The dollar went back down to 11 liras with the announcement of the new financial mechanism by President Recep Tayyip Erdogan, and then returned to the path of rise to touch the 14 liras threshold last Monday evening, without the markets witnessing a decrease in the prices of goods and services.
The Turkish economic indicators issued with the closing of the year 2021 reinforced the fears of observers and economic experts by prolonging the extent of the price hike that reflects the high level of inflation recorded in the country at the very least, and the worst case scenario is that prices will witness a new rise above what they have reached today.
Last Monday, the Turkish Statistics Authority announced that the consumer price index (inflation) in the country increased by 13.58% on a monthly basis last December and by 36.08% on an annual basis (compared to the same month of the previous year).
According to the authority’s data, the local producer price index recorded an increase of 19.08% on a monthly basis in last December, and 79.89% compared to the same month of 2020.
Turkish economists link the level of price increase, which was 54% when the dollar exchange rate was 11 liras last November, and what this increase will reach at a time when the dollar price has returned to above 13 liras at the beginning of this year, which is expected Observers expect the increase in producer prices to exceed 60%.
The structure of the Turkish economy
Despite achieving a remarkable economic growth of 7.4% during the third quarter of last year, the country’s success in achieving an unprecedented record in the volume of exports, which amounted to 225 billion and 368 million dollars during the year 2021, contributed to an increase of 32.9%. Observers expect that Turkey remains under the weight of an expensive winter in the short term, before its indicators tend to improve on the medium and long terms. What is the reason?
Tan Haskul, a Turkish economist and founding member of the “Intel Kit” data company, answers the question of Al Jazeera Net, by saying that the recent seemingly illogical changes in the performance of the Turkish economy are mainly due to its subjection to special evaluation criteria in terms of systemic risks and capitalization.
To illustrate this, he says that Turkey has default swaps and a higher credit rating than default swaps with a country like Ukraine, even though the latter, unlike Turkey, is on the verge of invasion, adding that debt default swaps can be considered one of the most common global tools for measuring Systematic risk in economics.
Hascoll describes the adoption of these criteria for pricing the Turkish lira as a “ridiculous thing” that drew the attention of senior economists around the world, including Robin Brooks, chief economist at the Institute of International Finance (IIF), who also served as the head of forex strategy at Goldman. Goldman Sachs, where he had set a parameter called the fair price of the Turkish lira, and said that sooner or later the dollar exchange rate will return to the level of 9.5 lira according to this criterion.
Haskul points out that the new financial instrument that President Erdogan announced on December 20 succeeded in motivating Turkish savers to convert their bank deposits from dollars to liras, following pledging to pay losses incurred in dollars. The dollar fell from 18 liras to 11 liras under the pressure of sudden selling.
It also shows that this measure succeeded in curbing foreign speculators and funds that for long periods of time put pressure on the Turkish lira, by concluding short-term borrowing contracts that inflicted heavy losses on it, and thus the fastest appreciation in the performance of the Turkish lira since 2010 was recorded under the influence of the new financial instrument.
shift tax
On the other hand, Hascoll believes that the inflation that Turkey recorded recently was the cost that resulted from this radical shift in economic performance, noting that the acceleration of the increase in inflation that the country is witnessing today led to the rapid rise in the prices of goods and services, adding, “This is a cost that we have to bear. We are dealing with its repercussions to protect the financial system, employment and accelerate investments.”
According to the Turkish expert, the monetary value is the most aggregate indicator of the economy, so it is expected that the depreciation of the dollar exchange rate once morest the lira will affect the entire economic system at the medium and long levels, to include inflation adjustment and price reduction.
For his part, the expert in Turkish investments, Khaled Diyarbakirli, believes that the direct effects of the decline in the dollar exchange rate will not appear in the near term, but he expects that inflation will decrease following 3 months from now if the lira succeeds in stabilizing at the level it reached and does not return to the path of the new decline.
Diyarbakirli, who spoke to Al Jazeera Net, relies on depositors’ confidence in the stability of the exchange rate and on continued growth, despite the exchange rate’s depreciation, to reflect inflation and price indicators, although he acknowledges that expecting the lira exchange rate represents one of the challenges for observers.
time factor
Although the state announced the start of campaigns to control and reduce prices in the markets through inspection and control campaigns on goods, production lines, marketing and display in supermarkets and subsidiary stores, any significant decrease in prices has not been recorded so far.
Abdullah Harb, an academic researcher at the Turkish “Kadir Has” University in Istanbul, said that the level of inflation is a reflection of high prices, and therefore it expresses the rise in prices and services on a monthly or annual basis, likely that prices will remain high, or increase unless measures are taken. It lowers the value of inflation.
In an interview with Al Jazeera Net, Harb pointed to the difficulty of solutions in dealing with the inflation crisis in Turkey, given that it stemmed mainly from the low price of the local currency and the decline in its purchasing power, explaining that countries usually deal with this type of inflation by raising the interest rate as the most important and first financial tool to be used.
He pointed out that resorting to raising the interest rate is not possible in Turkey in light of President Erdogan’s financial policy of lowering the interest rate, which compels economic observers to exclude this procedure in their predictions regarding the performance of the Turkish economy and to search for limited tools to deal with the existing situation.
He pointed out that the new financial tool announced by Erdogan has become an essential option to reduce the value of inflation if it succeeds in raising the price of the lira in the medium term, but he saw that the impact of this tool is still not tangible and requires more time to judge its effectiveness.
Harb said that there are other tools that can be resorted to to reduce inflation, including reducing government spending and imposing taxes and fees to reduce the rise in demand, but these two measures are not desirable within Erdogan’s economic policies and his government, especially in light of the approaching elections.
He concludes by saying that the options are limited and not easy, and are linked to the success of the procedures related to the new financial instrument in raising and maintaining the price of the lira, and thus reassure the markets and encourage investment, but he believes that judging the future of the lira exchange rate still requires more time to read the effects of the new tool.
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