High interest rates would lead to high inflation?

Yesterday, some of the news agencies have posted news that Turkey’s total domestic and foreign debt stock has exceeded its GDP. This type pf news, however, are always delivered in a manner to increase the number of their website clicks. Normally, when discussing debt stock, experts make separate evaluations for public and private sectors; because, public sector owes to the public sector and the private sector just like the private sectors owes to the public sector. There are debts to collect and settle. Most of this debt stock is either has provisions for receivables or has right to be transferred, which means many debts occur by cashing cheques, notes before the date, resulting in financing costs. Therefore, it is scientifically and practically objectionable to say, “Total debts stock exceeds GDP.

Turkey is not even a middle-ranker in terms of Private Sector’s ratio to the GDP. However, it is an undeniable fact that we, public sector, households and notably private, have a large amount of debt. Accordingly, “interest rates”, depicted as the mother of all evil by certain groups, will not go down. Here’s some further clarification for you.

“Are we really acting wisely when the resources are so scarce?”

Turkey has launched a large number of “build-operate” projects co-financed by state banks and international banks. It can be seen that the contractors have received a total loan of $14 billion for the construction of Yavuz Sultan Selim, Osmangazi and Çanakkale Bridges as well as Northern Marmara Motorway.

On the other hand; subway, tunnel, highway, bridge, airport, city hospitals and courthouse constructions in Turkey’s various locations are still underway. Launched by the private sector, the said projects are proceeding with Government supports. Although, cost/benefit analysis has certainly been conducted before their launch, we cannot ignore that these projects are placing huge pressure on the borrowing market. Contractors receive loans to get the work done, and the Government incurs domestic debts to pay contractors under different pretexts. By the way, I must say that frequent amendments to the tax code also lead to the liquidity squeeze. Interest rates go up while liquidity shrinks.

In the meantime, contactors are trying to extend loan maturity as the payment time approaches, while Government withdraws money from market to repay debts, causing billion lira funds to become frozen. Financial Institutions cannot find any other solution than to turn to overnight borrowing or higher-cost funds in order to expand the credit volume. In short, such mega projects are tremendous burden which falls upon the borrowing market. However, recently mega projects have been taking a larger in part in Turkey’s economic growth than housing construction. It looks very unlikely that Turkey will give up mega projects. This being the case, interest rates do not go down.

It is also reported that more and more people will ask or have already started to ask for a restructuring in the financing of such mega projects, which shows that the investment feasibility studies and the current reality turn out to be incompatible in some projects. It may be more appropriate to finance such restructuring using foreign funds (to be provided by a completely different source) in order to avoid pressure on interest rates and exchange rates. It certainly won’t be easy to pay such huge amount of debt especially when we are trying to paddle our own canoe. This very fact may be lying behind the recently launched economic cooperation with China.

“First ask why interest rates are so high…”

Before we find an answer to the “Do high interest rates lead to high inflation” question, I think we should first figure out why interest rates are so high in Turkey. If high interest rates do really create inflation, which is not a remote possibility, then whatever causes higher interest rates, it causes higher inflation as well. Not to mention our desperate need for foreign funds because of our massive savings gap, and the decrease in fund inflows brought about by diplomatic reasons.

In short, we should think to ourselves first before we engage in any discussion. Instead of getting into pointless arguments like “Do interest rates create inflation or the opposite?” we should first discuss the thing that is inducing interest rates to go up is.

Am I the only one who is aware of this fact? Of course not… But I think the defenders of high interest rates do not have the guts to discuss the real reason behind this incurable problem. So, it’s up to me to shed some light on things.