Turkey ponders capital controls amid currency crisis and record inflation | Business | Economic and financial news from a German perspective | DW
Turkey, which has suffered from a currency crisis in recent months, is moving closer to tougher capital controls. The latest move in a string of recent unorthodox attempts to support the weakening lira without raising interest rates has come from the country’s banking regulator, BRSA.
The Turkish authority announced on June 24 a new directive prohibiting commercial loans in pounds to certain companies. According to the directive, a company whose foreign currency liquidity exceeds 15 million Turkish liras ($895,000; €856,600) and exceeds 10% of total assets or annual sales, will not be able to obtain a new local currency loan. . The move means Turkish companies could be forced to start selling off their foreign currency holdings.
Erdogan’s thesis on interest rates
With Turkish President Recep Tayyip Erdogan’s attitude towards interest being quite clear, the Central Bank of Turkey (CBRT) and BRSA continue to regulate in a way that upsets the system.
Recently, the central bank of Turkey has been a controversial place
Claiming that high interest rates lead to higher inflation even though most economists say otherwise, Erdogan frequently reiterates his calls for interest rate cuts. After a Cabinet meeting in Ankara earlier this month, he said: “This government will not raise interest rates, no one should expect that from us. On the contrary, they will continue to lower interest rates. “.
Turkey has been grappling with a weak pound and high inflation for months as Erdogan refused to allow interest rate hikes despite soaring inflation.
A less valuable lira increases pressures on domestic prices, and when global pressures on input prices, especially energy, combine with currency-based pricing, inflation rates continue to rise by way disconnected from other similar countries.
The country is experiencing its highest inflation in 24 years
Inflation peak of the last 24 years
According to official data, the annual inflation rate in Turkey was 21.3% in November 2021. It then rose to 36% in December, 61% in March and finally 73.5% in May, reaching its highest level in 24 years.
The dollar exchange rate is also headed up. The rate, which started at 7.43 lira to the dollar last year, reached 8 lira in March 2021. After remaining at this level for a time, it exceeded 9 in October, around 11 last November and broke the all-time record by surpassing 18. on December 20, 2021.
However, the central bank has avoided raising interest rates, which is one of the tools it has to stop rising exchange rates and inflation. While a total of 500 basis points of interest rate cuts were made in the last four months of last year, the policy rate was held constant at 14% in the first six months of this year.
While the ultra-loose monetary policy stance is maintained, the central bank and economic institutions are using marginal measures to support the lira.
Businesses will be negatively impacted
At the beginning of the year, the central bank announced that exporters would now be required to convert 25% of their income from US dollars, euros or pounds sterling into Turkish liras.
In April, the government announced that exporters would be forced to convert 40% of their foreign currencies into liras.
The latest BRSA directive also aims to encourage businesses to swap foreign currencies, but experts criticize the step as it will increase credit costs and lead to tighter terms.
Economist Arda Tunca
As a result, businesses will not sell or ask for foreign currency for loans. Another possibility is that they will reduce their tendency to resort to loans, which could set the stage for an economic slowdown.
Economist Arda Tunca believes that many companies would be negatively affected by this decision. “Due to Turkey’s production structure, producers have to import to produce and export. It is a necessity for them. Companies have to buy foreign currency to produce. Even if they exchange the currency they have, after some time they have to buy foreign currency to import,” he told DW.
Large deficit and low reserves
Official data showed that Turkey recorded a record monthly trade deficit in May. Turkey’s exports increased to 18.98 billion dollars (18.25 billion euros) in May 2022 compared to the same period of the previous year, while imports increased to 29.59 billions of dollars over the same period. Thus, the foreign trade deficit increased by 155.2% between May 2021 and May 2022.
As the trade deficit widens, Turkey’s central bank reserves continue to shrink. Consequently, the country’s foreign exchange needs increase.
Continuing his push for rate cuts, Erdogan has fired three central bank governors by decree since July 2019. Economy ministers like Ali Babacan and Mehmet Simsek, who made relatively independent decisions, stepped aside to Berat Albayrak then for other ministers who swore allegiance to the president.
Due to doubts about the independence of regulatory institutions in Turkey, foreign direct investment is also down, with the exception of real estate. Foreign direct investment in Turkey was $17 billion in 2015. In 2016, out of $12.3 billion in direct investment, $3.9 billion was real estate purchases. Last year, $14.1 billion in foreign investment was recorded, including $5.7 billion in real estate investment
A new financial center is being established in Istanbul
Not enough to reinforce reading
Atılım Murat, a faculty member at TOBB ETÜ University of Economics & Technology, says the latest BRSA decision is a direct response to declining foreign direct investment and currency issues.
“In short, he takes such a step because there is no inflow of foreign currency and he thinks that the real estate sector has a large amount of foreign currency in its hands. If you want to get a loan, you have to exchange the foreign currency you have,” he wrote to DW.
Murat says he expects the pound to lose strength against the dollar in the near term. “At this point, the dollar is more likely to strengthen.”
Arda Tunca, on the other hand, points out that this step does not solve the root of the problem as it has done in the past. On the contrary, it will not be enough to strengthen lira.