Slowing inflation to single digits for the first time in a generation has been one of two key pillars of Turkey’s economic rescue package, the other being strict fiscal discipline. In concluding a draft agreement to provide a new three-year $10bn loan, the International Monetary Fund described the taming of inflation as one of the major policy successes of the past three years, paying tribute to the independence and effectiveness of the Central Bank of the Republic of Turkey (CBT).
Consumer price rises peaked at 68.5% in 2001, progressively slowing to a single-digit rise recently. Full-year inflation for 2004 is set to average 12%. This was achieved partly by monetary tightening but just as much, if not more, by the operational effectiveness of the CBT, which gained unprecedented independence with the new Central Bank Law of 2001.
By conducting and communicating policy in a transparent, open and accountable way, the CBT has been able to transmit policy interventions more effectively. The ending of lending to public sector entities was also key to curbing inflation.
Having slowed down inflation, governor Süreyya Serdengeçti is adamant that the maintenance of price stability must precede negotiations for entry to the EU. To this end, inflation must remain in check, but just as important is managing the inflation expectations of economic agents, to ensure that inflation is no longer a factor in investment, consumption and savings decisions.
Although conceding that there is still some way to go in entrenching price stability, Mr Serdengeçti points to the first signs that investment is increasing. “This is an outcome of the confidence that has recently been established [in the idea that] the decline in inflation and achievements in inflationary expectations, as well as stability established in the economy, will be lasting,” he says.
Turkey began issuing the new Turkish lira on January 1. The new currency drops six zeros from the old lira, “erasing the traces of the past period of high inflation”.
“In some countries that dropped zeros from their currencies, this operation was conducted as a part of the disinflation policies. In Turkey, it is the consequence of the successful implementation of the stability programme,” says Mr Serdengeçti.
