Let me get straight to the point: Given the fact that 65% of Turkey’s imports are realised in dollars and nearly 40% in Euros, the country will soon experience a financial problem involving the foreign trade deficit and current account deficit.
The recent developments in the terms of trade already showed us that the value of Turkish export goods is at least 30% lower than the value of the imported goods. Considering that nearly 90% of Turkey’s imports consist of raw materials, intermediate goods, and investment goods, therefore, we run a major current account deficit as we produce, naturally, the decline in the value of our products create a negative impact on the foreign trade deficit and current account deficit.
On top of all this, food, energy, and commodity prices follow a high and fluctuating trend. The head of the International Energy Agency, Fatih Birol says, “We haven’t seen the worst yet”. All of these show us that developed countries will have to face the threat of high inflation, while developing countries will be struggling with chronic inflation, countries like ours with hyperinflation.
I found myself in Kınalıada while I was wandering in Istanbul during the holiday week. While I was enjoying a cup of tea in front of the pier, some people came to me and asked me, “Professor, why do the prices go down?” Thankfully, people no longer ask me about the dollar.
First of all, due to the very low interest rates which have been in place for a long time, both producers and consumers have been stocking up on all kinds of raw materials, intermediate goods, final goods or any necessary good that they could stock up on. Although the Federal Reserve, ECB, and other Central Banks hikes the rates, they still could not surpass the “stocking profit”. As long as the gap between the profit obtained on paper by stockpiling a commodity and the interest earnings guaranteed by the bank remains at this level, we will suffer from high inflation and its aftershocks for at least two more years.
“Storing is the new polite term for stocking up…”
This stocking up situation in Turkey is progressing more systematically. Extremely experienced in hoarding any goods or assets, Turkish people manage to put aside some money to buy any necessary item or asset, despite their difficult living conditions. Similarly, the businesses “stores” whatever they think they will have trouble finding in the future, despite the high prices. This is the new polite term for stocking up on goods.
As the parity and the commodity and energy prices increase the Foreign Trade Deficit and Current Account Deficit, the exchange rates will continue to have potential of going further up. With insufficient money inflow to the country and its fragile reserves, the exchange rates will keep rising, and as this rise will negatively affect prices, it will continue to feed the vicious circle we live in. Inflation will remain high as wages are increased according to the rising inflation, and those who sell goods and services raise their prices due to this artificially made demand.
We need some drastic measures to eliminate or at least mitigate all these negative developments, however since it is not possible to “prescribe a bitter pill” before the elections, it seems that the economic circumstances in Turkey will not change for a longer time.