Is Turkey introducing “national and domestic money” to fight currency fluctuations?

Turkey has had a hard time trying to cope with fluctuations and US Dollar in specific, which have deteriorated all balances in its financial structures both on micro and macro scales. In fact the uncontrollable inflation which has been the main headache of the government is observed to originate from the fluctuations of Turkish Lira against foreign currencies mainly and it seems that the discontent it causes among citizens could turn out to be a major handicap for the ruling party in the elections to be held on 24 June 2018.

The business sector on the other hand is drastically effected by the devaluation of Turkish Lira against other currencies and many giant companies such as ULKER and DOGUS group have had to sit at the table with banks for restructuring of their huge debts.

This being the case President ERDOGAN made a very attention-grabbing statement in a speech addressed to his deputies at the last group meeting on 24 April 2018. He said Turkey would “spoil” the game played on the exchange rates and referred to counter steps to be taken. He added “Now the step we are taking is national currency, domestic currency. Hopefully we will spoil this exchange rates game with our national and local money. In fact, I will share another step further, I hope we will take steps to place gold in a determining position”.

In compliance to above statement some experts comment “National and local money can be one of the financial abilities Turkey can develop against the dollar domination. Putting gold in a determining position, could further suggest us alternative methods to be tried”. To support this view, some experts still believe the “golden rule” (as they call it) is simple: Whoever has the gold sets the rule.

However, on the contrary to this approach there is an opposite way of thinking based on contemporary practices in the finance world. Accordingly, with reference to Turkey’s situation some other experts paint the following picture:

The Central Bank is converting more and more of its reserves from foreign exchange (and US dollar in specific) into gold. While the total gold reserves of the Central Bank in 2016 were 377 tons, this figure went up to 54 tons in 2017. On the other hand the portion of the Central Bank’s ownership, rose from 116 tons in 2016 to 199 tons in 2017 (gold is calculated at $ 40 million per ton). Turkey has been exporting and importing gold bullions for a long while. However, there is no doubt importation and exportation of gold does not count as “commodity trading” and can only be recorded as financial transactions (meaning money movements). It is also a fact that Turkey was forced to seek such alternatives due to the US embargo implemented on Iran some time ago. Judging on this approach and considering the increase of the gold stock can be financed in dollars, we reach the conclusion that the goal targeted here is to keep the money in gold and not in US Dollars.

The experts also draw attention that Turkey has suffered an average deficit of 5 percent every year during the long AK Parti administration period and it would be difficult to comprehend the motive of further borrowing to buy gold when the country is obliged to borrow foreign loans to finance the current account deficit, already. The idea here is if Turkey did not import that monetary gold, it would have to incur a smaller deficit equal to the dollar value of that gold it would refrain from importing. Thus it would have to borrow less foreign loans. This bring us to the question; “Is Turkey’s new strategy based on stockpiling gold?”

At this point we need to share Russia for instance is observed to have been aggressively increasing its gold reserves, recently. Russia has long been uncomfortable with the idea that the US dollar dominates the global markets. That is exactly why it has been in close cooperation with China to end the supremacy of Western currencies US dollar to be in the first place. In fact, there are rumors Russia and China are to introduce gold-backed alternatives to circumvent the U.S dollar. The interesting point here is it is a fact the US dollar has had no gold-backing since 1933, nor has the US increased its gold reserves for a decade. Despite this this currency has never given up its role as the king of the monetary markets. Thus Russia and China are ambitious to shift this power from the West to the East

Coming back to Turkey again, it is not clear if Turkey has been inspired by the strategy adopted by Russia and China but it is very obvious we are not talking about an easy alternative to be put into effect here. Besides, while one of the motives here is to be able to give the electorate the message “Our gold reserves have risen” obviously, the negative point seems to be such move could be interpreted by the global finance world “things are getting worse.”