aposto-logoÇarşamba, 31 Mayıs 2023
Çarşamba, Mayıs 31, 2023
Aposto Üyelik

Central Bank’s Inflation Presentation and Ignoring the Reality

Şahap Kavcıoğlu, President of the Central Bank of the Republic of Turkey (CBRT), announced the inflation report, which includes medium-term inflation forecasts, on January 26th. Kavcıoğlu stated that “the midpoints of our inflation forecast range are 22.3 percent at the end of 2023, in line with our forecasts announced in the previous Report, it corresponds to the level of 8.8 percent at the end of 2024,”. Emphasizing the decreasing energy and commodity prices in his speech, Kavcıoğlu said that the energy costs, which have an important place in the balance of payments, increased by around 43 billion dollars in 2022 compared to 2021, but he predicts that energy prices will decrease in 2023. The most interesting aspect of Kavcıoğlu's presentation was his statement on the claim that Turkey would have a current account surplus in 2023.

It is known by all economic circles that Turkey has developed a monetary policy to increase exports under the name of the "Liraization Strategy" for a long time. In his presentation, Kavcıoğlu strongly emphasized the example of energy prices to explain how successful this strategy was. We observe that the Central Bank has left the price stability issue, which has been its main task for a long time and has developed policies that will form the basis of the government's populist policies. However, claiming that the economy will have a current account surplus by saying that energy costs will decrease shows that the institution is moving away from rationality at an unprecedented pace.

There are several problematic aspects to this discourse. First of all, the "Liraization" move has already been hampered by the artificial suppression of the US dollar. Due to the dollar, which has not appreciated at the rate of inflation in Turkey and has been kept constant for the last few months, Turkey has now lost its currency advantage in exports. Turkey's leading exporting sectors are knocking on Erdogan and his team almost every day to lower the value of the Turkish lira. Due to this situation, Turkey is faced with a growing current account deficit. Imports are increasing more than exports, and the current account deficit is growing day by day.

This undermines the “Liraization” strategy. The reversal of this reality was the basis of the Liraization strategy. In other words, the Turkish lira would become so depreciated, and Turkish goods would become so cheap that Turkish manufacturers would be able to sell more goods and services abroad. But even when the Turkish lira was extremely depreciated, the current account deficit continued to increase. Now, due to the increase in inflation, the prices of Turkish goods have increased. In this situation, it is quite irrational to hope that the price advantage arising only from energy imports will be beneficial when the dollar-TL exchange rate is in its current situation.

In addition, Kavcıoğlu gave another interesting information about energy: Domestic natural gas will come into operation in March, and thus the country’s energy imports will decrease even more. It goes to say without a doubt that this is a highly optimistic estimate. It is not yet clear how domestic natural gas will be distributed. Although it is said that the Filyos Port built on the Black Sea coast will be used for this end, it is not yet known whether its infrastructure is suitable for gas distribution.

The problematic aspects in the presentation are, indeed, not limited to the energy issue. The fact that food inflation forecasts were not revised upwards as a result of the drought deserves further discussion. However, Kavcıoğlu made a very different prediction and mentioned that the rains would start after February.[1]  I think we all have the right to find out which meteorologist got their opinion while making this forecast. On the other hand, there was a lot of talk about the fall in commodity prices. However, there was no mention of China leaving its "zero case" policy and setting its growth target of 5.5 percent for 2023. Even this situation will cause an increase in commodity prices.

Emphasizing that the framework of monetary policy is a cheap access to finance is a clear indication that the Central Bank is quite confused about its own main policy target. In addition, no mention was made of what measures the Central Bank would take against election economy activities such as tax amnesties, high-rate hikes, credit taps, and early retirement plans. It was even said that the election economy would not have much effect on inflation. In summary, the Central Bank has completely put price stability, which is its main task, into a corner and has undertaken the task of supporting the populist policies of the government. The CBRT stands before us as the biggest example of the institutional collapse and democratic decline in the country.

[1] https://www.youtube.com/watch?v=Ck1zP1gU96k

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We monitor the ongoings of Turkiye in the fields of the rule of law, economics, civil society, and politics.