of the bank.

The dollar retreated from its near-historic high levels above 264 to 259 and interest rates on bonds declined to slightly above 8 percent. It is good news since the weighted average cost of funds was up to 804 percent on March 10 after falling to 762 percent last week and this last fall in bond yields promises a decline in the cost to below 8 percent.

These are only limited effects, though. The BaII-ErdoIan meeting came after several ineffective measures implemented by the bank such as lowering the depot interest rates and amending the reserve option coefficients.

Aside from its futile attempts to persuade the markets that it still holds the power to sort things out, the central bank is interestingly dodging calls to reduce liquidity of the lira As known from its previous practices, the central bank utilizes tightening when the yield curve in bonds becomes negative, which means the interest rates of short-term bonds are higher than those of long-term bonds. This is the situation right now and there is no attempt to tighten money supply.

Plus, the excess liquidity is used by banks to fuel their demand for dollars, raising the currency rate. It is also a key reason for the ineffectiveness of the central bankand#39s recent steps to stem the depreciation of the lira So the central bankand#39s insistence on avoiding taking measures to squeeze the liquidity remains a question.

It may be afraid of creating an upward pressure on interest rates.Incidentally, the central bank also seems relieved due to the improving balance of payments figures.

The current account deficit (CAD) for January was announced on Wednesday and it was more than $500 million lower than the expectations. Coming up to $2 billion, it marks a steep fall compared to the figure of $5 billion a year ago.

The CADand#39s decline does not spring from a rise in exports, though. Exports fell dramatically in the first month of the year but imports suffered a much larger retreat.

Falling imports may sound quite nice, but unfortunately it isnand#39t because of the symbiotic relationship between imports and production, and hence exports.Meanwhile, an interesting figure regarding imports in the presentation caught my eye.

On page 121, capital good purchases from abroad seem to be ebbing down while production within the country is rising. This is a very positive indicator Apart from this, imports are falling and so are import duties, which make up almost half of the total tax revenues and which will force the government to offset the slash in its budget by higher taxes and lower spending.

Returning to the presentation, I donand#39t know if BaII had the guts to clearly tell the president that one of the determining factors for the recent hike in the exchange rate was the reckless battering of the central bank by politicians, especially by the president himself. I also donand#39t know if he explained why ErdoIan is fatally wrong in assuming that interest rates are the primary cause of inflation.

The markets were particularly interested in ErdoIanand#39s response and how his opinions have changed regarding his stance against the central bankand#39s independence. Unfortunately, we donand#39t know this as well.

The palace made a brief statement after the meeting saying the president and his aisers received the governor to hear what he thinks about the developments in the international markets and to convey andldquoErdoIanand#39s sensitivity on the interest rates and production.andrdquoThe meeting will hopefully help boost confidence in the central bankand#39s autonomy, but I have doubts that it will be enough.

It is now too late. The lira will likely continue to fall since the dollar will unavoidably gain value as time for the Fed to raise its interest rates draws nearer.

SOURCE: Today’s Zaman