Today let us continue with the topic we started to talk about on Tuesday. The topic was the upcoming period. When you look around, Turkish government that reflected the image of a sleeping beauty since the beginning of the crisis seems to open its eyes this time, when the issue of economic policy is considered. We cannot know whether or not the government will open its eyes, but we had better get prepared. Opening the economic issues of the coming period to discussion in advance can help us getting prepared in a way. With such an opinion, last week we opened to discussion the proposition "Are we in a climate where economic policy space tightens?"

Let us first summarize what we said previously. First, we asked the relevant question: "What does the tightening of economic policy space mean?" Here, there were two possibilities: First was that there is no action to take or a measure to implement with respect to economic policy. Second was the possibility the opportunity to take those steps was limited to a high degree. In the previous commentary, we put aside the first option and focused on the second one.  The current condition of the budget coupled with the climate change in public borrowing, the tightening in the "ability to take the possible actions" appeared clearly. And the aftermaths would evolve rapidly. Today, let us ask "what is the challenge arising while the possibility is decreasing?"

The problem in the public finance seems to affect closely the behavior pattern of both the public and the private sector in the period ahead. Have you noticed that Turkey is in a way being skidded back to 1990s? There is no need to set the Thames on fire; but it is necessary to be aware of what is next. What is happening? Government debt securities (GDS) were the best financial instruments until today. Remember that GDS interest rates decreased to single digit levels in the secondary market. What did we say then? We said "Single digit GDS interest rate is not a good sign".  Rise in demand for GDS's was directly related. Then what happened? This time, housing loan interest rates started to decrease rapidly. Banks started to act as if they want to extend credits. So, what happened? Did the recession start to end? No, it did not. In our consideration, banks that still have a fresh memory of the 2000 banking crisis and the Demirbank incident wanted to be precautious upon the "rumors" smelling to high heaven about the public budget and tried not to put all the eggs in the same basket. Such is life. Each development leads to another skid. Recession moves you away from firms and real activities and you start to buy GDS's as the safest instrument. Then, you see the uncontrolled changes in the public budget and the fact that the Treasury will have to borrow more than it lends; and you look for someone to extend you credit to have a more balanced portfolio. So, does this process enable the extension of new credits? Yes, but to a limited degree. Rather, current credit portfolio becomes to be distributed in a more balanced way between banks with refinance. This is a good thing for already indebted. So, is it possible to get a positive message about recessionary climate from this point? No it is not. The only message here is: the tightening in policy space created by the public budget and borrowing policy started to be translated into banks' behaviors. The problem will not be solved, but it means that banks are now aware of the problem. So this is a positive development.

What is the challenge in economic policy area created by the tightening in public budget and public borrowing policy? What should be expected apart from behavior change? This issue frequently discussed in the rest of the world is also valid for Turkey. Need for fiscal expansion in the global economy has not disappeared. However, before Turkey could initiate "thought through" fiscal expansion due to the tightening in the economic policy space, the opportunity to pursue fiscal expansion has disappeared. Resources have been spent thoughtlessly and unnecessarily (Please see the "chickens have come home to roost" issue).

Then, this is the challenge in this year: To carry out fiscal expansion in selected areas, the government will have to prioritize fiscal discipline. Today, the concept of fiscal discipline has a different meaning than in the past. In the past, fiscal discipline defined a phase of completely tightening the belts. The purpose was to save as a single body and decrease the GDS inventory. However, today, this is not the case we guess. Today, the meaning of fiscal discipline is reducing expenditures in items not necessary to tackle the crisis and to open space to be able to increase expenditures in items that can contribute to economic growth. We can need that space either today or tomorrow; so it is wise to get prepared and open it in advance. Then, we need an iron will and the power to make things happen.

So; it appears that the way to spend more is to reduce spending. Here the trick is to decide in which items the expenditures will be reduced and increased. How? For instance, reducing health expenditures and transfer funds to needy can prove successful in supporting domestic demand. What must be taken into account when making this decision? The effect of the step in tackling recession

This is the way to expand the resource constraint without asking help from the IMF. Do you think out administrator are able to solve this problem alone? This is exactly where the importance of the IMF lies.

The usual main challenge of the day is that the Honorable Prime Minister of Turkey could not monitor the economic policy developments.

This commentary was published in Referans daily on 10.09.2009