Not a dollar rush but an escape from lira!
Earlier this week, I had shared an article with you, explaining the parameters which determine the value of a national currency. If a country’s economy is perceived negatively by its citizens as well as other people living in foreign countries, both naturally would want to avoid the currency of that country. And the reasons leading them to do this are:
– A general state of uncertainty
– Complications in domestic politics
– Diplomatic deficit
– Independent decision-makers no longer independent
– Unreliable investment climate
– Weakening competitive environment and market economy
– Arbitrary decision-making
If a government lets political preferences or ideologies affect its decision-making which should be based on science and reality, economic rationality begins to fade away. When the society comprehends this, it will see that the value of the national currency does not depreciate due to changes in the economy, but due to turbulences in social and political life.
Today, the monetary policy in Turkey encourages investors and depositors, who avoid Turkish lira, to buy foreign currency by charging interest rates lower than the expected inflation. As the government tries to keep exchange rates under control, people turn more to buying dollars.
Some of my colleagues who claim that there is no reason for the US dollar to rise after the local elections need to think about what I said above. Because this isn’t about the elections. Whether there is an election or not, foreign exchange rates continue to go further up. And the efforts to keep them from climbing higher create this public expectation and hope as to the possibility that exchange rates could go down.
If the Central Bank had respected the free market economy and not sold foreign exchange reserves worth billions to prevent exchange rates from rising, we would never be talking about these things today. If it had not intervened in interest rates and let the market decide their level, we would not be talking about such high interest rates today. “We should to return to rational policies,” had said Minister Şimşek. Well, what he said was surely a rational suggestion which has never been put into practice, at least not in the past eight months.
Even today, the Central Bank continues to sell from reserves and keep TRY under control. This is what it does. What about the things it does not do? The Central Bank is afraid to say, “This is all we can do. A tight monetary policy would be of no use unless the government stopped reckless spending.” To exporters, the Central Bank says, “Don’t rely on the exchange rates”, but it cannot say, “The current level of exchange rates is our making, because we control them.” It cannot say, “As the new economic team, we made the mistake of hiking interest rates too slowly”, unlike the Fed Chair who actually said it.
When we do not do what needs to be done and do not say what needs to be said, we become a part of the problem we criticise.
