New IMF move to slash wages

Mehmet Şimşek had mentioned it before. Now, the IMF has announced it in its Turkey report: Do not index wages to past inflation. Determine them according to future inflation targets.

In plain Turkish, the Central Bank's inflation target for 2025 is 14 percent... A massive fantasy. Let's take a brief look at the fight against inflation.

First, let's state this upfront: The inflation figure to be announced in two days will drop significantly due to the base effect, as the high inflation rates of 9 percent from July and August of last year are being removed from the calculation. Most likely, both Mehmet Şimşek and the Central Bank will boast, "Look, the program is working. We have lowered inflation." I wrote that this would happen months ago, on February 25, 2024, right here on 12 Punto under the title "The Cunning Fox and Inflation." Those curious about the details of the base effect can find and read that article.

With the base effect, the 62 percent inflation reported by TÜİK could drop to between 50-55 percent, and the 101 percent inflation reported by ENAG could fall to the 85-90 percent level. But inflation will continue to rise on a monthly basis and will close the year again at the 80-90 percent level. Of course, I cannot speak for TÜİK. They announce inflation based on top-down decisions.

Even though Mehmet Şimşek and the Central Bank say, "our program is working, things are going as expected," the misdiagnosis in the fight against inflation and the resulting flawed and incomplete policies are not yielding results. And they won't... They will only lead Turkey into stagflation (inflation during stagnation) and subsequently into slumpflation (both contraction and inflation) in the name of fighting inflation.

Let's first address the misdiagnosis and incomplete policy. There are multiple shortcomings. Let's not go into the details of structural reforms, law, or competitive market conditions; let's just remind ourselves. Fiscal policy is needed alongside monetary policy. Fiscal policy has two legs. One leg is collecting taxes from those who do not pay... The other leg is for the state to pay attention to its budget deficit...

Turkey is governed by a one-man regime. Therefore, there is no political will, intention, or determination from the President to collect taxes from capital. Even the 750 billion lira package prepared by Mehmet Şimşek, which would have been useless anyway, was gutted. It turned into a 100-150 billion lira package. Yet, tax evasion and losses, combined with the advantages provided to religious sects, exceed 10 trillion lira... There is no work being done on this.

The second leg of fiscal policy is cutting expenditures... The central government and governors are ignoring the austerity circular prepared by Mehmet Şimşek. The austerity package is designed to put pressure on CHP-run municipalities. As long as the policies of transferring resources to a narrow group and religious sects continue, along with the "prestigious and flashy!" expenses of the Palace and central government units, the state budget will not recover, no matter how much tax you collect. Let's note this down as well.

THE RICH'S DEMAND IS INCREASING

We have written many times, and shouted many times on television and our YouTube channel, that the diagnosis made by Mehmet Şimşek and the Central Bank to curb total consumption demand in the fight against inflation has been wrong from the very beginning. They suggested cutting the incomes of retirees and minimum wage earners to curb total demand and ensured the implementation of this policy. However, the purchasing power of retirees and wage earners had already fallen significantly in real terms due to the fake inflation announced via TÜİK. We warned repeatedly that the demand of the segment whose purchasing power has fallen in real terms does not trigger inflation. We shared many scientific articles showing that excessive increases in profits, public expenditures, and prices set by the public sector fuel inflation. They didn't care.

We said that the source of the increasing demand in Turkey is the wealthiest 20 percent of the population, who hold 50 percent of the income due to the distorted income distribution... And again, there is a black market economy throughout Turkey whose scale and size we do not know. There is a segment that appears to do no work but drives top-segment cars, travels by private jet, and spends like crazy, along with public officials and a political wing that benefits from this segment. We said, deal with their demand for luxury consumer goods, land, and housing. It was not taken seriously.

Foreign trade data was released recently. Imports fell, and Mehmet Şimşek announced that our program is working, and both the current account deficit and our foreign trade deficit are falling.

No, that is not the case. Yes, imports are falling. The interest rate policy implemented has put the private sector, which had become accustomed to very cheap interest, in trouble, and there is some contraction in the economy. However, we see an import composition that supports the demand increase we have been talking about from the beginning. The demands of the segments we listed a paragraph ago are still continuing at full speed.

In the 7-month period between January and July, Turkey's imports decreased by 8.3 percent.

When we look at the sub-items, imports of investment goods decreased by 0.8 (8 per thousand).

Intermediate goods and raw materials, which have the largest share in imports, decreased by 13.6 percent. This data also shows that there is a decline in industry.

However, although total imports decreased by 8.3 percent, imports of consumer goods increased by 15 percent.

This shows that the 20 percent of the population that receives 50 percent of the income in Turkey is not really cutting back on their consumption and total demand. The thing to do is not to cut their demand for consumer goods, but to collect more taxes from that segment from which you do not collect taxes. And not through indirect taxes, but through direct means. But the IMF, Mehmet Şimşek, and the Central Bank say, "Let's give them more real interest to lower the demand of the wealthy segment." In other words, let's make them even richer. They expect the demand of the segment that will become even richer to fall. It's complete nonsense...

INFLATION EXPECTATIONS AND 2025

First, a foreign bank published a report. It said, "To fight inflation, the minimum wage should increase by 20-25 percent. Otherwise, the sacrifices made will be in vain." Just a day or two later, the IMF's 2024 report on Turkey was released to the press. They suggest that wages should not be increased according to past inflation, but according to future inflation expectations. The relevant paragraph in the IMF report is as follows:

"Setting prices, wages, and other contracts (such as rents) annually and based on forward-looking inflation is crucial to reset expectations and maintain competitiveness. Once relative prices are adjusted, backward-looking indexation should be eliminated, and prices managed by the public sector should be aligned with production and maintenance costs."

Rent controls were just lifted. Public sector price hikes have never been in line with future inflation targets. To patch the budget deficit, while energy prices are falling globally and the exchange rate has remained almost stable, fuel, electricity, and natural gas prices are constantly rising. There is only one victim left in the target here, and that is wages...

So, what is the Central Bank's inflation target for the end of 2024? 38 percent... But they said there is a flexibility margin up to 42 percent. Based on practices to date, we can say that the minimum wage will increase at these levels. Yet, we will see when the time comes in the ENAG measurement that the real inflation will not be between 38-42 percent, but will be at the 90 percent level at the end of the year.

But now there is something even worse. The IMF says, determine it according to future inflation.

So, what is the Central Bank's inflation target for 2025?

Only 14 percent... So, are you going to raise the minimum wage by 14 percent now?

Then I am making a call to the Central Bank. Since you are going to lower inflation to 14 percent in 2025 and you believe in this, and you say let's raise the minimum wage accordingly... Then, if you have the courage in January, lower real interest rates to 20 percent by making them 6 points positive. Let me add 5 points, 11 percent positive interest. Lower the interest rate to 25 percent at the beginning of the year and let me see you... You will see what kind of storms and hurricanes break out in the financial markets, and how the hot money you rely on turns everything into hell. You will see the reality of the situation.