Turkey’s experimental macroeconomic policies, often referred to as the “Turkish style,” have been under the global spotlight due to their unconventional nature and significant impacts. Let’s delve into the key elements of these policies and their consequences over the past year.
1. Negative Real Interest Rates: Speculation and Excessive Credit Growth
One of the most striking aspects of Turkey’s macroeconomic policy has been the maintenance of negative real interest rates. This policy aimed to stimulate economic activity by making borrowing cheaper. However, it led to several unintended consequences:
-
- Speculation: Low borrowing costs encouraged speculative investments, particularly in foreign currencies and real estate, rather than productive economic activities.
-
- Excessive Credit Growth: The availability of cheap credit fueled an unsustainable boom in lending, leading to a buildup of private sector debt and potential financial instability.
2. Erosion of Central Bank Credibility
The Central Bank of Turkey (CBRT) faced significant criticism for its inability to effectively manage inflation and maintain confidence in its monetary policy tools. Key issues included:
-
- Ineffective Monetary Tools: Repeated interest rate cuts and unorthodox measures failed to curb rising inflation, leading to a loss of confidence among investors and the public.
-
- Delayed Inflation Response: The CBRT’s reluctance to respond aggressively to mounting inflationary pressures further exacerbated the problem, resulting in a credibility crisis.
3. Currency-Protected Deposits: Public Cost and Uncontrolled TL Increase
In an attempt to stabilize the Turkish Lira, the government introduced Currency-Protected Deposits (Kur Korumalı Mevduat, KKM), which provided a safety net for individuals and firms against currency depreciation. This policy, however, had several drawbacks:
-
- Public Financial Burden: The cost of these guarantees was borne by the public sector, leading to increased fiscal strain.
-
- Uncontrolled TL Supply: Each depreciation of the Lira resulted in the Central Bank injecting more TL into the financial system, further amplifying liquidity and fueling inflation.
- Uncontrolled TL Supply: Each depreciation of the Lira resulted in the Central Bank injecting more TL into the financial system, further amplifying liquidity and fueling inflation.
4. Exchange Rate Control: Reserve Loss and Borrowing Problems
The Turkish government’s efforts to control the exchange rate amidst uncontrolled TL supply created additional challenges:
-
- Reserve Depletion: Attempts to defend the Lira led to significant losses in foreign currency reserves, weakening the country’s financial stability.
-
- Borrowing Crisis: The depletion of reserves and increased reliance on foreign borrowing raised the cost of external debt and heightened the risk of a debt crisis.
Conclusion
The past 12 months of Turkey’s experimental macroeconomic policy have highlighted the complexities and risks of unorthodox approaches. While the intent was to stimulate growth and stabilize the economy, the outcomes have included increased speculation, financial instability, and a loss of confidence in monetary policy. As Turkey navigates these challenges, the lessons learned will be crucial for shaping future economic strategies.