Erdoğan unveils new fiscal policy tools to tackle crisis

Turkey’s President Tayyip Erdoğan unveiled new fiscal policy tools to be implemented to overcome the recent currency crisis and further boost export-led economic growth, emphasizing that “Turkey will not drift apart from the free-market economy.”

“Turkey has neither the intention nor the need to take the slightest step back from the free market economy and the foreign exchange regime. We will achieve our goals by playing this game by our own rules. Anyone who claims or thinks otherwise should turn around and question himself,” he said after the cabinet meeting on December 20, revealing “new fiscal policy instruments,” which he defined as a “new financial alternative.”

Erdoğan’s unorthodox determination to keep the policy rates low, which deepened the depreciation of the Turkish Lira, has started to be interpreted as an “exit from the global economic system,” while Central Bank’s latest rate cut has caused further currency fluctuation problems in the supply chain due to unpredictability of the prices, price hikes and high cost of living. Moreover, after Erdoğan cited Islamic teachings to legitimize his insistence on low policy rates, some experts started to express concerns about possible intervention to Turkey’s foreign exchanges.

Reacting sharply to the criticisms, Erdogan said that Turkey would keep its stance in the free market economy.

“We did not and will not respect any game or trap aimed at excluding Turkey from the restructuring process of the global economy, as has been the case many times in the past,” he added.

Following his announcement, the Turkish Lira had gained 20% value against US Dollars, going back to its November levels when the Central Bank insisted on cutting interest rates and instigated a historic fall of the Turkish currency.

Dissuade citizens from rushing into FX

As journalists stopped writing “historic low” for Turkish Lira’s value because it kept its depreciation in the last three months, eyes were on Erdoğan’s cabinet for the next move.

Ensuring the “free market” framework, Erdoğan stated that the cabinet introduced a program to dissuade citizens from rushing into foreign currency to minimize their loss by Turkish Lira’s depreciation. He added that the possible return of the foreign currency will be guaranteed if people keep their assets in the Turkish Lira.

“No citizen will need to transfer their deposits from the Turkish Lira to foreign currency because the gain will be higher,” he said.

“If the deposit earnings of people’s Turkish lira assets in the bank are higher than the exchange rate increase, they will get this return. If the exchange rate return of people’s Turkish Lira assets in the bank exceeds their deposit earnings, the difference will be paid directly to our citizens. Moreover, this income will be exempted from withholding tax,” he said.

“In addition, we will implement tools that will ensure that Turkish lira assets are used in a way that does not create a new foreign exchange demand,” he added.

He also revealed a series of implementations for exporters, stating that “Central Bank will set forward-term exchange rates for export companies,” which have difficulties in pricing because of the rapid fluctuation in the foreign currency.

“The exchange rate difference that may arise at the end of this transaction will be paid to the exporting company in Turkish lira,” he added.

Minister: economic manifesto

Treasury and Finance Minister Nureddin Nebati defined the new program as a “magnificent economic manifesto.”

“We are certain. Turkish Economy will be the winning party with Turkish Economy Model, which focuses on investment, production, employment and export,” he posted on his official Twitter account on December 20.

The Banks Association of Turkey Chair and state-bank Ziraat Bank General Director Alpaslan Çakar said that “in a few hours after Erdoğan’s statement 1 billion US dollars were exchanged.”

“I spoke to one of my friends who is a manager at a private bank. They will participate in this system. Public banks and related banks do not cover the cost here. The Treasury will cover this cost,” he added.

Indirect rate hike, treasury burden, dollarization: experts

Fiscal policy tools created controversy after its announcement. Economists underlined that the implementation principles are not yet clear, so the details of the program should be awaited.

Some experts stated that this plan to encourage TL could be called “convertible deposits”, a method that has been used before and caused inflation.

Some experts commented that this program could be regarded as an “indirect interest rate hike” and may lead to further dollarization.

Emphasizing that the details are not yet clear, it has been commented that this practice carries the risk of placing a burden on the Treasury, and the fact that the difference is covered by the public budget and taxpayers increases the risk of inflation.

Most commentators described the program as risky.