Low interest rate policy has led to loss of welfare
WHAT WILL BE PRIORITIZED BY THE TURKISH INDUSTRY AND BUSINESS ASSOCIATION ˷TUSIAD˸ IN THE COMING PERIOD?
We’ll focus on policy proposals to overcome the economic difficulties affecting all segments of society. We have members and strong networks across Turkey. We’ll lend an ear to the problems faced by the Turkish business world with our Anatolian meetings and will develop solutions together. We’ll continue to emphasize the vital importance of a strong democracy and rule of law for Turkey. We’ll monitor important developments in international relations with our strong global network. Restoring the integration process with the European Union (EU) is among our most important priorities. We’ll guide the business world toward green transformation, digital transformation, energy efficiency, climate disasters, and sustainability. We’ll continue to support the career journey of young people with training programs that will develop their digital competencies and entrepreneurial skills. Gender equality and women’s empowerment in all spheres of life are one of our primary working areas. All matters that are important to building the future of Turkey are our working areas. Around 3,000 people work for this “idea factory,” including our members, professionals in member companies, and our Secretariat General.
THE GOAL TO ACHIEVE CURRENT ACCOUNT SURPLUS WITH DEVALUATED TRY HASN’T BEEN ACHIEVED. THE CURRENT ACCOUNT DEFICIT ˷CAD˸ HAS STARTED TO RISE. IS THE NEW ECONOMIC PROGRAM STILL EFFECTIVE?
The expectation that devaluating TRY would increase exports was an idea left behind in the 1990s - the dynamics of the global export markets are different now. Technology-based high value-added products with brand value are most important in export markets. Moreover, the Turkish economy relies heavily on energy imports. There was a considerable price hike before the Russia-Ukraine war. The war has accelerated the process. The CAD reached USD 30-40bn with our exports which slowed to 20% and imports which reached 40%. The plan to reduce the CAD by devaluating TRY and inflation falls afterward hasn’t worked. Turkey will experience high inflation as long as TRY devaluates as the share of imported input is high in production. From this aspect, a decision has been made to reduce inflation after it increases. Under these conditions, this has resulted in welfare loss.
THE CENTRAL BANK’S ˷CB˸ RESERVES AREN’T INCREASING DESPITE FX OBTAINED FROM THE FX˹PROTECTED TRY DEPOSIT ACCOUNTS, AS WELL AS EXPORTS AND REDISCOUNTS. WHERE IS THE BLACK HOLE?
The Turkish economy needs a lot of foreign currency (FX). It has high CAD and external debt payments. Its FX resource is low. Turkey’s risk premium has increased with the newly implemented program. The cost of finding foreign borrowing has risen as a result of this. The CB’s reserves are being used to turn the wheels of the economy. We would have the necessary FX resource at affordable prices and reserves wouldn’t need to be spent if TRY didn’t devaluate that much in the first place.
WHAT ARE THE SHORT˹ AND MEDIUM˹TERM FORECASTS FOR INFLATION?
I don’t think that we are sufficiently fighting against inflation. We can’t implement the right monetary policy or can’t take necessary structural steps for issues such as agriculture and food. We can’t prepare the economy against possible global shocks. It was very likely that the inflation wave would come on the global side. We’ve experienced this wave with record-high inflation and by cutting the policy rate while the world increased the interest rate. The inevitable FX shock happened. It’s more costly to fight against a shock after it happens. The important thing is to be prepared against that shock. We haven’t properly fought against inflation for the last five to six years. Pricing behavior has deteriorated, and inertia has stepped in over the years. I don’t even mention the FX pressure. If you believe that high inflation fully stems from global developments, this diagnosis is wrong. The inflation outlook is challenging in the short term.
New products enter stocks at new prices in the real sector. This will further create price pressure. Backdated demand still causes inflation. The increase is high in global commodity prices. That’s why inflation is likely to increase further in the short term. The rapid surge in producer prices hasn’t stopped yet. This shows that inflation will continue to increase.
WHICH INTEREST RATE DOES THE BUSINESS WORLD LOOK AT WHEN CONSIDERING AN IN˹ VESTMENT?
The business world looks at long-term funding resources when they invest. Before that, they consider the future and predictability of the economy. If there is a stable economy, inflation is low and they don’t see a risk, they decide to invest. Then they examine the interest rate. If the interest rate is cut in an economy with stability concerns, the decision doesn’t transform into an investment. We experienced this situation in the Credit Guarantee Fund (KGF) in 2020. The low-interest-rate funding was used for houses, cars, and FX. The issue isn’t just about the interest rate. The business world prioritizes predictable and steady growth.
WHAT KIND OF MEASURES SHOULD BE TAKEN AGAINST THE SURGE IN COMMODITY PRICES AND RAW MATERIAL SUPPLY DUE TO THE WAR?
“The expectation that devaluating TRY would increase exports was an idea left behind in the 1990s - the dynamics of the global export markets are different now. Technology-based high value-added products with brand value are most important in export markets.
New markets should be found for certain products on the supply side. There is a serious problem with prices and deliveries. Although the ministry and companies are working to find a solution to this problem, it can’t be resolved quickly. That’s why we are observing a slowdown in all global markets. On the positive side, some demand has shifted to Turkey due to interruptions in supply from Russia.
HOW WILL MONETARY TIGHTENING IN THE WEST AFFECT TURKEY?
The Federal Reserve is pursuing an aggressive monetary policy to control inflation – and it will. This means USD appreciation and an interest rate hike. Turkey’s access to FX will be more difficult.