1 Phenomenon: Relation Between Exchange Rate and Inflation; 2 Deadlock: Economic Stability and Exports

Balance of payments is a record of the economic relations of a country with other countries, and shows the monetary value of the economic relations of that country with other countries in a given period. As known, balance of payments consists of 4 major parts: current accounts, capital and financial accounts, reserve movements and net error minus. When we look at the balance of payments picture in Turkey we can see that there are huge deficits in current accounts. Balance of goods (balance of trade), which is one element of current accounts, is one of the most important reasons that trigger this deficit. The latest data which make this chronic deficit in Turkey even more serious were provided by TÜİK and Undersecretariat of Customs for July 2010. Hurting enough, Turkey is faced with a growing foreign trade deficit whose consequences can be disastrous. The skyrocketing imports in the first 7 months have turned trade deficit upside down. When compared with 2009, foreign trade deficit increased from 18.436 million $ to 34.918 million $. This represents some 89% increase. But how is this deficit being financed? The answer is clear: with hot money, which is the only way of closing current deficit. As of end of August, some 100 billion $ of hot money entered Turkey. This creates an image that the deficit is being closed but actually it represents an even worse deadlock. So much so that, hot money leaves USA and EU, which are the focus of second-trough fears, and creates a huge transaction volume in developing countries such as Turkey (which is not endangered by budget deficit and public debt stocks); thus, intense hot money pours down on our country. The contradiction is that as hot money comes exchange rate goes down and this drags the country to importation. Right at this point, exporters ran out of their patience. Exchange rate, which gained value due to hot money, destroys exporters. The latest calls made by Turkish Assembly of Exporters (TIM) stated that National Bank should resort to devaluation at once and take up polices in order to cheapen foreign currency. But what are its consequences? Devaluation can be made (we can see its examples in Turkish history), but it is not that easy. In developing economies such as Turkey, the relation between currency and inflation has a vital importance. First of all, changes in exchange rate have strong influence on prices. When exchange rate increases (in national money) general level of prices tends to increase; on the contrary, when currency decreases, general level of prices tend to decrease. In addition, as indicated above, Turkey is a country which is dependent on the import of every kind of goods, from investment goods to consumption goods and semi-finished goods. Therefore if National Bank agrees with the demands of exporters, first of all, the prices of imported consumption goods will be negatively affected, and important increase will also be witnessed in production costs. At the same time, the second problem that can be caused by value-loss of exchange rate through Central Bank is that current debt stocks will increase very heavily in terms of TL. In order to cover this increase, National Bank will resort to increase money supply. But what will be the side effect of this surplus liquidity on markets? Of course an increase in inflation and as a result shrinking for fixed income earners, decrease in demand, lower consumption and adrift to recession…lastly, the third problem is an increase in budget deficit. The government will make more consumption and cover the loss of value of TL caused by the increase in exchange rate, which will in turn cause a more serious instability. In addition to these three envisaged probabilities; one of the reasons for TL to be excessively strong is the high interest rates, as they mean high real return for foreigners. Hot money flows into our country so as to obtain this return. As a result TL gains value due to an abundance of foreign currency. This is the thesis. The demands of exporters is either the decreasing of interest rates by National Bank or preventing hot money entrance by such tools as Tobin tax and thus ensure that TL loses value, and increase gains on exports. One wishes that we had such a strong economy that allowed us to do that. But under current conditions preventing capital flows into our country would be suicidal for growth (!) and stability (!). But it will not be long before they escape, as the second trough scenarios can come true. We will of course wait and see. This is the situation; foreign investments, hot money flows, huge current deficits, problems of debt burden and budget deficits, imported inputs…Turkish economy is on the verge of a cliff and unstable under the false image of stability. The measures taken against employment in order to decrease inflation a few years ago are now being taken in order to decrease the level of current deficit which is a function of hot money. I think that these discussions will continue for some time more. But one point shows that in future indicators, export figures will be too much lower than import figures for a long time due to the policies applied and the situation will become catastrophic when potential hot money escape becomes a reality.