I tried to explain it yesterday but as the things I said apparently seem not to have been understood fully, now I’m getting bombarded with questions: “Why the currency transaction tax in Turkey is 1%” or “Why would people even want to buy foreign currency?”.
Let me try to clarify it again: Last week, government received some sharp criticism about the 1% tax imposed on currency transactions and I humbly tried to explain the ‘why’ of this policy. First all, there isn’t any currency transaction tax levied on the specified organizations. There is also not any sort of restriction neither on persons or enterprises in terms of buying or selling foreign currency. I think now it is fully understood that the rise of Dollar (from 2 TRY to 7 TRY) following the calm period of 2002-2013 will definitely not end here. So, this 1% currency transaction tax has been a critical decision as the continuation of the two important steps taken by the government over the last decade.
As you may remember, in 2009, citizens were banned from borrowing foreign currency loans, and in 2018, firms were only allowed to borrow limited amounts of foreign currency loans. These decisions, however, were mostly aimed to avoid unstable movements in foreign currency supply and demand, rather than preventing exchange rates from further increasing. As Professor Eğilmez says, “Turkish economy keeps working under a dual monetary system. One of these currencies is Turkish Lira and the other is US Dollar.
Even the trade activities in Turkey are Dollar-indexed. Even though only 10% of total costs are denominated in Dollar, most companies issues Dollar-indexed invoices. From the price of threads to airline tickets, from consumables to house rents, almost everything is denominated in USD. When you ask the employers and property owners why they are doing this, they almost usually say, “Because everyone is doing the same” When I hear this response, I tend to offer some witty words to which they won’t be able to come up with an answer, “You hedge yourselves using the money in your customers’ pocket. Everyone else gets hurt, except you”.
Indeed, in Turkey, the reason why people tend buy foreign currency or gold is not only about the decisions of economy administration. It’s rather about the government’s tolerance of these people who want to keep winning and winning, without losing once. No matter where they look, consumers see either foreign currency-denominated or a foreign currency-index costs. Let’s also forget the challenges faced by those who have to import raw materials or other goods as these things do not exist or are not produced in Turkey. Sadly, these people are the real victims of this unjust system.
“Don’t get angry with people; just get them to trust you…”
People usually tend to buy foreign currency or gold to basically protect themselves, because they know whatever they will be required to buy or pay for soon, their prices will be increased based on dollar’s movements. When exchange rates go up, people’s distrust reaches a peak and the number of foreign currency transactions accordingly goes higher. The sad thing is that people who bought foreign currency in panic when it was going up, they start selling it again in panic when the currency tends to go down, and eventually, they lose.
There are a number of reasons for the fact that FX rates in Turkey are constantly rising:
- Import-based production and consumption
- Outdated growth system
- Huge external debt pile and its cost
- Insufficient reserves
- Insufficient private savings and the need for external funds
- Current foreign and domestic policies and the need for a structural reform
As the reason for FX rates rises is clear as day, interestingly, the government keeps fighting with the results of it. This being the case, it seems unlikely that those people who “hate losing” that I mentioned earlier will change their attitude. I think, despite the new tax, ordinary people will continue to protect themselves against TRY’s depreciation. Perhaps, BIST may receive some funds in the process. As now shares are soaring on the world stock markets after investors pinned their hopes on a possible treatment for Covid-19, this could be a good time to invest.
Over the next period, the government should keep fighting against the causes of rises in USD/TRY exchange rate. This way, we could both prevent savings from melting away and help Turkish Lira restore its reputation. But, instead, if the government continues to fight with the results, it won’t be able to change Turkey’s ill fate.
