Exchange Rates and Export Performance
In 2006, when I was serving as the secretary general of the Turkish Exporters Assembly (TIM), my colleagues and I had conducted an empirical study to put an end to the “exchange rates and export performance” debates.
The relationship between exchange rates and export performance we analysed using the ““Engle and Granger approach”, named after Nobel Prize-winning economist and statistician Robert Fry Engle, led us to the following conclusion:
1) Rapid increases in exchange rates are not always good for exports.
2) Constantly low and declining exchange rates do impact export performance negatively.
We presented this study to the Central Bank as well because the then Central Bank management and TIM officials were arguing with each other frequently over exchange rates. After that day, although some economists, who were also columnists, continued to say “exporters want the exchange rates to rise continuously”, exporters never made such a claim. Quite the opposite, in times when exchange rates were set freely by the market itself and remained calm, export performance continued to improve as inflation rate remained low. But today things are different.
The CBRT have been trying to manage exchange rates have been since 2018. Billions of dollars were sold in order to prevent exchange rates from going up. Efforts to keep the dollar’s price below inflation proved futile. The economic team of the country could not figure out what was the cause and what was the effect of rising exchange rates. The fact that Minister Şimşek recently said changes in exchange rates are irrelevant to export performance” indicates how the government is twisting the reality so as to defend its exchange rate policy.
I, for one, am trying to wrap my head around the absurdity of the fact that Şimşek and his team is trying to keep exchange rates under control while at the same time continuing to increase costs and making things even more complicated by raising minimum wage, imposing additional customs tax on imported raw materials, and transferring foreign currency earnings directly to the Central Bank.
As a consequence, this conflicting policy causes the top companies of the country to slowly withdraw their unconditional support from the government. Having apparently noticed the growing anger of the exporters, Minister Şimşek has delivered a rather cautious speech at the Istanbul Chamber of Industry. But what’s done is done. Now it’s too late for the Minister to take back what he said.
Şimşek and his team is impairing Türkiye’s production capability in order to keep inflation low and deter citizens from buying foreign currency by pushing exchange rates down. This poorly calculated attempt can only end in disappointment. I just hope the government will go back to free-market first principles as soon as possible.