Let’s look at the right place for the high interest rates…

As a new week begins, let’s see where the world stands economically:

Fed is preparing for swinging from the monetary expansion, that they’ve been able to reduce gradually before, monetary tightening. According to the Fed members’ statements, they might soon kick off the tightening as per the calendar. 

As for Turkey, the “What to do to decrease interest rates?” discussions are going on. Let me tell you one thing to do: “Reduce inflation first.” 

I hear some very inaccurate comments and statements based merely on spontaneously increasing interest rates. CBRT could not have been able to achieve a target of 5% even though they engaged in drastic rate hikes. Here’s the reason: It is quite difficult to reduce inflation using a “monetary tightening” tactic while costs are consistently rising because of the Ministry of Economy’s additional custom duties, and ever increasing taxes imposed by the Ministry of Finance. Of course, there’s also the Ministry of Agriculture… And the reason lying behind the rise in food price is the oligopoly market structure and wrongly positioned incentives… In short, neither the producer nor the consumer is happy.  

Ministry of Customs and Trade has released the foreign trade January data last week: imports grew three times faster than exports. Even just January, foreign trade deficit was 9 billion dollars, and what is worse, energy prices were still following a rather modest trend when Turkey’s foreign trade deficit hit that number. 

So, it shows that placing additional taxes on imports or by-passing the Customs Union Agreement, hiking the Special Consumption Tax (SCT) or VAT is no remedy to narrow down the Foreign Trade Deficit or Current Account Deficit.  Both must be reduced by increasing exports and creating high value added activities, but obviously not through parity. To accomplish that task, we need to stay cost competitive. Competitiveness cannot be achieved by making imports more and more expensive. 

“International trade and financial policies must be revised…”

At this point, interest rates do not go down either; because, inflation rates are high, as I have explained above, public sector withdraws money from market all the time. Under these circumstances, how can one expect interest rates to fall? First, we need a certain descent in inflation. And the key actions to achieve that goal are obvious. But if the Government does the exact opposite of the solutions I suggested above, the problem would be resolved over the medium-term.  

Obviously, private savings do not increase any further when inflation rates and taxes are too high. Companies and individuals go for loans. Costs of funds, intended for private sector and individuals, will continue to increase drastically unless Government stops getting involved in Borrowing Market. In conclusion, interest rates just cannot drop.

But the solution is evident: An entire revision of international trade and financial policies.