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UĞUR GÜRSES >The Turkish Lira exchange rate says it all

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The foreign exchange rate is not just an economic parameter, it has been a central data issue for Turkey for at least a quarter of a century. Foreign exchange rates in Turkey say a lot about the country. The poor and the rich, the villager and the urban dweller, the young and the old are all somehow aware of Turkey’s most fundamental problem. 


In 1994 and in 2001, the last stop of major problems that got us into trouble and resulted in crises was the sharp foreign exchange rate hike. In 1994 and in 2001, the issue had political bases.  

It has been 27 years since the liberation of the foreign exchange regime was introduced, with the aim of making the Turkish Lira convertible and opening the way to capital inflows. 

Turkey was to play in global capitalism’s playground, abiding by the playground’s rules. These rules included features such as the rule of law, democratic values, accountability, a functioning free press and freedom of expression. 

Whenever Turkey has moved away from these rules of the game, it has been reflected in the economic field. Foreign exchange movements are a sign of this. The economic maturity Turkey has reached over 27 years and its relations with the mechanisms of global capitalism, (in terms of capital and debt levels), cannot handle any distancing from these values. Any distancing from the separation of powers, pluralism, the rule of law and democratic rights is reflected in the economy through capital movements. The sign of this is the unstoppable rise in the foreign exchange rate.  

Since the New Year - in other words in seven or eight work days - the increase in foreign exchange rates has approached 8 percent. Before this, there was an increase of around 20 percent in the previous three months. No one should look for a “secret power” or “sabotage operation” behind this. In a country open to the international world, where capital movements are free and where foreign currency worth at least $200 billion is needed in the coming year, a constitutional amendment attempt that is neither pluralistic nor reconciliatory will inevitably push the exchange rate upward. 

This is especially the case when the Central Bank - which has always undertaken a fire-extinguisher role and tried to dress the wounds of political crises – has remained silent despite the forex hike exceeding 25 percent. It should thus not be surprising that the exchange rate hikes are only accelerating. 

Those who argue that the Central Bank should not increase interest rates but in fact decrease them have obviously forgotten to look at the interest rates of the bonds issued by the Treasury itself. The shortest two-year bonds are currently at 11 percent, while the longest 10-year bonds are at 11.5 percent. 

Under normal conditions, in a country where the foreign exchange rate hike is almost 30 percent in just three or four months and where expectations of inflation have deteriorated, the central bank of that country would be expected to calm markets, perhaps increasing interest rates by 3 to 3.5 points. The additional inflation that this foreign exchange rate hike would bring is around an annual 4 to 4.5 points. 

The fluctuations currently experienced in Turkey’s financial markets have completely gained their momentum from the political field. But the Central Bank cannot intervene in this with the limited tools it has. 

If it could provide financial stability, interest rates should be increased even during periods of recession. The “fire extinguisher duty” should fall on the Central Bank in any country with a foreign currency deficit and inflation issue, and which is experiencing political crises and turbulence.


What did Bank do on Jan 10? 

The Central Bank made a verbal intervention on Jan. 10. But the “measures” it announced are not of the type that would work. In particular, the lowering of the liquidity level to 22 billion Turkish Liras it issues from the interbank money market will not be effective. 

Even though this gives the image of a “liquidity reduction,” the loan amount of banks from that channel is already at the level of 22 billion liras. Even if the “valve” in this channel is turned down, the other valve in the overnight BİST (Borsa Istanbul) repo market will continue to give money. It would therefore not cause a liquidity crunch. It would not calm the foreign exchange rate.

January/12/2017

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