WHAT’S TO COME IN APRIL?

► We have left the first quarter of the year behind. Unfortunately, each year is getting stranger than the last. We entered 2022 with globally unforeseen commodity prices and tension between Russia and Ukraine, followed by a war. We are also facing inflation and cost of living issues in Turkey in addition to this. These dominate the domestic agenda. We are trying to adapt to this new environment on a wide scale, from the real sector to the consumer, due to prices nearly doubling from last year’s. But neither producers, intermediaries, nor consumers have been able to fully adapt.

► It is obvious that this is a very difficult process. As a matter of fact, the data announced while I was writing this article show that there is a massive expansion in the number of people behind on payments for their credit cards or personal loans. Employees’ wage increased, which started the new year satisfactorily, disappeared in three months. There are statements that the government lean towards new hike in wages, which will relieve the employees but will not solve the price increase problem and new wage increases will follow in the near future.

► Turkey welcomed the autumn of 2021 by stopping the fight against inflation and trying to improve the current account balance. The new strategy was based on an assumption that the credit costs would be lowered by lowering the interest rates, and thus both production and consumption would increase. Imports would be under pressure due to the rise in the exchange rate, while exports would continue to perform well, and eventually growth would be supported by a better current account balance.

► That didn’t happen.

► TL savings began to shift more towards foreign currency due to the interest rates being drawn below inflation. Almost two-thirds of the deposits in banks were held in foreign currency, something its nearimpossible to see elsewhere. Increasing exchange rates caused a jump in the prices of imported inputs. Prices for agricultural products, metals, gas and oil were already rising in dollar terms. In other words, while the prices of many products rose in dollar terms around the world, we faced an additional increase due to the increase in domestic exchange rates. I don’t know how accurate it would be to say “additional” because this additional increase was much larger than the original price increase, resulting in eight-to-ten times greater inflation compared to other countries.

► Worst of all, our imports did not decrease despite the increase in commodity prices and the jump in domestic exchange rates. In fact, USD 56bn worth of imports, a 19bn increase, has been realized. Fortunately, our exports (USD 31bn) in the first two months of 2021 increased to USD 37.6bn, somewhat covering the increase in imports. Nevertheless, the foreign trade deficit, which was USD 6.4bn in the first two months of last year, increased to USD 18.5bn this year.

► As of today, we see that contrary to what was planned in the new economic setup, interest rates did not decrease, imports did not decrease, the current account deficit got bigger and growth slowed down. The major disadvantage of this plan was that it was executed in an unsuitable global conjuncture. It was not right, at least in terms of timing to bring interest rates below inflation while a there was a tightening in monetary policies around the world, while there were sensational rises in commodity prices, and while our foreign exchange reserves were extremely low. Had the same attempt been made ten years ago, we probably would not have seen today’s results.

► But we did. Now we have to see what happens next. The problem is that although there is a widespread opinion about what should happen, none of us knows what will happen. For example, let’s think back to the days just before the Monetary Policy Committee (MPC) meeting in mid-March. Rumors that the interest would increase by two-to-three points suddenly raised questions in the market. When bank economists are asked about their MPC decision predictions, almost all of them said it “will be kept constant.” But if the same people were asked what should be done, I’m sure they would all give the opposite answer. This uncertainty damaged Turkey’s predictability in both the domestic and foreign markets. Much more radical moves are now needed to reestablish transparency and predictability in monetary policy, which could have returned to its true course with small adjustments not so many months ago.

► Inflation and the cost of living will again be at the top of the economic agenda in April. We will start the month with inflation data for March. The forecasts of daily DUNYA columnist Alaattin Aktas show that the monthly CPI increase will be around 9%. In this case, the CPI will have increased by 66-69% on an annual basis. Thus, we will witness the highest inflation since 2001. The speech of the Central Bank governor on the inflation report on April 28 will also be remarkable.

► We are facing such interesting data that it is almost impossible to explain this to someone who has never experienced it. Inflation will exceed 65% this month while the policy rate is 14%, the deposit rate is 19-20%, the loan interest is 22-30%, the government domestic borrowing interest is 25% and the foreign borrowing interest is over 8% in dollar terms.

► We will once again be in a “do or die” mood before the MPC’s decision on April 14 and will see what happens at 2pm. This time, the probability of an interest rate hike seems higher than in previous months.

► We know that exchange rates move in a narrow range and there is still strong demand for foreign currency. A new upward movement in the exchange rates may cause inflation to reach three digits in a very short time.

► The Fed does not have a pre-planned interest rate meeting in April. For this reason, there will be no new de facto moves by the U.S. However, this does not mean that there will be no verbal instructions. The European Central Bank, on the other hand, will announce its interest rate decision on the same day as the Central Bank.

► The outcome of the Russia-Ukraine War will be decisive in terms of the global climate. The statements of the parties that met in Istanbul with the initiative of Turkey last week strengthened the possibility of peace. Turkey’s attempts to end tension between the two countries deserve commendation. A proactive policy is being followed in order to end the problem as soon as possible in this area where no other actors have made a move. The end of the war promises results in favor of the Turkish economy in many areas, from the calming down in commodity prices to betterment of agricultural production, foreign trade and tourism.

► Despite all these national and global developments, we do not receive negative signals from the state budget. As a matter of fact, strong increases in tax revenues have been announced due to rising prices and rising imports. We can say that this will continue in the coming period. The first quarter of the year was not that good, let’s hope for a better quarter with the start of the spring.