Focusing on the Cause of Inflation Instead of its Consequences.

Focusing on the Cause of Inflation Instead of its Consequences.

 

Dear friends, I have written numerous articles about the side effects of tax policies

and the foreign trade regime which has been in effect since 2014.

 

And I also have been calling upon the officials for conducting a proper impact analysis of economic practices in Turkey and a sincere evaluation of their outcomes. In the closed meetings I was invited to, I used the appropriate tone of voice and examples to make the critical decision makers realise the crucial necessity of such analyses.

 

Don’t get me wrong, I’m not saying “they didn’t listen to me”. They are free to do as they choose. There are dozens of reliable economists in the country, and I am only one of them. The only thing that makes me sad is the fact that the sectors that are being protected at the cost of ignoring the structure of imports activities in Turkey and the causes of the high cost of living do not yield the desired results though they are being provided with many privileges, which price is always paid by the people. Instead of getting stronger in international competition, these sectors got fat by relying on the advantages have been granted in domestic trade. As inflation and the cost of living have soared due to high customs duties and other taxes, the ordinary people of this country had to suffer the consequences, whereas it should have been those privileged sectors who were being held accountable for their failure.

 

Some of the biggest mistakes were increasing the taxes on essential goods or services that people need for their health and happiness, and constantly levying additional taxes on imports, both of which made inflation stickier and caused further poverty. This is the main reason behind the economic turmoil in Latin America and Turkey today. When a government does not want to deal with the causes of inflation, it is left with no other option than dealing with its consequences.

 

One of the major causes of high inflation and high cost of living experienced in Turkey today is the foreign trade regime which has been in force since 2014 and the tax policies that the Government was unable or unwilling to ease even during the pandemic. Recently, the CBRT officials have been implying that these policies, which are among the reasons for the deterioration in pricing behaviour, might change.

 

But most interestingly, the Monetary Policy Committee members, who had considered the former policy “harmful”, are the same people who made the previous policy decisions. So, why this sudden change of heart? If they believed that those decisions were not the right ones, why did they not express their dissent at the time? I am not asking “Why didn’t they resign?” because obviously this is an uncommon behaviour among office-holders in Turkey. As public banks sell foreign currency, the Central Bank claims that it is not doing it. Does not this statement clearly show that there is a duality in the management of the economy in this country?

 

We see that the Central Bank buys foreign currency from the market as well. It is important to replenish the reserves, but how rational is it to have public banks sell foreign currency so that the exchange rates do not rise when the Central Bank buys it? Apparently, the Government is still reluctant to liberalize the exchange rates.

 

The inflation rates to be announced tomorrow will tell us that whether the deviation from reality continues or not. Economists estimate that the year will end with a CPI below 50% given the circumstances. Are we ready to face the consequences of the Government’s insistence to make it look like below 30%?

As the gap between official figures and the reality grows, will the pricing behaviour not deteriorate further?

 

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