Inflation analysis in six points from economist Mahfi Eğilmez: 'The most painful part of it all...'

Economist Dr. Mahfi Eğilmez stated that some disasters that are extremely difficult to compensate for have been committed in Turkey over the last decade, noting, "They are such mistakes that they could enter economics and finance textbooks as a separate chapter under the heading 'mistakes that should not be made'."

Eğilmez listed the points he sees as errors in the economy as follows:

PRIVATIZATION

"The purpose of privatization is to transfer production facilities for which the public sector cannot allocate resources to the private sector, thereby ensuring productivity increases through new investments and new technology, and enabling more production at a lower cost. Before the twenty-first century, Turkey privatized all the facilities, businesses, and production units it had established through the state, but neither an increase in production nor lower prices were achieved. Because what was done was not actually a true privatization."

EXTERNAL DEBT

As we entered the twenty-first century, Turkey's external debt stock was 103 billion dollars. As of the end of 2023, our external debt stock is 500 billion dollars. This means we have increased our external debt stock 4-fold in 23 years. Where did these debts go? We are a country that has been in the textile sector for 200 years and yet has not been able to produce a world-class brand. Unless external borrowing goes toward importing new technology, productivity-enhancing developments, and improving quality in production, it only brings a burden to the economy.

GRANTING CITIZENSHIP

Citizenship was granted to those who bought real estate for 400 thousand dollars (it was 250 thousand dollars until recently). These properties cannot be sold for three years: that is the only condition. However, in other countries, in addition to such investments, one cannot obtain citizenship without meeting many conditions, including learning that country's language, and without waiting for many years. Most of those countries grant a permanent residence right called a golden visa at the end of five years, not citizenship. In the meantime, they also collect a lot of fees. In our case, those who obtained citizenship and then sold the houses they bought at a higher price after waiting three years earned money in addition to obtaining citizenship. Thus, we granted citizenship by ensuring they earned money on top of it without seeking any conditions.

LOWERING INTEREST RATES WHILE INFLATION IS RISING

When September 2021 arrived, inflation was 19 percent, and the Central Bank's policy rate was also 19 percent, and inflation was on an upward trend. At that stage, the claim that “interest is the cause, inflation is the result” was put forward, and interest rates began to be lowered. Even though the rate of increase in inflation accelerated, the insistence on lowering interest rates continued, and it was eventually reduced to 8.5 percent. Inflation rose to 85 percent. Around this time last year, when it was understood that interest is not the cause but the result, interest rates began to be raised. As a society that managed to understand in the first quarter of the 21st century that interest is not the cause but the result, we have gone down in history once again. We are still waiting for inflation to fall. Fortunately, there will be a decline in the coming months due to the base effect.

Since real inflation is much higher than the announced inflation, people do not believe that the measures taken will reduce inflation, and their negative expectations regarding the future continue. When that happens, people do not save, do not hold money, and with the money they get, they tend to buy dollars, gold, housing, cars, or more of the goods they need as soon as possible. Because interest is adjusted according to the announced inflation rather than real inflation, people do not give up this habit and continue to contribute to inflation. By hiding the facts, we have increased inflation.

CURRENCY-PROTECTED DEPOSIT ACCOUNTS (KKM)

The government, which set out with the claim that it would reduce inflation by lowering interest rates, saw that as interest rates fell, people rushed to foreign currency; to prevent this rush, it invented a tool called currency-protected deposit accounts (KKM). This tool was actually a means of making the Treasury and the Central Bank, rather than banks, pay interest equal to real inflation under another name. In later stages, the Treasury was removed from the process, and the burden was transferred to the Central Bank. The practice caused the Central Bank to lose 818 billion liras in 2023. When the Central Bank, which normally makes a profit every year and transfers this profit to the Treasury (the budget), makes a loss, the budget is deprived of that much resource.

CARRY TRADE

The Central Bank raised the interest rate to 50 percent. This interest rate is below even the announced inflation, let alone real inflation. On the other hand, as the exchange rate tends to stabilize, people convert their foreign currency and deposit it into TL deposit accounts or bonds. When that happens, the exchange rate starts to decline even further. These accounts are very short-term accounts, such as 1 month or 3 months. If the exchange rate has not changed when the maturity expires, the interest received becomes a foreign currency interest rate. Thus, although we seem to be borrowing in our own currency, we have actually borrowed in foreign currency by paying the world's highest foreign currency interest rate.

The fact that we are still managing to stand tall despite having done everything that should not be done in economic policy in the first quarter of the twenty-first century is due to the contribution of the parallel universe created by the informal economy. The most painful part of it all is that at the stage we have reached today, people living in the formal economy have been made dependent on people living in the informal economy."