Adventure ends in Turkey’s economy

The problems in Turkish economy, that were swept under the carpet as we were entering 2020 have now grown even bigger with the adventurous policies of 2020. There is no path left to sustain it. Thus, the problem of the lack of growth of companies and the issue of not being able to pay the debts will take Turkey closer to the doors of the IMF in 2021.

If somebody asked me to sum up the year 2020, I would say, in one sentence, “End of the adventure.”

In mid-2018, an adventure started with the “Alla Turca” presidential regime with cheers and bids that “we will be flying.” There was a claim which went, “We know this all; you will see how both the interest rate and the foreign exchange rate drop.”

Early 2019 was the scene of a new kind of “command economy.” With the motive of trying to win the upcoming local elections, this was conducted by public banks where the aim was both a credit expansion and eroding of the foreign currency reserves to keep the exchange rate at a certain level. After the loss of two major metropolises in the local elections, the Central Bank Governor was dismissed, which was the sign of the start of an “adventurous economic policy.” As a matter of fact, the newly appointed governor rapidly lowered interest rates while foreign currency reserves continued to be eroded.

At the end of the first quarter of 2020, the economy, while its issues were swept under the carpet, this time was caught in the pandemic crisis.
Even when the world's most liberal countries put checks in the pockets of their citizens from budget resources, this “adventurous economic policy” encouraged its citizens to take “consumer loans.”

As a matter of fact, according to the IMF data, those additional non-health expenditures from the budget compared to GDP were 11.2 percent in Australia, 11.6 percent in Canada, 10.3 percent in the U.S., 7.6 percent in Britain, 7.7 percent in Germany and only 0.5 percent in Turkey.
Turkey was the only country among developing countries to respond to the pandemic with a massive credit expansion through public banks.
This “adventurous economic policy” somehow invented peculiar regulations that forced banks into risky loans. The banking authority BDDK and the Central Bank introduced rules and regulations imposing banks to give credits. Banks, which would otherwise face quite high fines, quickly began reducing deposits by lowering interest rates to circumvent these rules. This in turn caused and accelerated negative real interest. On one hand, while the Central Bank funded banks below inflation rate and below the policy interest rate; on the other hand, credits, especially balance sheets of public banks, boosted. Imports rose rapidly. Households and companies rushed to buy foreign currency and gold. Turkey imported gold worth more than $20 billion. The forex rate skyrocketed.

When the dollar rate hit the roof at 8.50 Turkish Lira level, most probably the question “Why we cannot hold this forex rate?” must have been asked at the presidential palace in Beştepe. The answer was probably “We have exhausted the reserves; now, we are at a negative position.” Upon this response, both the governor of the Central Bank and the son-in-law/cabinet minister, in charge of the economy, were removed from their posts.

So much so that Ankara-based rumors said the President was unaware of this erosion of the foreign currency reserves. Sources close to the issue said “He had a grasp of the gravity of the situation just recently.”
At the end of March 2019, when I asked Murat Çetinkaya, the Central Bank's governor at the time, this reserve erosion, the hiding of data and covering them up by swaps, there was no response. Could it be possible that this situation, written and commented on repeatedly, which was also questioned by opposition parties in the parliament, was not heard in Beştepe? Were those dozens of counselors and senior advisors not able to inform him, or they did not know either?

The politically tragic side of all this is that while Turkey could have been able to solve its economic problems in the troubled period between 2018 and 2019, the son-in-law, who was fully trusted by the President of the Republic of Turkey to run the economy, brought the country closer to the IMF than it had ever been. Brought it closer because he both inflated the problem and also deepened it with bad management.

A wreckage is standing before us, created by this adventurous economic policy; a giant negative open position in the Central Bank reserves, a historic one; the treasury is borrowing foreign currency and gold, which creates a cost higher than even the most expensive TL borrowing; and the biggest budget deficit of the past 10 years. We are yet to see the exact size of ‘contingent liabilities’ that will create additional burdens on the budget. This is because it is clear that the burden of infrastructure projects indexed to foreign currency with revenue guarantees is already a complete “wreckage.”

Another aspect contributing to the wreckage is that the Turkish lira’s convertibility has been damaged more than ever before. There is an escape from TL globally.

As a result, after the minister and the Central Bank governor were removed, the incoming CB governor increased rates by 8.75 points, stopping the bleeding in the value of the national currency. Those wrong decisions were withdrawn one by one, together with the new finance minister.

If the price of this “adventurous economic policy” were to be paid by the removal of the responsible politicians or the loss of an election, then there would have been no harm to the citizens. However, as a huge financial wreck lands on the citizens, there will also be loss of income, unemployment and poverty. This is what we are experiencing currently. About 9 million people, under these pandemic conditions, are unemployed, on unpaid leave, have given up hope of finding a job and would start working right away if they found a job. Besides, a huge segment of the society, made up of the unemployed and those who work on minimum wage have to deal with a destructive inflation rate.
Turkey will probably be ending 2020 with a positive growth, borrowed from the growth in 2021. This will be marketed as a “success” by those who run the country in a global landscape of economic downsizing, especially in the group of other developed and developing countries. This, on the other hand, will be a huge wreck with a heavy cost on the society and the future of the society.

These problems that were swept under the carpet as we were entering 2020 have now grown even bigger with the adventurous policies of 2020. There is no path left to sustain it.

Thus, the problem of the lack of growth of companies and the issue of not being able to pay the debts will take Turkey closer to the doors of the IMF in 2021.

The year 2020 will go down in history as the end of the ‘adventure’ in Turkey’s economy.

September 10, 2021 Central Bank's Beştepe problem