Let’s Agree on a Solution to Reduce Inflation (Revisited)

Let’s Agree on a Solution to Reduce Inflation (Revisited)

 

July’s high inflation rate reminded me of an article I published in April, before the elections. Today, the conditions remain unchanged while the country is heading towards another election.

 

Here’s what I wrote months ago:

 

“… Let’s take a look at the following wrong strategies to fight inflation:

– Keeping exchange rates under control so as to prevent them from causing the inflation to go up further: Rising or falling exchange rates due to market conditions obviously affect inflation, but keeping exchange rates under control is not a fruitful method at all. Thinking that exchange rates will rise eventually, the business and the industry are pricing their goods and services based on this expectation, or they, including ordinary Turkish people, are buying foreign currency to protect themselves from the descent of the Turkish lira. As the burden of instruments such as KKM (foreign currency-hedged Turkish lira deposit scheme) on the Treasury increases, the probability of higher inflation in the future equally increases.

– Imposing a ceiling price on end products or forcing the manufacturers and suppliers to sell them at discounted prices: Imposing a price ceiling on essential goods and services without first dealing with the rise in production costs, unfair competition, consumer abuse is also an ineffective strategy. Because eventually these high costs swell the prices.

– Import Taxes: Exorbitant taxes levied on foreign products in order to stop imports hence the demand for foreign currency keep fuelling inflation. By doing so, the Government might think that it protects the domestic producers, whereas in fact it destroys their ability to be competitive.

– Adding the foreign currency revenue of exporters into central bank reserves: Exporters are struggling as a result of this decision made to help increase the reserves of the Central Bank. The financial structures of the companies began to deteriorate due to both this decision and the foreign exchange rates which are forcefully kept stable. Yet, the inflation remains high.

– Continuous wage hikes to protect employees against rising inflation: The cost structure of companies has equally deteriorated due to the continuously increasing wages in line with current inflation rate. Inflation remains high as wage hike demand has not stopped yet.

Instead of wasting its precious time using all these ineffective strategies to deal with the inflation problem, if the Government had thought of implementing a monetary and exchange rate policy that is compatible with the market realities, minimising taxes on essential goods and services, preventing anti-competitive activity and unfair competition by closely monitoring the markets, and using the government budget, not corporations, to finance its citizens, this country would have a much better economy right now.

Sadly, the Government chose to control the interest rates and the exchange rates, and when it realised that it was not working, it tried to control the capital movements, and made irrational attempts that violate the market logic so as to ensure low inflation figures. As a consequence, the current account deficit and budget deficit swelled further, inflation did not go down as desired, and public trust in official inflation figures has drastically decreased.

I look forward to a gradual switch to the market mechanism after the elections, hopefully allowing us to get rid of these problems as fast as possible…”

 

As a new election fast approaches, taxes keep increasing and the government deficit grows larger. My fear is that the government might decide to sell net forex reserves again, which are already deep in negative territory, if exchange rates start a volatile phase. I think the policies that kill demand will be abandoned by October or November. So it would be wise for everyone to be prepared for such a possibility.

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