Epistemological Rupture

What was done a year ago?

The central bank cut the policy rate. They called the interest rate as a handle, but of course this was not the reason. 

They wanted to try something new in the economy. 

The interest on the debts taken in the current practice had become too high, and they could not find new debts in order to at least roll over the debts. The lenders were also demanding too much interest. The current account deficit was constantly increasing.

Something had to be done to reduce the current account deficit.

What was it that was tried?

The policy interest rate would be lowered, thus reducing the interest burden that the state is legally obliged to pay to the banks! This would create a relief in the country. 

Is that all? No, the real effect will be abroad, namely on the current account deficit!

The dollar will skyrocket, which it has! 

Thus, the paltry salaries earned by labourers will fall even further in dollar terms. 

In other words, since the share of labour in the price of a good produced domestically and exported abroad will decrease, our chances of competition in the world will increase!

Well, in fact, almost 80 per cent of the price of whatever we produce depends on imported raw materials, so if the dollar exchange rate increases, the cost of these will also increase! How will it be in this case?

Yes, that's right, but don't forget that the cost of raw materials in dollars does not change, in fact, if domestic raw materials are used for 20% of the production, an advantage can be gained even from this ratio, since the cost of this part in dollars will also decrease. 

In other words, at least whatever we produce with cheap labour and export, we can give a more competitive price. This means an increase in exports! 

An increase in exports means more foreign exchange earnings. Isn't it better to earn with the sweat of your own brow than to borrow? 

This is what they said and they planned to turn Turkey into a country with cheap labour!  

O my labourer brother, have I made myself clear enough so far? 

Let's move on.

More exports require more imports, but normally what is expected from this scenario is that the earnings from exports will be more than imports and the foreign exchange balance, which we call the current account deficit, will be positively affected. In other words, a decrease in the current account deficit!

So, has the expectation been realised? In other words, did the current account deficit decrease?

No! On the contrary, for now, the current account deficit tends to increase!

In other words, since the beginning of this scenario, yes, the dollar exchange rate has increased, and as expected, our exports have also increased slightly. But our imports have also increased! In fact, they have increased much more!

Therefore, our current account deficit has also increased.

Isn't this strange? 

The reason for this increase in the current account deficit is the increase in energy prices in the market. 

Compared to the same period last year, both the amount of energy we spend is higher and its unit cost to us is higher. Perhaps the energy agreements that expired but were not renewed on time have a big share in this, but it is not possible to know exactly, because the existing agreements are trade secrets and the prices are confidential.

Therefore, the price paid for energy imports has increased considerably compared to the previous year.

Another reason is that the amount spent on gold imports has increased considerably compared to last year. This is probably due to the fact that weddings, which were postponed last year due to the pandemic conditions, were held this year, so weddings may have increased the need for gold. 

We can say that there is no serious fluctuation in gold prices compared to last year. In other words, the amount of gold imports in the current account deficit is mostly due to the increase in the amount of gold brought from abroad. This gold must have been purchased by domestic citizens either for investment purposes or for weddings.

Although tourism revenues seem to have increased considerably this year, it is necessary to take into account the base effect of the extreme decline in tourism revenues due to the pandemic in the previous year. In addition, there must have been the negative effects of the war between the two countries with the highest number of tourists this year.

It is also rumoured that direct investments decreased by half compared to the previous year. However, it was expected to increase since labour costs have decreased, but such investments have other expectations other than cheap labour. The most important of these expectations is an environment of trust. 

Of course, there is also the outflow of domestic capital abroad. This is probably related to the climate of confidence.

Portfolio investments, which we call hot money, are also outflowing money. This is not only due to foreigners repatriating their money abroad, but also domestic investors have increased their investments in foreign stock markets. In other words, domestic investors are also transferring finance abroad. The negative impact of this on the current account deficit cannot be underestimated. This may be partly due to the unfavourable conditions imposed on domestic investment opportunities.  

For all these reasons, our current account deficit is negatively affected, in other words, the deficit is increasing.

So, is there nothing positive about this practice?

Yes, there is no increase in the level of imports in real terms, that is, imports for luxury expenditures other than raw materials and energy remain at the same level. I was actually expecting a decline, after all, the level of earnings of the society has fallen considerably, and one would expect luxury consumption to decline as well. But it seems that whoever was doing luxury consumption yesterday, it didn't make any difference for them, they are swimming in luxury as they always have. Of course, I described this as positive, but in reality I think we need to save money.

On the positive side, as expected, there is an increase in exports. However, there are serious obstacles to exports. 

First of all, the negative impact of the Russia-Ukraine war on Europe is of great concern for us. After all, half of our foreign exports go to Europe.

Another negative factor in this regard is the Euro/Dollar parity. We buy raw materials in dollars and sell the product in euros, and the depreciation of the euro against the dollar has also affected us negatively.

Another issue is the worldwide financial stagnation and recession after the pandemic. Naturally, this has a negative impact on export volumes.

But there is another development that we can call positive in terms of exports. While Europe imposes an embargo on Russia on the one hand, on the other hand, it continues to shop with Russia through Turkey, which is the only proper channel. I can say that this situation is also positive in terms of Turkey's export-import balance.

ive issue in terms of exports is that Russia, which is embargoed by Europe, is a big market for Turkey. I can say that Turkish products have already started to increase in some stores.

Yes, this is how the new economic order looks in terms of current account deficit with its pros and cons. 

The current account deficit is increasing contrary to expectations, and the government is trying to cover this deficit with borrowed money from outside, as always.

In the meantime, the fixed-income citizens in the country are crawling, inflation is rampant because of the imbalance, the cost of living is at its peak, the citizens are miserable.

I don't know, this is like a stick with two ends in the mire. On the one hand, there is the interest rate squeeze on the money coming in, and on the other hand, there is the foreign exchange need created by the investors fleeing the country. 

Maybe it is a bit unlucky, energy prices might not have increased so much. 

I also mentioned gold, there is not such a significant increase in its prices, but if we do not count the issue of wedding associations, probably most imported gold has gone under the pillow.

Because with this economic method, on the other hand, people's investment options have decreased. Citizens can no longer receive interest on deposits at least at the level of inflation. 

In this case, they are looking for other investment instruments in order not to lose their savings under inflation.

First they attacked the foreign currency, which is why the exchange rate exploded. Then the government introduced a currency-protected deposit account. At first, this was a remedy to reduce the demand for foreign currency.

But at the moment, investors are not that satisfied with the exchange rate protected deposit accounts because the exchange rate is artificially kept at a certain level.

Since bonds are not suitable as they were in the past, another remedy is the stock market.

But the stock market, as an investment instrument, can sometimes upset its investors too much. Especially small investors can be crushed like grass under the feet of elephants. 

I will write a more detailed article on the stock market later, but for now, I can count the stock market as an investment instrument that money has recently turned to.

But as I said, these are the remedies that those who have a little savings are forced to use to protect their savings from inflation. 

Those who live on daily earnings, pensioners and those on fixed incomes have a hard time even to live, let alone save. 

They have to suffer this torment because of the current government's preferences.

But they put up with it because they have to, many of them think that there is no other solution.

Of course, there is a solution to this problem, if you don't like it, you can change the government! 

I have written as clearly as I can about the choices made by the current government. You know the results better than I do. 

The new one says he will not do this. He may be telling the truth, and I think it is not possible for the current situation to be worse.

If there is a need for an increase in exports, the way to do this is not through reducing labour costs, but through quality production. You will compete with quality, not cheap labour!

Make your own choice.

Love and respect to everyone from Moscow