President Recep Tayyip Erdoğan on 20 December announced a new financial alternative to alleviate concerns of deposit holders about the depreciation of lira
The statement was the start of Turkey’s rate protected lira-deposit programme. Following the president’s statements, the dollar/lira rate – which on that day had reached 18 lira-quickly slumped. The scheme announced seeks to prevent ordinary citizens from preferring non Turkish Lira savings, a step which will facilitate conversion of FX assets to TL. Experts say that the measure can only work as a short term solution and it will take a while for its full consequences to emerge.
A new economy model: prioritizing production focused exports
Experts note that President Erdoğan’s speaking of the “Chinese model” – referring to a large, cheap workforce – as a remedy for Turkey’s economic woes would bring adverse effects for the economy. Nureddin Nebati, Turkey’s recently appointed Finance Ministerwho replaced Lütfi Elvan, said however that Turkey’s economic model cannot be described as “the Chinese or South Korean” model, noting that the government’s model is unique to Turkey. “Turkey, as it prioritizes exports focused on production, will use all instruments effectively”. The new model seeks to end Turkey’s spiral of a growing current account deficit at times of high growth and a lower account deficit at times of slow growth, which is a circle caused by the dependency of the manufacturing industry on exports. “We are moving towards a real price, where the foaming on the FX rate is decreasing. The FX rate will balance out at a good spot.”
Will rate cuts continue in 2022?
In another statement about the new economy programme, Erdoğan said the government was moving fast towards its target of getting Turkey in the top 10 economies of the world and said: “Interest rates make the wealthy even wealthier, we will spoil this and bring our nation to its target.” With this statement, the president indicated that Turkey’s policy of low interest rates will continue in the new year. Meanwhile, the FED announced plans to increase the rate three times in 2022 and tight monetary policy will be implemented in most emerging nations.
How will the new scheme affect inflation?
Chronic inflation has been one of the persistent issues of the Turkish economy. Experts express concern that the new scheme, which will compensate the sharp soaring in the FX rate, will deplete public resources and increase inflation even further. What’s more, the Central Bank hasn’t revised its ambitious aim of 5 percent inflation at a time when permanent inflation is an increasingly pervasive risk globally.
TOBB: We are positive about and support the steps
During the unstoppable freefall of the lira earlier in December, different bodies representing the business world had issued statements, reiterating their demand for stability. President of the Union of Chambers and Commodity Exchanges of Turkey (TOBB) Rifat Hisarclıkıoğlu has stated that urgent action is needed for the markets to restore stability; and later also commented on the new economy package saying that, with the move. “The extraordinary and extreme increases at FX rates have been stopped. Stability has increased in financial markets. We are finding these steps which are restoring confidence in the Turkish Lira and which are increasing stability very positively and we support them.” The business world believes that the sudden drop in the FX rate, combined with measures can be beneficial and increase production thanks to this. The most critical question however remains whether the burden formed by the new steps on the budget will be covered through more borrowing, taxes or the Central Bank printing more money.
Will the new economy policy work?
According to the government, a policy of lower interest rates will increase Turkey’s production and exports and make Turkey attractive for forin investment. The impact of the new steps on foreign investors is however, primarily still decided by confidence. A monetary policy which has undermined confidence and fluctuations in the markets is causing investors to act with caution.
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