I need to make a quick summary of the situation we’re currently in:
It has become clearer that Central Bank’s tireless efforts were in fact aimed at delaying USD/TRY hitting 4.00. I think we shouldn’t be surprised at the result as any Central Bank in the world has got no power to resist Dollar’s ascending movement.
At this stage, before we get into the “manipulation” or “foreign forces” debates, it is crucial to admit that the exchange rates issue is Turkey’s Achilles’ heel. Evidently, Turkish exports, which has been continuing down the road of Price/Quality competition since 1946, falls behind the imports. Besides, import restrictions lead to higher inflation and eventually higher inflation rates.
While the industrial sector fails to find competitive interest rates for financing costs, its energy and input costs show no improvement at all. And the fact that the sector is dealing with competitors by knocking down the prices causes problems with profits. There’s no growth where it’s hard to make profit. Besides, high consumption and public spending, rather than the successful industrial data, are the real reasons lying behind the high growth rates, Turkey’s supposedly source of pride.
Public deficit and current account deficit has become a chronic condition in Turkish economy. It can be seen that Government has quit the budget discipline in public sector long ago, thus making it more difficult for tax collectors to long overdue tax bills. Despite all that, however, public spending continues at full pace. And to top it all, Government keeps increasing indirect taxes on almost everything, from juices to cars. Higher indirect taxes, just like additional taxes on imports, bring negative impact on cost of living and inflation rates.
According to my conversations I had with the leading executives of the sector, Government incentives offered to agricultural sector negatively affect the inflation.
While on the one hand, private sector’s chance to make savings decreases by the day, for sector workers with the same level of income pay higher taxes; on the other hand, the very situation accelerates foreign currency denominated loans. The ratio of private sector’s external debt to national income is almost around 30%, except the financial institutions. This being the case, I think it would not be very realistic to expect exchange rates to remain calm.
From now on, it won’t be very easy to offer solutions to neither Central Bank nor the Government; because, it might take more than one medicine to cure the disease. All economy teams must work in coordination to eliminate the abovementioned problems, which seems not possible for now in Turkey.