The exchange rate burns the poor at home and the industrialist abroad

We have been writing for years that the implemented economic model has impoverished a large segment of society, and we have been explaining it on television as best we can. The middle-income level has been destroyed. Nearly 80 percent of the population lives on an income below the poverty line. We are constantly trying to voice the problems of retirees, workers, and farmers. 

Attempts are being made to lower inflation by suppressing the exchange rate, but inflation is rising rather than falling. Orthodox economists and the private sector have now begun to join those of us who have said from the beginning that this approach is wrong. What happened to the former minister and Chairman of the High Advisory Board of TÜSİAD is clear. The private sector was already hesitant to speak out. But now, even the industrialist can no longer bear it.

Why are criticisms rising from the private sector and industrialists? First of all, their access to credit has become difficult. They cannot find cheap credit. Due to the suppressed exchange rate, the competitive advantage of exporters has been seriously lost. At the root of the criticism lies the fact that “the exchange rate remains far below inflation.”

This policy was one that the AKP predominantly implemented from 2003 to 2016. An artificial abundance was created domestically by paying high interest rates on hot money. For years, we have written that this destroyed Turkey's competitiveness in industry and agriculture, dragged Turkey into a debt trap, and caused a transfer of wealth from within the country to abroad. 

Money has functions of exchange, measurement, and savings. In Turkey, which has lived with inflation for many years, the Turkish Lira had lost its measurement value. Therefore, contracts and prices were determined by the exchange rate and expressed in Turkish Lira. I persistently emphasized this in the book I wrote in 2007. Due to the high interest rates given to hot money, the exchange rate also lost its measurement function. If the exchange rate in an economy loses its measurement function, prices in that economy are not determined by supply and demand under market conditions. Our Central Bank, our economic management, and polite economists call this a “distortion in pricing behavior.” However, its true name is a state where anarchy prevails in the price mechanism, which brings with it opportunism and speculation.

A very strange situation is emerging. Due to high inflation, the country's currency loses its value for those living within the country. Purchasing power falls. However, because the exchange rate is suppressed, the rate does not rise as much as inflation. Because the rate does not rise as much as inflation, the currency this time appreciates against foreign currencies, against the dollar and the euro. The Turkish Lira becomes worthless at home but remains expensive abroad. As a result, exports cannot be made. The economy cannot grow. 

The economy was not good before Mehmet Şimşek. While inflation and interest rates were rising globally, the lowering of interest rates (September 2021) and the subsequent period further disrupted already fragile balances. Mehmet Şimşek and the current Central Bank team were brought in to find a solution. But the only thing they knew was to implement policies that suppress the demand of the poor, pay high interest on foreign currency and hot money, suppress the exchange rate, and thereby transfer resources to foreign financial circles. 

Especially when the relationship between the exchange rate and inflation broke down, the industrialist who exports became particularly squeezed. Bananas coming from the other side of the world became cheaper than local bananas. Agriculture has collapsed. The period before Mehmet Şimşek was a disaster. In the period after Mehmet Şimşek, we continue to experience the same disaster while paying heavier prices. Let us try to explain why they are criticizing Mehmet Şimşek.

We calculate a basket exchange rate by adding 1 dollar and 1 euro and dividing their value by two.

Mehmet Şimşek took office at the beginning of May 2023. The basket exchange rate at the end of April was 21.36 liras. Today, it is 48.76... The increase in the exchange rate in the nearly three years that have passed is 128 percent... 

In the same period, the increase in inflation is 209 percent... The exchange rate is 35 percent below where it should be. The costs of the industrialist and the tourism operator are rising due to domestic inflation, but the exchange rate increase does not cover this when they export their goods. If the exchange rate increase had gone hand-in-hand with inflation, the basket exchange rate (half the sum of the dollar and euro) would not be 48 liras and 76 kuruş, but 66 liras and 15 kuruş. And this is according to the TÜİK inflation that no one believes... It is much higher according to ENAG inflation...

If we ask why Mehmet Şimşek is unsuccessful... What shall we compare him with? With the 3-year period before him... That period was also a terrible period, and Şimşek and his team were brought in to save the country from that terrible period. When we go back three years from April 2023, the basket exchange rate increase in April 2020 was 193 percent, and the inflation increase with TÜİK consumer prices in the same period was 186 percent... The rate and inflation had gone head-to-head, and the basket exchange rate had even increased 5 points more.

If they had not suppressed the exchange rate, inflation would have been even higher. This is true, but the culprit is not the rise of the rate... The rate rises, but you must also have fiscal policies and production policies that increase supply so that balances are achieved and economic prosperity is obtained. 

Mehmet Şimşek tried to lower inflation by suppressing the rate and curbing the demand of low-income earners, and he failed. The public's purchasing power is gone, and interest payments in the budget have skyrocketed. The amount of interest paid from Turkey to hot money abroad has reached the level of 25 billion dollars from 15 billion dollars. First, he made the poor even poorer, and now he has cornered the private sector that is trying to do business without relying on the government. Inflation is not falling, it is rising; poverty is spreading, unemployment is increasing, the debts and interest payments of the public sector are swelling, and Turkey's foreign debt is rising. Let alone foreign capital coming to Turkey, existing industrialists and capital are fleeing abroad. 

First, the purchasing power of low-income earners melted away. Now, the competitiveness of the producer is melting away. In Turkey, not only the laborer but also the industrialist can no longer breathe.