Are we this desperate?

UĞUR GÜRSES

From Ankara to Istanbul there are whispers: “What they did to Ecevit in 2001 they are now doing to Erdoğan, and this is behind the exchange rate speculation.” A new host of “actors” like the Ergenekon gang and the finger of Israel are being added to the commentary. 

In other words, there is this idea that there is a concerted effort to instigate an economic crisis in Turkey in 2012 that would be tantamount to the economic crisis in 2001 that led to Ecevit and his coalition partners’ election defeat. Last week, there were quite a few articles in the local papers to this effect.

If the AKP or politicians in the government are behind these sorts of rumors, then it would make the current situation worse. But no, if these rumors are being instigated by the economic bureaucracy, then it is even more of a worse case scenario – it would be like putting a mine in the path of the execution of political policies. 

Let us ask three questions: Is the current economic landscape the same as in 2001, or does it have a more solid foundation? Are the political tools at hand sufficient compared to 2001? Are our foreign exchange reserves enough to combat a potential conspiracy or a speculative attack? 

It is one thing for there to have been economic problems and political mistakes in the past few years that we are feeling the brunt of today, but quite another thing to be weak enough to be dragged down by a conspiracy theory. Even as someone who has been critical of the government’s and the Central Bank’s policies over the past five years, I believe that to give weight to these rumors coming from Ankara would be like the government shooting itself in the foot. 

One could even go further and ask if there is an effort to cover up poor policy choices that led to today’s high inflation and exchange rate appreciation. Let’s return to the three questions. First, the 2001 crisis came about in an atmosphere of high public borrowing and a weak banking sector coupled with the problems stemming from populist economic policies with no accountability. Today, however, Turkey has a very strong banking sector and public borrowing is at an all time low. 

Second, the tools in the hands of the Central Bank in 2001 were not as strong as they are today. The Central Bank’s biggest weapon today is not its currency reserves but rather the interest rates, which is the lira’s control mechanism. These tools, however, need to be applied consistently. We are seeing this already with a hike in interest rates and the Central Bank’s intervention in the foreign exchange markets. 

Third, while the Central Bank was forced to defend its exchange rate in 2001 with only $20 to 25 billion in foreign exchange reserves, today the Central Bank is not tied down to a particular exchange rate and has $88 billion in foreign exchange reserves. If the Central Bank wants it can conduct an open position because some of its liabilities are a part of the Treasury and some are part of domestic banks. 
Instead of making its citizens feel like we are in a desperate position with only $40 billion in usable foreign exchange, Ankara should focus on how it can use the instruments in its arsenal and in its control to reduce the level of uncertainty and instead institute policies that would make this happen. We are not this weak nor are we at the whim of the control of others. 

Does anyone ask those who buy foreign exchange where they get the liras to buy the foreign currencies in the first place? Are there enough liras to keep this coming? Could there be further speculation if the Central Bank were to no longer give these liras? 

Both the 1994 and 2001 crises were instigated when Turkish citizens flocked to the banks. I hope someone in Ankara puts an end to these desperate rumors and scenarios that “three banks are behind the exchange rate; they are going to instigate crisis.” 

It is completely normal for banks and companies to buy foreign exchange reserves. So what if the Central Bank now wants to sell another $15 billion? What matters is how you use the tools at hand and the policies you choose to implement.