Economy in Turkey: Management doesn’t seem to have a solid recipe to solve problems

A very good article by Prof. Emre ALKIN, real worth reading to have a good idea about where Turkey is heading in the next few months. Mr. ALKIN is known to be a prominent economist in the country. The article was translated by BTT.

EMRE ALKIN’s Article (on ekonomim.com)

“After the Central Bank’s interest rate decision and statement, the roadmap is roughly shaping up as follows:

– The Central Bank is expecting inflation to decrease due to base effects, while being aware of the levels of money supply and public spending.

– They anticipate that the 12-month inflation, to be announced at the beginning of July, will peak, and they will attribute the subsequent decline to the success of their “recipe”.

– They plan to gradually release the exchange rates during the summer months, expecting an increase in tourism revenues and calm markets, while also buying foreign currency to strengthen reserves.

– During this period, they will encourage banks to offer high interest rates for returns from FX deposits and savings accounts.

– Towards autumn, they will prepare for interest rate cuts, considering that inflation will be around 50%, and therefore a 50% policy rate won’t seem too high.

– Knowing that they will likely miss the year-end target of 36% by at least 10 percentage points, they will reiterate the “expectation for 12 months ahead” at every MPC meeting.

These plans may look good on paper. As long as the support from the business community and market players continues, they are likely to persist with this plan. However, there are some problems:

When the CPI exceeds 70% in June, owners of rental contracts (housing) completing during this period will face serious disputes. Meanwhile, wage earners will complain that they haven’t received sufficient raises and feel disadvantaged. On the other hand, seeing such high inflation, merchants will try to compensate for their losses by raising prices, which will naturally maintain Turkey’s status as the most expensive country in its region.

While all this is happening, the new Constitution works will test the solidity and cohesion of the ruling coalition in Parliament, and it will become apparent that reaching a conclusion without convincing the main opposition party, which won in local elections, will be difficult. Meanwhile, the fate of the U.S. trip (of Turkey’s President – which likely seems to be canceled by US), efforts to clean up the bureaucracy, and measures to save in the public sector will form the basis for all these mentioned items.

To reiterate, the economic management lacks a solid recipe to solve problems, and due to the slippery nature of politics, there is no inclination to undertake radical actions. All of this indicates that we can only temporarily reduce inflation without achieving fiscal discipline. Otherwise, it’s clear that the journey will continue where it left off.”

In conclusion, we will continue on a fragile plan that anticipates some relief as we enter the summer months. Regardless of the level of bank interest rates, we will continue to take advantage of low exchange rates. Those who have been buying foreign currency while it’s cheap will continue to do so. And we will keep a constant eye on the Official Gazette.”