“How can the economy take shape in 2023? It would be useful to try to answer this question by dividing 2023 into two: before and after the election. Judging by the statements made, the possibility of a reasonable return to the table of six is very strong. If the People’s Alliance wins the election, there are three options.
How can our economy be shaped in 2023? It’s a difficult question. Because we are in an extraordinary period in terms of economic conditions and we are very close to a very important election. It would be useful to try to answer this question by dividing 2023 into two: before and after the election.
First after the election. What may happen in the economy after the election “Will it be reasonable to return?” closely related to the question.
Let me summarize what I mean by reasonable.
Post-election option one: Returning to the makule
In the first group, there are policies aimed at macro stability: the Central Bank’s return to its core business – that is, its fight against inflation.
The removal of all constraints that have the potential to distort the balance sheet of the banking sector. Begin to reduce and gradually eliminate black holes in the budget (such as abandoning the currency-protected deposit system, reviewing income guarantees).
Gradual reduction of the public debt to its citizens in foreign currency. Implementing a budget that prioritizes the rights of the poor and the low-income. Unemployment insurance fund is not used for any other purpose.
In the second group of things that can be done after the election, priority structural reforms take place: Establishing an institutional structure that will provide confidence in the announced statistics. Rewriting the procurement law from scratch. Establishment of a central institution that will monitor the Turkish and world economy, design economic policy alternatives, and analyze the impact of the policies implemented. Making legislative changes that will restore the independence of the Central Bank. Taking similar steps for institutions such as the Banking Regulation and Supervision Agency and the Competition Authority. The most important thing is to establish an independent judicial system that works fairly and quickly.
Is it necessary to return to the macula?
The current economic situation is not sustainable. Although it will decrease for a few more months, when we come to June, that is, in post-election conditions, inflation will still be very high on a world scale. On the other hand, an interest rate that penalizes the saver far below inflation… This means the potential for the demand for foreign currency to surge at any moment.
It’s not enough; In 2022, the foreign trade deficit exceeded $100 billion, the current account deficit is expected to approach $45 billion, and our foreign debt due in 2023 has reached the limit of $190 billion. The election economy to be implemented in the first half of the year is likely to increase foreign trade and therefore the current account deficit.
Major central banks are in the process of raising policy rates. This process is expected to continue in the first half of the year. Particularly in periods when the risk premium is high and the major central banks are in the process of increasing interest rates, some of the borrowers who do not want to pay high costs may want to borrow less than due. Likewise, they may not be able to borrow money even if they wanted to.
Second option after selection
When you put them all together, the existence of upward pressure on the exchange rate becomes clear. When the interest weapon cannot be used, in order to reduce the demand for foreign currency, under the title of ‘macro precautionary measures’, pressures are imposed on the banks, which are essentially destructive to their balance sheets.
The current situation cannot be sustained, but it is useful not to conclude that there is no other way but to return to reasonableness from this result. Undoubtedly, there are other options. The second option is to turn the current unsustainable policy into a sustainable one by preserving its main axis.
What is the main axis of the current economic policy? In essence, it is a world where capital movements are extremely restricted (borrowing from abroad and lending abroad becomes very difficult, and for some segments it is impossible), and an economic policy suitable for this world. You can take the milestone back to the 2018-19 crisis. The trauma of a conflicting foreign policy with the US and the threatening tweets of the US President causing a crisis in Turkey. Huge job losses and a shrinking economy.
How could this happen?
How could it be? It was possible because Turkey was a country dependent on foreign debt. It was necessary to get out of this situation. When there was no sound plan on how to get rid of it, something started to be done in vain. Basically, steps were taken to gradually reduce foreign presence in domestic financial markets.
U-turns aside, the second stage came with the steps taken by the Central Bank to supposedly reduce the current account deficit. When the policy rate fell sharply, the exchange rate jumped and Turkey came to the brink of crisis. You know what happened next. A whole lot of decisions one after the other: The following problem came up today, let’s solve it. When the new decision raises other problems, newer resolutions to solve them.
The important point is this: Capital movements have been increasingly restricted. Loan and deposit interest rates and which sectors can be opened to loans began to be determined centrally. It should be added that the Central Bank is playing a supporting role in the loan supply.
There are two more options
The world of the second option after the election is a completely different world and requires a very well thought out design. This is what coherent framework means. Is such an economic policy framework good? An important question. But answering this question is the next step. First of all, this framework needs to be created and discussed. Without such a framework, how do we decide whether it’s good or not?
Apart from the first two options, there are two more options. In fact, they should be considered as ‘half’ options. The first half option is to try to maintain the current unsustainable economic policy called the Turkish Economy Model. There is no need to dwell on it; this policy is not sustainable. I discuss (once again) why it is not sustainable in the ‘pre-election’ section below.
The second half post-election option is a policy framework that lacks the structural part of the first option, defined above as ‘reasonable return’, especially the independent judiciary and the independent Central Bank.
Can the Table of Six turn “makule”?
Judging by the statements made, the possibility of a reasonable return to the table of six is very strong.
If the People’s Alliance wins the election, there are three options. It is unrealistic to hope that there will be a structural part of the ‘reasonable’ in post-election economic policy, given the practices that have been implemented almost since the transition to the new government system. Therefore, it may come to the fore to turn to the ‘second half’ option.
Another alternative if the People’s Alliance wins the election is to try to maintain the current economic policy despite its unsustainability. In other words, choosing the ‘first half’ option. Even if this path is taken, eventually a transition to another economic policy becomes inevitable.
Therefore, either at the end of this road or from the beginning, the current policy called the Turkish Economy Model must be placed within a consistent framework that will make it sustainable. This is the second option I mentioned above. However, there is no design for this option. It is very doubtful that there are cadres who think this.
What does “reasonable” mean?
The ‘reasonable return’, the first option, promises: normalization in fiscal, monetary and financial stability policies. Increasing importance of institutions and their involvement in policy design. It is a period in which the risk premium drops significantly, the exchange rate calms down without the need for artificial interventions, the interest rate decreases without artificial interventions, and the inflation decreases from around 40-45 percent to around 20 percent in a year. And then single digit inflation.
It is clear that such an environment will be growth and employment friendly. In addition, a significant recovery is expected both in public finance and in the banking sector. In short, in a period of about two years, it will be possible to create a ground where steps can be taken to easily take Turkey to the next league.
The whole article is here.