Published On: Fri, Oct 27th, 2017

Inflation in Turkish economy and pressure on banks to lower interest rates

Inflation in Turkey and high interest rates are important issues on the agenda of Turkey.

For quite a while now the top administration in Turkey have been insisting that the inflation and related negative developments in the economy are to be blamed on the “high interest rates” applied by the banks. In other words, it is explained to the public that the inflation goes up because banks (scapegoats in this case) do not lower their interest rates. However when one looks at the issue through the eyes of experts in this area equipped with necessary technical knowledge to attribute a healthy analysis to the problem, the picture may be totally different.

In fact the question is quite simple: “Why does the Treasury borrow excessively when the banks are required to lower interest rates?” However rather than providing a realistic and valid answer to this question, it is like the administration is trying to make up a public opinion that banks are responsible for the inflation by raising interest rates happily and if they were willing to do otherwise the interest rates would drop immediately thus affecting the inflation in a positive manner. To be even worse banks are accused of raising interest rates because of their high ambition to make profits adding they should lower the rates, settle for smaller profits and gain from higher turnover etc.

Looking at the actual picture however the reality seems to be quite different. The reason is if banks were capable of handling this, they would certainly reduce interest rates much faster and willingly than required by the political authority, as the government bond portfolio in their hands would rise to higher values with the drop in interest rates, thus enabling them to make better profits. Moreover, this would be achieved much more comfortably without having to put a lot of effort in activities such as depositing deposits, selling credits, checking credit risks.

Thus coming back to the point “What are the actual reasons behind high interest rates?”, experts comment there are so many aspects such as “the deposit-credit balance, budget, treasury borrowing, current account, external debt payments, hot money and external loans, currencies and political risks” to influence the situation.

According to experts one of the most important factors among these is the amounts borrowed by the Treasury. In other words has the Treasury borrowed excessively – that is more than it should? If the answer to this question is yes then we need to know that the Treasury’s excessive borrowing could be one of the main reasons why interest rates are high. Therefore, it is quite a contradiction that the government is pressuring banks to lower interest rates, while the government itself is borrowing much more than necessary (tolerable limits) thus causing the interest rates to climb upwards.

The interesting part according to experts is that the deposits held by the Treasury in the Central Bank at the end of September amount to TL 30.32 billion. It is not common for the Treasury to continue to borrow more than its financing needs, when there is such a high cash reserve.

It goes without saying the debt of the Treasury does not necessarily have to match with the cash deficit. It is only normal and possible that the debt could be above or below the need. However, the fact that the amount of borrowing has gone beyond this requirement in such a short time is not accountable under normal conditions.

On the other hand experts comment, a pressure is being applied on banks to lower the interest rates while the Treasury is over-borrowing in violation of the laws which is a situation often discussed in economic circles trying to find an answer to the question why the Treasury is borrowing such big amounts with concerns about potential extraordinary reasons for entering such an unusual path.

Opinion leaders say this could have to do with speculations about the prospects of the economic crisis, the military developments in Syria and Iraq, the possibility of a heavy payout in the near future, and “the treasury accumulating funds” to be used for elections etc.

Although this debate has been on the agenda for a while now, there has been no explanation from the administration regarding the excessive borrowing by the Treasury and why legal debt limits are exceeded. To recap, the ongoing silence of the government is considered to be raising concerns and providing a basis for people to believe presumptions in circulation.