The Economic Model Remains, With A Little Retouch…

The Economic Model Remains, With A Little Retouch…

 

Apparently, the Government is determined to keep the current model despite the fact that market interest rates, exchange rates and the cost of living keep increasing.

 

President Erdogan’s speech at the Union of Chambers and Commodity Exchanges of Turkey (TOBB) gave me a glimmer of hope for the possibility of creating a new advisory body similar to the Economic and Social Council, tasked with providing advisory opinion to the President in the formulation of economic and social policies. “Problems will be solved in consultation with industry”. This statement by Erdoğan may be heralding an attempt to end the long-time lack of connection between the Government and the markets. I hope that TOBB and Turkish Exporters’ Assembly (TIM) will make the necessary efforts to help normalise the relations again.

 

Considering how difficult it is to increase economic growth and trying to reduce inflation at the same time, I believe that the banks should be urged to offer easier loan terms, since it is unlikely that inflation will drop below 50% for a long time. If we don’t make easier for businesses and individuals to access funds, which is necessary if we want further growth and lower inflation, we may have to face undesired consequences.

 

“You Cannot Control Everything…”

 

In fact, accepting the situation as it will be quite effective in the process of transitioning to normalisation. I’m certain that Turkish economy will take its first step towards improving once the Government stops trying to control everything and accepts that some things are impossible to control, which brings me to a popular concept in international economics, called the ‘impossible trinity”. According to this theory, it is not possible for an economy to pursue an independent monetary policy, have a fixed exchange rate, and allow free capital flow simultaneously. Our vain efforts to have them all sadly break us away from the reality of global markets, which leads to an undesirable rise in investors’ distrust of Turkey, hence in our CDS premiums.

 

What the Government should do is simple: loosen credit terms, allow markets to determine interest rate, let interest rates rise gradually and wait for the exchange rates to eventually stabilise, and most importantly, deal with the causes, not the consequences, of high inflation. Obviously, the Government should be patient and not expect that problems will disappear tomorrow.

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