The point of reckoning

Dünya Executive - - COMMENTARY - Ismet Ozkul Columnist

June data showed that inflation came to the point of running out of control. The problem is now so bitter and widespread that it cannot be avoided by blaming it on the prices of potatoes and onions.

While the CPI has exceeded 15 percent, all core inflation indicators have also climbed to around 15 percent. Inflation, which rose to 23.71 percent in terms of PPI and to 28.47 percent in intermedia­te goods, shows that the frightenin­g rise will last.

The structural problems of the economy and inflation continue to grow into a vicious cycle. High and persistent inflation is directly related to the high current account deficit. Moreover, it is fed by the current account deficit. The high current deficit is a result of supercharg­ed growth based on excessive consumptio­n in the absence of increasing production and competitiv­e power.

This situation increases the fragility of the economy in a number of ways. Each of these fragilitie­s, which are caused by the high current account deficit, has a knockon effect on inflation.

A high current account deficit means an economy that is highly dependent on excessive borrowing and external sources of funding. While there was an abundance of cash in the world, the pain of these erroneous economic policies were not felt that much. Now, the opposite is happening.

There is a need to find more outsourcin­g for the financing of the foreign debt of $467 billion and foreign deficit of $58 billion. Since the period of abundant cash is over and the fragilitie­s of Turkey have increased, there is not as much capital inflow to Turkey as there used to be.

The cost of foreign sources is also increasing. The current account deficit continues to increase rapidly despite the decrease in the amount of foreign-sourced funds. Currently, the amount of foreign sources cannot even finance half of the current deficit.

The direct result of this dilemma is the rapid and continuous rise of currencies in an economy in which production is dependent on imports foreign sources of funding. This upsets the balances, with the consequenc­e of rising inflation.

But Increases in currencies and inflation also cause interest rates to rise. Thus, a spiral of exchange rate increases, interest rate increases and inflation increases emerges.

Political fragility and the rise of the budget deficit due to the economic policies based on electoral cycles fuel also inflation.

We have come to the point of reckoning and are paying dearly for the mistaken economic policies applied for years. Now this road is finally coming to an end, the road is blocked. A new road has to be taken, either by choice and planning, or by hitting the wall...

In the short term, while high interest policy continues, public spending has to be cut down. Policies that will effectivel­y cut down the current deficit have to be actively promoted. In order for these to have a lasting impact, they must also be supported by coherent medium- and long-term plans to fix the fragility of the economy.

This means a difficult process that is shaped by high interest rates, low growth, falling profits, corporate bankruptci­es, increasing banking difficulti­es, rising unemployme­nt and decreasing wages.

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