If Only They Could Let Economy Be…

If Only They Could Let Economy Be…
 
Let us be reminded that after the June 2015 elections, a government could not be formed so the elections had to be re-held on the 1st of November. Interestingly, the parameters had improved during that period despite the delayed formation of a government and the fact that economy was managed in an almost technocratic manner. Perhaps this was the very thing that helped the AKP win the elections.
 
Frankly, the fact that economy was improved within a few months was not a miracle. The absence of meaningless interventions, assertive statements, and a desire to control everything were the reasons that made this amelioration happen. In November 2015, monthly inflation was 0.67% and annual inflation was 8.10%. In June, annual inflation was 8.28%. When the free market principles are truly implemented, the presence or absence of Economy Officials becomes no different than a referee that watches an exciting football match to make sure that the rules are adhered to. If free market economy is absent or it is not wanted, the Government becomes  a selfish referee who constantly stops the game and drives the audience crazy with arbitrary decisions.
 
A week ago, the Central Bank announced that foreign investors bought a net $700 million in Turkish equities and bonds. This is the highest sale since Naci Ağbal was dismissed from office. When Naci Ağbal left his post after a presidential decree issued on 20 March 2021, a net $1.2 billion bonds were sold within one week. Also last week, foreign investors purchased a net $124 million in Turkish stocks.
 
Another important development was, according to data released by Turkey’s Banking Regulation and Supervision Agency, the number of granted foreign currency commercial loans has continued to increase, from $150 billion in recent weeks to $154.5 billion last week. Now it has become clear as to why Central Bank has taken a series of precautions regarding foreign currency loans last week. We shall see whether they will be effective or not. The Central Bank's job is not easy. If they had the courage to hike policy rates sharply at once instead of increasing them gradually, we would not be experiencing the problems we are experiencing today.
 
As interest rates go up, the amount of money created by banks and financial institutions would exceed the Central Bank's money by several times. In some countries, the amount of bank money held in commercial banks is almost ten times higher greater than the amount of money in circulation. Also, as interest rates increase, deposit and credit multiplier come into play, and central banks that try to handle the problem by promising a cut in money supply get hit by another problem: "Sterilising the bank money created by high interest rates." In countries that are vulnerable to external shocks, the fact that central banks purchase US dollar or gold to replenish their foreign exchange reserves also causes an increase in the amount of national currency in markets. Consequently, central banks have to deal with an abundance of money created by their own purchase of foreign currency, which was essentially aiming to shield the economy against high interest rate and external shocks.
 
I do not think we will manage to get out of this vicious circle. Inflation would eventually lose its momentum anyway. But, when TurkStat started to manipulate inflation data, things have quickly morphed into something unsustainable. It is not rational to intervene in price increases by pretending not to control foreign exchange rates and that inflation is falling. Those who take advantage from this situation are making huge profits in dollar terms. The Government was too late to issue super bonds to sterilise excessive liquidity.
 
Apparently, we have no other choice but to wait for the economy to recover on its own. It has happened before and it can happen again as long as people responsible for managing the country’s economy understand that nothing will change when they leave.
 
If they focused more on their work and fulfilled their potential, instead of throwing threats around, people would see their true value. Their recent statements do mirror how angry they are. Staying calm would be the sensible choice in this situation.

Prof. Alkin