Since September 2021, when Turkey embarked on an economic experiment dubbed the "Turkey Economy Model" by the government following a decision to lower interest rates, the country has had to confront several long-standing economic assumptions. One of these assumptions was that low interest rates would reduce production costs and, coupled with increased investments, would lead to faster economic growth and improved prosperity. However, this experiment resulted in several adverse outcomes, including a rapid increase in the exchange rate, soaring inflation, a sharp rise in asset prices, market distortions, and an unpredictable investment environment due to deteriorating market conditions. The current state of affairs has led to the creation of a high-interest environment to slow down the economy and restrict credit.Despite the claims of the Turkey Economy Model, no significant acceleration in exports was achieved. The rapid increase in imports exposed the flawed premise that a devalued Turkish lira would lead to high export performance. Today, discussions around the exchange rate continue, but the debate has shifted from concerns about the devaluation of the lira to concerns about it being overly valued.The shift in debate from an excessively undervalued Turkish lira to an excessively overvalued one was sown by efforts to control the exchange rate and maintain it at a certain level before the presidential elections. Following the elections, the exchange rate was allowed to rise slightly, stabilizing around 32 TL for an extended period. The Central Bank openly stated that the exchange rate would not increase significantly for some time due to concerns that a rise in the exchange rate could trigger inflation. However, inflation increased much more than the exchange rate during this period, sparking debates about Turkish lira-denominated goods and services being overly expensive. Exporters and those in the tourism sector, whose revenues are tied to foreign currencies, argued that this situation was unsustainable and frequently engaged in lobbying efforts.Expectations have now shifted in the opposite direction, with concerns that Turkey might be driven towards rapidly increasing imports and declining exports due to an overvalued lira, ultimately leading to a high current account deficit. However, this scenario has not materialized so far.Turkey Recorded a Current Account Surplus in JuneIn June, under economic conditions where the exchange rate remained stable despite high inflation, Turkey's current account showed a surplus for the first time in a long period. According to the Central Bank of Turkey's data, the country registered a current account surplus of $407 million in June. Excluding gold and energy, the current account surplus was $4.55 billion. This trend suggests that there may not be a significant increase in imports in the near future. One possible conclusion from this is that the exchange rate level is not the primary determinant in foreign trade and the current account balance. While the appreciation of the Turkish lira does have a tendency to increase imports to some extent, if the exchange rate is left to the free market, this effect would be balanced by an increasing exchange rate due to a gradually decreasing supply of foreign currency. However, when the exchange rate is not left to the free market, and inflation remains high, it is normal for imports to increase to a certain extent. The main reason why the appreciation of the lira has not led to an increase in imports so far is the slowdown in domestic economic activities.The gradual interest rate hikes by the Central Bank are beginning to show their effects, albeit slowly. As interest rates rise, economic activity is contracting, which negatively impacts Turkey's imports. Despite the exchange rate's tendency to increase imports, the contraction in the domestic market has a more dominant effect on reducing imports. In Turkey, imports rise as economic activities accelerate and fall as they slow down. Therefore, even if the Turkish lira appreciates, this effect does not manifest clearly in imports due to the contraction in the domestic market. Consequently, under current conditions, the exchange rate level is not the main factor in determining imports. If economic activity revives and the exchange rate is kept stable, demand for imports will increase.Under these circumstances, the Central Bank and the government should focus on reducing inflation as quickly as possible and ending their periodic market interventions. The longer these interventions continue, the more anomalies emerge in other economic indicators, and these anomalies deepen over time. The Central Bank's management is aware of the risks it is taking and does not view this situation as ideal. In contrast, the government previously saw its market interventions as an ideal approach rather than a risk, which led to the current economic situation. Going forward, much depends on how closely the government aligns with the Central Bank's perspective. Beyond verbal support, practical assistance is necessary. However, even if they take these steps, achieving success will not be easy.* Dr. Caner Gerek<hr fr-original-style="" style="height: 0px; overflow: visible; border-bottom: none; clear: both; user-select: none; break-after: page; box-sizing: border-box;"> [1]&nbsp;Şerafettin Can Atalay (2) [GK], B. No: 2023/53898, 25/10/2023, karara şuradan erişilebilir:&nbsp;https://kararlarbilgibankasi.anayasa.gov.tr/BB/2023/53898&nbsp;2&nbsp;Şerafettin Can Atalay (3) [GK], B. No: 2023/99744, 21/12/2023, karara şuradan erişilebilir:&nbsp;https://kararlarbilgibankasi.anayasa.gov.tr/BB/2023/99744&nbsp;3&nbsp;AYM, E.2024/45, K.2024/61, 22/02/2024, karara şuradan erişilebilir:&nbsp;https://normkararlarbilgibankasi.anayasa.gov.tr/ND/2024/614&nbsp;https://x.com/aselimkoroglu/status/1824427577206870500&nbsp;

The Freedom Observer

Under these circumstances, the Central Bank and the government should focus on reducing inflation as quickly as possible and ending their periodic market interventions. The longer these interventions continue, the more anomalies emerge in other economic indicators, and these anomalies deepen over time.

Turkey Economy Model ile ilgili hikayeler