The markets should be reassured
After the surge in the exchange rate reached alarming levels, the Turkish Central Bank finally held an extraordinary meeting on May 23 and decided on an interest rate hike of 300 basis points.
As a result of this the exchange rates have plunged but it is not clear yet if there will be another wave of increase.
On the positive side, government spokespeople made reassuring statements, emphasizing that no steps opposing the principles of the market economy will be taken after the presidential and parliamentary elections on June 24. We will soon witness whether these remarks have been enough to calm the markets or not.
Several explanations about the upsurge in the exchange rates have been brought forward, including some claims of political reasons. Ruling Justice and Development Party (AKP) officials defend the opinion that the increase in the exchange rates is not normal because the growth rate is considerably high and the government has announced new incentive schemes. Thus, they assert that the recent depreciation of the Turkish Lira against the dollar is the result of a plot laid by foreign powers.
Some opposition figures also, without mentioning the economic reasons, say the issue is mainly political and the recovery will come after a government change.
These are both exaggerated comments that disregard the main economic reasons. Actually, several warnings have been made for a long time pointing that the expanding current account deficit and high inflation rate could disrupt businesses, and if deterioration in the fiscal discipline is added to this, the economy could get out of hands.
It was also voiced that interest rate hikes in developed economies with rising growth and inflation rates will speed up, leading to capital outflows from countries such as Turkey. And it was obvious that economies which have external deficit and are dependent on foreign capital for growth would be affected the most.
We have been raising the concern that not decreasing the dependence on foreign sources the high rate of growth would also increase the economy’s fragility, underlining that the priority should be given to protecting macroeconomic balance and stability.
Positive steps taken
There used to be confidence among the markets that despite the political discourse of the ruling party figures the right economic decisions would be taken at the end of the day, the Central Bank would take the necessary monetary policy measures, and the Finance Ministry would act firmly in terms of fiscal discipline. That is why no big fluctuations were observed before the previous elections.
In regard to the Central Bank’s interest rate increase, it has been a positive step taken by the AKP to realize that the markets should be reassured for the right fiscal and monetary decisions to be taken. Because the assumption in the markets that the necessary monetary measures would not be taken has to be wiped out. In this respect, the remarks of the opposition parties were also positive.
Thus, it should be known in the markets that Turkey will continue to be governed complying with the rules of the economy, either by one party or the other. All parties should declare their own economic policies and projects ahead of the elections, but they should firstly meet on the common grounds of the aforementioned principle.
The lira is the national currency and any political party who wins the election is responsible of protecting it. All the assets in the public and private sectors belong to this country and when their values decrease, the whole country gets poorer.
