Currency and GDP: growth and recession

Dunya Executive - - COMMENTARY - Alaatt n AKTAS Economist

The growth rate is a confusing piece of datum. But it is also the most important datum for a country. We buy, we produce, we consume and invest and based on these activities, we calculate our economic size. We compare it to the previous year and we say:“We grew or contracted that much.”

But what’s the best way to make sure the comparison is accurate? If we make it with ruling prices, inflation must be included. Why does it matter if we grew as much as inflation?

So it’s best to use inflation-adjusted fixed prices. It is often done this way. It is also the right way to calculate the growth rate. We grew by 7.4 percent in 2017, above initial projections. It was a also a strong growth rate relative to global growth.

But it doesn’t help to calculate growth with fixed prices. Despite growing very fast, it really matters what the growth means and the only way to do that is to convert the GDP figure into dollars. When we do that, things get awkward. We didn’t grow but rather contracted last year compared to 2016 and, more worryingly, our GDP reached its lowest level since 2012.

It’s all the dollars’ fault!

If we measure our growth in liras, we are good. But we need to convert the GDP size to dollars for international comparisons. At this stage, the value trend of the Turkish currency against the dollar becomes important. The period between 2002-2017 should be divided into two: the 2002-2013 period, when the dollar was very moderate and the 2014-2017 period, when the dollar climbed aggressively.

The dollar rate, which was 1.51 in 2002, rose to 1.90 in 2013. In other words, the dollar rose slightly more than two percent a year over eleven years and by 26 percent in total. Turkey’s GDP was $236 billion thanks to high foreign exchange rates when Turkey was generating a higher GDP. And it climbed up to $950 billion in 2013. Income per capita increased by $3,581 to $4,000.

Beginning in 2014, the trend reversed. The dollar has risen more than 90 percent over the past four years, with an average annual increase of around 18 percent.

As a result, the total GDP has fallen from $950 billion to $851 billion, and per capita income has fallen from $12,480 to $10,197 dollars.

The rapid exchange rate increase over the last four years has led to a loss of $100 billion in GDP. But maybe it is possible to set things up differently.

Was the rate at a true level in 2013, or was it necessary to establish a higher exchange rate at that time?

In other words, perhaps the dollar rate in 2013 and in previous years was not realistic, and so, 2013 was well beyond what should be peak values.

Look at the real value of the l ra

How accurate was the real value of Turkish lira in 2013? The answer to this question lies in the Central Bank’s real effective exchange rate index. The average value of this index in 2013 was 108, meaning the lira was 8 percent more valuable in 2003, the base year of the real exchange rate index.

The real exchange rate was at 88 in 2017, so lira was 12 percent less valuable. So the situation in 2013 does not fully reflect the reality or the situation in 2017.

However, when the lira is so far off its real value for whatever reason, it leads us to the wrong conclusions. Those who are displeased in the exchange rate increase and the GDP loss of $100 billion should bear this in mind.

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