Tuesday, September 6, 2022
Turkey implemented a fixed exchange rate regime in 2000. Target exchange rate increases CPI increased by as much as 20 percent. But when the CPI rose to 39 percent, higher than the target, the exchange rate exploded in the free market.
The fixed exchange rate policy at that time served as insurance in a way. There was a crisis with the exchange rate shock. But with the stabilization program, Turkey got out of the crisis in a year.
The floating exchange rate policy does not create sudden crises. But it chronicles the crisis and prolongs its life. Turkey first fell into the floating exchange rate trap. Then, he fell into the trap of negative real interest rate targeting for the financing of politics.
It is called heterodox politics… But heterodox policies are based on short-term shock measures. For example, it is necessary to keep public prices constant for the short term. But our government has increased the price of electricity and natural gas two to three times the inflation rate. Sector representatives announced that a 50 percent increase in electricity and natural gas prices used in industry will increase costs in clothing by 20 percent and in automotive by 15 percent.
Again, in heterodox policies, exchange rates are also temporarily frozen. The floating exchange rate system is contrary to heterodox policies.
Such biases and mistakes deepened the TL crisis and brought inflation in Turkey to an inextricable end.
* At the end of 2002, the dollar was 1,600 lira. The average for August 2022 was 18.20 liras. The rate of increase is 1127 percent.
*While the annual consumer prices were 29.7 percent in 2002, it became 80.21 percent in August 2022.
*The 2002 annual wholesale prices index (WPI-Similar to D-PPI) was 30.8 percent that day, while it was 143.75 in August.
Those who lose more than inflation;
While the CPI was 80.21 in August, the 12-month average CPI rate was 54.69 percent. Workplace rent increases are legally increased by 12 months CPI. In this case, the owners of the workplace lost, the tenants of the workplaces won.
Tenants won, as residential rent increases were limited to 25 percent. The hosts lost.
Food prices rose 90.25 percent, more than the annual CPI. TURKSTAT took the share of food as the average of rich-poor in the CPI basket for August by 25.32 percent. In reality, the share of food in the spending basket of the working and poor people is 40 percent or more.
If we take the share of food to 40 percent, the CPI rate for August becomes 93.51. It is necessary to increase salaries and wages by 93.51 percent by preparing a living index.
In the current situation, workers and civil servants are losing. The poor are more affected by inflation.
Will the government’s end-year 65 percent CPI target be kept?
D-PPI is 143.75 percent and CPI is 80.21 percent higher. D-PPI shows cost increases. If higher cost growth stays with the firm, firms will go bankrupt. These increases will be reflected in the retail and therefore the CPI rate will increase.
The wrong and wrong policies have put us in the interest-exchange-inflation trap. Negative real interest causes an increase in the exchange rate, and as the exchange rate increases, inflation also increases. Because production is dependent on imported inputs.
The government does not have a stabilization program.
The two most risky indicators in the crisis are the deterioration of price stability and the exchange rate risk. If there is no stabilization program, the problem of trust will increase. There is a perception that the economy management is not aware of the problem or cannot solve it. Inflation rises.
This is what is happening in Turkey. The government has announced a 3-year medium-term program, but this program is only a wish of the government.
In 2001, inflation in Turkey was reduced with the program of transition to a strong economy. There is no similar program or search for a solution today. For this reason, the year-end target of 65 percent is not met, and moreover, the risk of hyperinflation is high.