‘Just getting by’ is back on people’s agenda in Turkey
Forecasts predict that monthly inflation in June will come in between 1.3 and 1.4 percent. If those forecasts materialize, the annual inflation rate will rise to 14 percent from 12 percent.
The impact of the 20 percent depreciation in the Turkish Lira over the past three months will also be felt in July and August. If consumer prices rise by 1 percent in July, which is very likely to happen, the annual rate will come in at 15 percent.
We do not yet know how state-supported prices will move. What will the authorities decide about fuel prices that have not been increasing, even though this has hit Special Consumption Tax (SCT) revenues? Will the government opt for price hikes or be willing to accept more SCT revenue loses? We’ll see.
An inflation rate of 15 percent points to the fact that inflation could have been much higher if the government had not held back price increases that were “swept under the rug.” But it is not sustainable to keep postponing fuel price increases: The result will either be additional borrowing to finance the additional revenue shortfall (which exceeds 50 percent of the annual budget deficit) or a sharp price adjustment in fuel prices. It is impossible not to hike the prices of imported goods such as natural gas and fuel in the face of rising exchange rates. If you generate electricity by using natural gas you will only end up with a budget deficit if you do not increase the price of electricity.
According to the 2003-based inflation index, the highest annual rate was recorded in November 2017 at 12.98 percent. The 14 percent annual inflation rate was recorded in February 2004, according to the 1994-based CPI index.
The motto “don’t fear interest rates, fear acting late” has once again been proven right. We tried to avoid a 1 percent rate hike but ended up hiking interest rates by five points, but even this hike did not bring along any significant “relief.” The interest rate on commercial loans jumped to 23.56 percent in the week ending June 22, a level last seen in March 2005.
We are set to experience two unpleasant developments of the post-2009 era: A potential interest rate hike necessitated by the inflation rate hovering around 15 percent, which could hit even higher due to factors “swept under the rug.” The other unpleasant development is the prospect of stagnation. The elections are now over and it is once again time to refocus on the struggle to earn a living.
Describing this as “rebalancing” or presenting it as economic stagnation designed in the first place by using policy instruments is just wrong. It is also not right to tell the public that the inflation rate is “cost-push inflation,” because the real reasons behind this are the exchange rate shock that was actually caused by inaction and the belated decision and the resulting interest rate shock.
What’s more, more liquidity has been injected into the market. The authorities made large payments in the wake of the recent religious holiday instead of reducing expenditures in the face of high economic growth and the high current account deficit. The money supply, which is the amount of bank notes that the Central Bank pumps into the market, increased by 18.6 percent to 160 billion liras ($32.3 billion) during the religious holiday. Under normal circumstance, the money supply rises by 10 percent during the Eid al-Fitr holiday and by 15 percent during the Eid al-Adha holiday. The reasons for the large increase during the latest Eid al-fitr are obvious: Bonus payments to pensioners and bringing forward salary payments for civil servants. It is also likely that the government might have made some transfer payments. Indeed, the decline in the Treasury’s deposit account with the Central Bank stands at more than 40 billion liras.
To put it mildly, it is not a good idea to inject demand into an economy through making early and additional payments because of the election promises at a time when inflation is likely to hit 14-15 percent.
Given this picture, people are asking the question “who will be the new boss of the economy?” It must be little more than an example of black humor to mention the name of the respected economist Daron Acemoğlu as a potential candidate for the post. After all, Acemoğlu is an economist who believes “inclusive institutions” are necessary for long-term and sustainable growth. How can the government put him forward as a “savior” for an economy whose institutions are badly damaged and its rules undermined.
The era of cheap and abundant money is over. It is impossible to “keep going” by just doing what we did in the past. We are now anchoring in a territory of high inflation and economic stagnation because we ignored all the writing on the wall and failed to take the necessary precautions. It will be impossible to be rid of inflation and stagnation unless some kind of normalization returns.
*Note: The Turkish Statistical Institute (TÜİK) on July 3 announced that the consumer price index (CPI) increased by 2.61 percent in June. The year-on-year rise was 15.39 percent.