Expectations as we enter 2024

Will inflation fall? Should we sell our dollars?

One of the expected duties of economists is to make forecasts for the future. After reading the economic climate of the country and the world and making future projections, companies prepare their budgets and investment programs based on these forecasts. These forecasts are not fortune-telling. When making these projections, we conduct an assessment by looking at the country's macroeconomic data—such as budget, foreign trade, past inflation, unemployment, and growth—as well as its financial markets and developments in the outside world. Except for the last two years, I have never been wrong in my exchange rate, inflation, and growth forecasts at the start of every year for nearly 40 years. For the last two years, I have known the inflation, but I have been wrong in my exchange rate forecast.

For an accurate forecast, a country must be predictable. However, over the last two years, Turkey's one-man rule has reached such a state, and there has been such an “epistemological rupture” away from rational policies in the economy, that all balances in the economy have been turned upside down.

Arbitrarily taken irrational decisions, legal regulations that are made to comply with the law but do not fit the spirit of the law, relations with international markets that resemble capitulations on one side, and incomprehensible transactions that have caused Turkey to be placed on the Grey List on the other… Each of these is a source of uncertainty in itself. On top of all this, unbelievable things were done in the money markets. Under these conditions, it is a bit difficult to make sound predictions. Therefore, I will not make a dollar forecast for this year; instead, I will settle for an inflation forecast.

Let us briefly summarize the great absurdity in the foreign exchange and money markets over the last two years so that we can estimate what might happen tomorrow. The measurement function of the Turkish Lira had been lost years ago. However, such monetary policies were implemented in Turkey that the measurement function of the world's reserve currency, the dollar, was also lost. There were such interventions in foreign exchange that while the fair dollar level should have been 40-43 lira looking at the last year, or 55-60 lira looking at the last two years, it remained at the 29-30 level. A vast majority are not aware, but we have all paid the serious costs of the dollar being at the 30 lira level when it should have been at the 40 or 60 lira level. What happened, and what costs did we pay? First of all, we feared that a rise in the dollar would cause inflation. We intervened in the dollar. Over the last two years, in addition to the 128 billion dollars sold previously, the Central Bank sold approximately 140 billion dollars more for the first year and about 100 billion dollars for the second year through the back door. (Estimates by colleagues who monitor Central Bank accounts)

Again, to prevent the dollar from rising, we invented the world's most absurd financial instrument, the KKM (FX-protected deposit scheme). We loaded the interest payment, which should have been between the depositor and the bank, onto the backs of the Treasury and the Central Bank, and therefore the public. It is calculated that the burden placed on the Treasury and the Central Bank for KKM over the last two years is at the level of 1 trillion 600 billion lira. And we still have not been able to get rid of the KKM trouble. The inflation caused by this massive black hole is far, far above any potential exchange rate increase.

And again, because the exchange rate remained below the level it should have been, our exports did not increase sufficiently; in contrast, our imports and foreign trade deficit grew. While we were running an average foreign trade deficit of 4-5 billion dollars every month until two years ago, we are now running a foreign trade deficit of approximately 9-10 billion dollars every month. Our current account deficit and external debt are ballooning.

By applying negative real interest rates at levels around one-quarter of inflation, we loaded the financing costs of everyone using credit onto the backs of the public and ruined income distribution. However, due to lawlessness and one-man arbitrariness, despite such low negative real interest rates, the business world did not invest, could not increase production, and could not achieve a technological breakthrough.

By paying these costs, we prevented the exchange rate from rising, but we could not prevent inflation from being 62 percent according to TUIK and 129 percent according to ENAG. Even according to TUIK, we are one of the 5 countries with the highest inflation in the world.

There is currently a perception management campaign. They say Mehmet Şimşek and Hafize Gaye Erkan are implementing such successful and rational policies that inflation will fall, the dollar will fall, and you should sell the dollars you have… As in every field, a perception operation is being carried out here as well. I do not know what else they will do to lower the dollar. They are selling whatever they can get their hands on. In addition to selling factories and land, they have started to sell the country's geopolitics. Even though it is known that the US protects and supports the PKK, they approved Sweden's NATO membership, saying, "Heaven forbid the flow of foreign currency to Turkey is disrupted." We seem willing to pay any price to keep the dollar low. But the question of "until when?" is always on the agenda… One thing is known: Artificial pressures in money markets do not last very long. When they burst, they burst badly.

They claim they will lower inflation with interest rate hikes. The Central Bank raised the policy rate, which was 8.5 percent, to 42.5 percent after the elections. They claim that with these rates, a large amount of foreign currency will enter Turkey, consumption will fall with these interest rates, and consequently, inflation will fall.

In an unexpected place, in September 2021, all balances of the economy were turned upside down and deteriorated by playing with interest rates. Now they think it is possible to restore the balances and bring inflation under control by again playing only with interest rates, but they are wrong.

It is said that there is a demand-pull effect in the inflation we have experienced over the last two years, but it was not the demand of workers and retirees that caused this increase… The purchasing power of this segment and its share of the national income have both declined. Therefore, talking about a demand increase from a segment whose purchasing power is decreasing is absurd, and saying that this non-existent demand increase is causing inflation shows that you have misdiagnosed the problem.

Fighting inflation cannot be done with monetary policy alone. Supportive fiscal policies and structural reforms are necessary. When we look at the 2024 budget, let alone fighting inflation, we see signals that inflation will be fueled even further. Let us take a brief look at the 2024 budget.

The budget deficit, which was 659 billion lira in 2023, is projected to be 2 trillion 652 billion lira in 2024. That is a 4-fold increase. Domestic and foreign borrowing will be made for the 2 trillion 652 billion lira deficit. However, borrowing to roll over debts remaining from previous years will reach 3 trillion 600 billion lira.

1 trillion 250 billion lira will be paid in interest. For every 100 lira of tax collected, 16 lira will go to interest.

For Public-Private Partnership investments, which were supposedly going to cost the nation nothing, a total of 162.4 billion lira will be paid, including 73.8 billion lira for bridges and highways, 83.7 billion lira for city hospitals, and 4.9 billion lira for the Eurasia Tunnel.

They have increased the item for strengthening local governments by 125 percent. They will transfer 901 billion lira to AKP-run municipalities before the elections. There is a 143 percent increase in off-program expenditures. 1 trillion 42 billion lira will be spent off-program.

Ultimately, despite a budget that has increased by 147 percent and a budget deficit that will increase 4-fold, people are expected to believe that the TUIK inflation, which is claimed to be 62 percent, will fall to 36 percent! Meanwhile, the state will seize the Bentley, Audi, Mercedes, and Ferrari automobiles of social media influencers. Instead of selling them and transferring the proceeds to the Treasury, they will give them to traffic police for use. And the public will think that the government is saving money in the fight against inflation and will sell the dollars they hold.

CONCLUSION AND INFLATION FORECAST: Inflation does not fall with monetary policy alone. Demand growth is not curbed by strangling workers and retirees whose real purchasing power has already fallen. In a period when the budget deficit increases 4-fold, let alone lowering inflation, even keeping it at the same level is a miracle. How much inflation TUIK will announce is equivalent to guessing the next number on a roulette table. Therefore, my forecast, not according to TUIK but according to ENAG data and my own inflation measurements, is at the 140 percent level based on this budget structure. If "emergency brake"-like measures are taken after the local elections, the lowest level inflation could reach, despite a possible recession, is 90 percent. In a country with this much volatility and unpredictability, I reserve the right to revise my annual inflation forecast in April and May. I have been saying for years that the growth experienced in the economy is not growth that ensures the country's development and prosperity. I have been defining the growth I used to call "hormonal" as "toxic growth" for the last four years. However, I am leaving my forecast regarding growth, even if it is toxic, until May. I am not making a forecast as to when the exchange rate will find its fair value until the local elections.