The most important institution based on trust is the Central Bank (CB). The reason is that they print the money of that country. The money is credible first by gaining the trust of the citizens of that country.
Our Central Bank has been losing its credibility for a long time. The year 2019 will be remembered as the year when its reputation fell to the floor.
Unprecedented things happened in the bank in 2019. The institution that prints the country’s national money has been filleted.
This institution which was given the power to print money has been engaged, not to print the national money and protect its reputation, but to protect the political survival of those governing.
First of all, the period income of the bank would normally be distributed after its general assembly held in mid-April. When the calendar year changed because of a law amendment, it was made possible for the treasury to take this income in advance.
Second, again with a legal amendment, the contingency reserve of the bank was turned over to the treasury. The contingency reserve accumulated until 2019 was 42 billion Turkish Liras. This amount was taken in July and August and released to finance government expenses.
Third, the president of the bank was dismissed. The reason for this was not based on any justification listed in the bank’s founding law. It was done through the President’s directive based on changes done through a decree-law (KHK). The real reason was apparent. He had angered the President. The newly appointed president of the bank was later found out that he had plagiarized line by line in his master thesis from other theses written before. No politician stepped forward at that time while in normal circumstances, this mistake would have been corrected immediately considering the reputation of the country’s money.
Fourth is, for the first time, a portion of the Turkish Lira operations were hidden from the public. The volume of swap transactions started not appearing in the publicly announced balance sheets. It is an understandable situation that a central bank sells foreign currency, makes interventions in the market and then would justify by saying that disclosing every detail would put them in a weak position. However, we have never seen a central bank that has hidden the source of the national currency it has released.
Fifth, the factor that caused the hide of the swap transactions was that the bank was selling its reserves to public banks covertly and then the latter would sell them to the market. The central bank of a country where free floating exchange regime is claimed to be followed, was deceiving economic entities. Even if we were following a “managed float regime” we would have known when the CB would sell foreign exchange and which band it maintained. This veiled vague exchange rate regime can only be named “disguised floating exchange rate regime with a back door to fixed exchange rate system.”
According to the calculation of economist Haluk Bürümcekçi over the bank’s foreign exchanges flows, roughly there is a 31 billion dollars’ worth of “foreign currency leak.” The meaning of this is that while the bank’s reserves would have increased that much, they are not seen in the reserves. What happened to this foreign currency? We know the answer. The roughly 30 billion dollars bought by residents since the beginning of the year, were sold “from the back door.”
Since July, the CB lowered interests 12 points. The exchange rate did not “bounce.” In the pro-government media comments and headlines such as “How come the exchange rate did not bounce when the interests were lowered? What happened?” appeared. As a matter of fact, the exchange rate did not jump because the approximately 30 billion dollars that would have been the public’s had melted; it had evaporated.
Sixth is this business carried with the small-town merchant mentality leaves a very bad stink for the CB staff. “Unrealized foreign exchange gain” accumulated at the valuation account has been transferred to profit and loss account through side tracks.
This topic was in the public debate at the end of October. An amendment was referred to in the bank’s law. However, even though the CB has been formed as an incorporated company, it is a privileged company with its power to print money. If profits from foreign exchange transactions occurred, it was through selling and buying of foreign currency. This was predominantly from discount transactions and through transactions done with the Treasury.
In the inflation report presentation dated Oct. 31, this was repeatedly asked to CB Governor Murat Uysal. His answer was “There is no study done in this field.” The topic that was asked numerously (as I have also asked) was basically what the bank management’s attitude in this area was. Playing stupid, his only answer was there was no study in that field. As a matter of fact, it was pretty clear a couple of weeks later that accounting geniuses in the bank have already begun these transactions cheek by jowl. It goes without saying that Uysal also knew about it.
The business done since mid-October is this: By doing certain buying and selling operations, the unrealized foreign exchange profit in the valuation account have been changed into realized profit and transferred into P&L account.
This was also disclosed by economist Haluk Bürümcekçi and written in the report he submitted to his customers.
My calculations as of the end of December show that a roughly 22 billion TL foreign exchange valuation have been transferred to profit and loss account through certain operations. Thus, the Central Bank’s 2019 profit will be 22 billion TL fatter. As of January 10, this profit will be transferred to the Treasury’s account together with other profit amounts accumulated up to that day. The Treasury will pump this to the market.
Consequently, in the January 2019 to January 2020 period, including the profit of the CB, reserves and the valuation account tampered with questionable methods, money over 100 billion liras will be released. I guess it would have been better than this if the CB had given advance (loan) to the Treasury.
The mission assigned to the Central Bank President by law is to provide “price stability.” In other words, maintain a low-level inflation.
However, year 2019 has been a complete fiasco. Managers of the bank who have their signatures on our money have been after changing of the bank’s foreign exchange valuation account to profit making in a very short time, providing money to the government, shaming generations of idealist employees of the Central Bank.
Politicians may have an inclination to regard the Central Bank as a “cow of the government to be milked.” But it is logic blowing that those who have undertaken CB jobs have rolled up their sleeves and personally worked for that.
Year 2019 has also been a year when residents bought 30 billion dollars. When we have such politicians and such CB executives who run in front of them, the money they sign is not very much demanded. Money of reputable countries is demanded. Incompetent monetary policy cannot protect the Turkish Lira, and it was the last straw to tell the banks that the CB will take higher commissions for the required reserves for foreign exchange.
Gresham’s law is in place, which says “bad money drives out good”.
The Central Bank of the Republic of Turkey (CBRT) continues to be a part of the economic policy conducted by the government. The ground of the economic crisis was laid with the fire of a political crisis. It moved to a new level with the pandemic. Now, there is no possibility left that the Central Bank helps bounce back or curbs the situation.
The effort of “trivializing the issues” demonstrates the stance of Turkey's economy administration of “intervening on the symptoms and not on the issues.” It is the effort to sooth the society, to narcotize them by saying, “If you do not know, have not heard of it, if you do not care, then you are happy.”
Our economy administration wasted billions of cash foreign currency of the Central Bank and public banks just to maintain a self-styled economy policy and to keep the foreign exchange rate at a certain level. It is a pity that now, this economy management, with its collapsed economy policy, is resorting to the monetary tightening of the Central Bank.
Unlike what those in Ankara who are managing the economy believe, 51 percent of the economy is not psychological perception, it is trust. Empires of fear do not generate trust.
Those who are ruling the country are spending so much energy on blaming vague foreign powers for all the wrong and bad management. If they could have channeled this energy to understanding the problems of the country, then we would have gone a long way and truly would have made these “foreign powers” envious of ourselves.
Turkish Treasury is “printing” forex bonds to create additional foreign currency for its own operations. Public banks, on the other hand, are spending their cash foreign currencies and replacing them with forex bonds the Treasury is printing.
For a long time, Ankara had eroded foreign currency reserves worth near 100 billion to hold the rate. Now, it has come to the end of the road. It has spent its last penny and left the rate to the markets. Thus, the “unheard of” invented exchange rate regime has collapsed.
Can the forex loss in Turkey be recovered without sending the bill to the public? If first signs of the establishment of political normalization, democratization and rule of law emerge in a powerful way in Turkey, then the “shrunken” foreign currencies will come back to the system.
If the ruling Justice and Development Party (AKP) sees an increase in erosion of their votes and the increased possibility of losing power in a possible election then it would "use all the ammunition till it is finished" for their own political continuity. But this would indeed mean leaving a “gigantic wreckage” for the citizens of the country.
The trend in that started just before the presidential elections in 2018 and accelerated after the elections changed the chemistry of the economy in Turkey. Private sector in Turkey was restricted in every aspect. From pricing to sourcing, to investment licenses, all regulatory higher bodies worked to make the entrepreneurs feel that ‘the party state’ was watching them at every step.
A currency, that is losing value and is not the good money to its own citizens, cannot be the good money of another country. Most probably those who declared they have switched to the Turkish Lira in Syria will be doing their payments in Turkish Liras and - even if it may be only a few pennies - they will keep dollars to store the value of their accumulation.
No matter how long or short the COVID-19 crisis lasts, a broad range of working masses, but especially the unskilled labor force will be the ones exceedingly affected. They will lose income and their jobs. As a result, inequality will spread on a mass scale and poverty will soar.
Ankara thinks it can obtain stability through the sale of foreign currency from the “back door,” which erodes reserves. Ankara has also resorted to bans and restrictions on foreign currency, but these are actually very old tools from the 70s.
The economy management in Ankara may have this thought of stopping the devaluation of the Turkish Lira by wounding the lira’s convertibility but actually it also damages the debt capacity of the Treasury.
What would we have included if we wanted to write a guideline for those who have the wish to intervene in foreign exchange rates but who do not have the adequate experience, but at the same time want to do it right? Taking into consideration today’s circumstances in Turkey, here is a list.
In those countries where it is presented as they have a “floating exchange rate regime,” if their central banks are intervening at the exchange rate, the name of this in economy literature is “fear of floating.”
Since the COVID-19 crisis erupted, Turkish Central Bank’s reserves fell nearly 20 billion dollars. Now, the thought of “Can there be a swap line opened from the U.S. Central Bank Fedreserve ?” is in question.
Turkey was caught with the coronavirus outbreak at a time when it was weak structurally. Just like in the COVID-19 epidemic, the underlying disease story is the story of those problems in economy which were “swept under the carpet” for a long time. Turkish government's economy policies after 2018 were based on bans, limitations and covering up of the symptoms rather than resorting to necessary steps to solve the problems.
Ali Babacan's unfulfilled desire, the “fiscal rule” theme features in the program of the newly established Democracy and Progress Party’s (DEVA) . Babacan had made preparations to start the practice of fiscal rule in 2010, until Prime Minister Erdoğan shelved this.
Even though its name is “floating exchange rate regime,” the current one in Turkey can only be called “commanded foreign exchange regime.” Some may object to that and suggest “managed floating rate regime.” If it was the latter, then the Central Bank would have openly done it. Everybody would have been informed of a rate regime which has targets, a framework and a system. But we do not know anything about this “dystopian regime.”
Talking about Turkey’s economy is like a stand-up show. Turkey’s Central Bank is as independent as the Fed, says the Finance Minister. This comparison can be uttered because of the mood created in Ankara where the government commands the economy. But even in regimes of command economic, there is interdict and logic.
In the last two years, the economic policy team governing in Ankara that has been intervening on prices, interest and exchange rates with an iron fist has cost banking executives their jobs for making their own trade decisions in an open market. Turkey is supposedly an open market economy, but Ankara has been nudging market players under the table to the point that the market is “open” only in theory.
Both the consumption and investment data in the third quarter show a tendency toward “exhausted growth” in the private sector. I wrote at the end of October that this is the picture of weak, anemic growth. The economy is out of energy. With the economy in this weak and feeble state, Ankara cannot carry the country politically to 2023.
The "orchestrated" issue on the agenda last week was an effort to form public opinion about punishing comments on economy by jail sentences and monetary fines. Stories in newspapers were followed by a speech by Economy Minister Berat Albayrak the next day, who wanted to lay "thought infrastructure" for this.
Russia's strategy is quite clever; it continues to accumulate reserves by using dollar and euro for its exports while using ruble for one third of imports. By receiving 7-8 percent of its net foreign trade in ruble, it creates demand for its currency at the same time.More so, Russia is trying to recruit Turkey as a customer for its Russian made SWIFT alternative SPFS and again homemade credit card system MIR.
The three-way wheel of the Turkish economy, which depended on the flow of foreign capital, domestic credit growth, and household consumption, has stopped. It seems like the politicians running the country in Ankara couldn't find the answer to "What awaits the Turkish economy in 2020?"—since they undertook a military operation in Syria to get back the votes they lost due to the economic crisis.