Have you checked the Global Financial Stability Report by the IMF? You can access the report and evaluations on the report at the website of the IMF. The most highlighted part of the report is mainly the warnings it makes about capital movements and exchange rates for the current period. The report mainly says this: Nowadays after the crisis the world is faced with an asymmetric recovery process; some countries secure recovery earlier. In that case, we should be prepared for the possibility that the liquidity arising in abnormal conditions will flow toward countries which recovered relatively earlier and which offer relatively higher interest rates, leading to rapid increases in exchange rates. This is more or less the message it gives. We also have addressed a similar issue a while ago. Today let us focus on the same issue again. When evaluating the Central Bank's strategy for reversing the crisis measures, we had better take into account the above point the IMF report emphasizes.

Global liquidity, which came to halt after the global crisis, tends to rise again. The table below implies that when it comes to global liquidity, recovery takes place faster than expected. Examined in terms of the ratio of total fund flows to developing countries like Turkey to GDP, the share of global liquidity increased from 2 to 3 percent. International fund flows the ratio of which to the GDP of developing countries like Turkey fall to pre-1980 levels rise rapidly. This, we guess is the first point to underline.

Table 1. Private Capital Flows to Developing Countries, Share in total GDP, 1995-2010

Source: World Bank, Global Economic Prospects 2010

The second point is related with the route liquidity takes. Once bitten twice shy; international fund flows are now more selective across countries. For instance, they prefer Brazil over Greece or Spain. They also like countries which seem not to cause any trouble in the short term though offer relatively lower interest rates. And Turkey fulfills these criteria. Let this be the second point to keep in mind.

Third; even the global liquidity did not yet achieve the pre-crisis level, some countries might have to deal with the negative effects of rapid exchange rate appreciation occurring as a result of the course of capital flows. In fact, the level of foreign exchange inflows to the country falls. On the other hand, the country's demand for foreign exchange also falls as the total level of imports decreased. So, what happens? Though the level of foreign exchange inflows decreases, demand for foreign exchange also falls, enabling an appreciation in the exchange rate.

The IMF report precisely concentrates on what countries facing such a situation should do. The report discusses what to do in the process of asymmetric recovery in order not to be affected by the negative impacts of cheap global liquidity. This is in a way an exit strategy to reverse the crisis measures. In a time when the Central Bank also started to discuss the exit strategy, it can be useful to add exchange rates to the picture.

So, what should be done? To begin with, we should probably insist on the floating exchange rate regime. The same old arguments spread all over: Sudden depreciations in the exchange rate as a result of sudden outflows slow down the exit strategy as a whole intensifying the damage. Second, fiscal policy measures which will secure that interest rates will not be relatively higher should be initiated. Moreover, high emphasis should be put on account transparency. Third, central banks should start to make foreign exchange purchase auctions and accumulate reserves.

When discussing the exit strategy, international fund flows dimension should also be accounted. That the lira appreciated against Euro along with the crisis in Greece is alone a negative development for Turkish exporter. We should at least avoid the exchange rate appreciation stemming from recovery asymmetry. We had better address the exit strategy with this lens.

This commentary waspublished in Referans daily on 15.04.2010