Reforming External Debt Governance in Turkey to Reach External Debt Sustainability

Abstract

The paper argues that the attainment and maintenance of external debt sustainability is challenging, and that it is not a choice. A country whose government fails to respect external debt sustainability would eventually default on its external debt. But in the case of default the penalty is the inability to borrow in international markets, and hence the cost of defaulting could be extremely high. The paper emphasizes the importance of having a functioning external debt governance system that will reduce the probability of explosive debt trajectories over time requiring solutions to the following three issues. First, in policy circles minds should be clear about the importance of achieving sustainability of external debt. Second, policy makers have to agree on the way to attain external debt sustainability. Based on empirical analysis, the paper recommends implementing legal reforms, reducing inflation, and devaluing when necessary the real exchange rate. Finally, the country needs to find a way to translate the concept of external debt sustainability into policy technicality. In particular, such a translation requires the development of an institution that when established will enable the country to avoid facing external debt problems over time. The paper proposes the creation of an independent public advisory body, the External Debt Council, equipped with adequate resources to ensure sustainable debt management, and building and sustaining social consensus in the society on the achievement of external debt sustainability that will bind not only the officials in the present government but also the officials in future governments.