prof. Dr. Korkut Boratav: Currency protected deposits are designed for the short term; No chance of success if the Russia-Ukraine shock is not passed quickly

Economist Prof. Dr. Korkut BoratavHe stated that the Currency Protected Deposit (KKM) system went in line with the expectations of the Palace until the Russia-Ukraine war, but the war collapsed the expectations of the government. Boratav said, “If the West’s sanctions on Russia continue, it is doubtful that the KKM system will work for the government as an election method, as the Russian economy and all energy markets are affected by that wave.”

Speaking to Şehirban Kıraç from Cumhuriyet, Boratav stated that the solution to the jump in foreign exchange and triggering inflation is the KKM, but that this system is limited to the election calendar, that is, there is a plan until “they take the horse and pass Üsküdar”. It was going in line with his expectations. The last currency crisis was not caused by foreign capital outflows. After September, foreigners had largely left the stock market. Citizens and companies seeking to protect their liquid assets in real terms turned to foreign currency. That’s why the TL is running away and the dollar is climbing. The KKM arrangement, which was introduced as a remedy, secured savers against foreign exchange losses. Companies participating in the KKM were also given attractive tax concessions and the demand for foreign exchange was curbed. The dollar stabilized around 13.50 lira. There were also factors that supported these developments in the short term. Increases in exports provided some relief in the current account deficit. It was hoped that the tourism flow would keep the exchange rate stable after the spring. Stability in dollar prices will also curb inflation. The resulting image of stability could lead the Palace to an early election after the fall,” he said.

“Until the Russia-Ukraine war, the KKM was going in line with the expectations of the Palace,” said Boratav, adding, “After the spring, it was hoped that the tourism flow would keep the exchange rate stable. Stability in dollar prices will also curb inflation. The resulting image of stability could lead the Palace to an early election after the fall,” he said. Boratav stated that the expectations of the government began to collapse with the Russia-Ukraine crisis.

“The Russia-Ukraine war created a shock that would prevent the use of the KKM arrangement as an election policy,” said Boratav, adding the following views:

“World markets are adversely affected. Oil and gas prices skyrocketed. The sudden increase in oil and energy will disrupt the current account balance in Turkey. Our foreign trade and tourism relations with Russia and Ukraine are very strong. These will also be adversely affected. All economists were basically in agreement that KKM would not work in the medium term. The Russia-Ukraine shock also destroys the chance of success in the short term. It is doubtful that the KKM will serve the government as an electoral method if the US and the West continue to impose sanctions on Russia and the Russian economy is affected.”

– What were the policies that brought the Turkish economy to this point?

In 2013, when the Fed’s liquidity pumping to the outside world was restrained, the external resource flows that drove Turkey’s growth momentum also slowed down. After 2016, the country was governed in a permanent election atmosphere. The government did not break with electoral psychosis after the 2019 local election defeats. It tried to compensate for the stagnation in external resources by pumping domestic demand. It did this through the financial system, not through public finances. Lowering the Central Bank interest rate; Keeping it below inflation became a priority. We can call this the interest obsession of the Palace government.

On the other hand, it is also true that low-interest credit expansion restrained the contraction of the economy. The Turkish economy grew by 11 percent in 2021. Accordingly, between 2016-2021, Turkey grew at a pace close to 4 percent. On the other hand, the increase in external deficits dragged the economy into three currency crises. The Central Bank (CBRT) stopped the currency crises of August 2018 and November 2020 by jumping the policy rates. These adjustments were followed by gradual interest rate cuts. The currency crisis that broke out at the end of the policy rates, which were reduced for four months in a row in the September-December 2021 period, was very harsh. Someone in the palace perceived that the election cannot be won as long as the interest obsession continues. Because the election conjuncture is approaching. It is risky to ward off this crisis by jumping the policy rate once again.

ELECTION IS ON THE AGENDA

– So early elections are on the agenda of the government?

A one-year election calendar is on the agenda. The jump in the exchange rate and the triggering of inflation in December were very harsh. Apparently, the political priority prevailed in the Palace. Apart from raising the policy rate again, a method was sought to circumvent the currency crisis. The solution was the currency protected deposit (KKM). This arrangement was designed for the short term only. Limited to the election calendar; that is, until they “take the horse and pass Üsküdar”…

– Does this new policy contain elements that will lead the government to a new election? The exchange rate did not have what they expected, it started to rise again, will it be successful?

Until the Russia-Ukraine war, the KKM was going in line with the expectations of the Palace. The last currency crisis was not caused by foreign capital outflows. After September, foreigners had largely left the stock market. Citizens and companies seeking to protect their liquid assets in real terms turned to foreign currency. That’s why the TL is running away and the dollar is climbing. The KKM arrangement, which was introduced as a remedy, secured savers against foreign exchange losses. Companies participating in the KKM were also given attractive tax concessions and the demand for foreign exchange was curbed. The dollar stabilized around 13.50 lira. There were also factors that supported these developments in the short term. Increases in exports provided some relief in the current account deficit. It was hoped that the tourism flow would keep the exchange rate stable after the spring. Stability in dollar prices will also curb inflation. The resulting image of stability could lead the Palace to early elections in the post-autumn period.

WHY ARE THE PEOPLE UNRESET IF WE HAVE GROWED!

– Turkey’s economic problems are also in the middle, growth is called, but unemployment and poverty are at the highest level, what should we call this?

Yes, that is the fundamental question: Where does the unrest today come from while the economy is growing? Our country is one of the rare countries whose economy did not shrink during the Covid-19 period. In 2021, the Turkish economy grew by 11 percent. Then why were the streets filled with protests? Why did the workers take to the streets? Why are the electricity bills burned? Despite the epidemic and currency crises, the Turkish economy will have grown with an annual average of 4 percent in the last five years. How can one explain the absolute impoverishment that accompanies a growth at this pace, inflation exceeding incomes, unemployment, detachment from employment, the decline in real wages, and the unemployed with diplomas? There is only one answer: In the last five years, Turkey has faced a distribution shock that we have never seen before throughout its economic history.

– Who was this distribution shock against?

According to the national income data of the last five years, the share of wage earners in net income decreased by 6.2 points. This means that while the economy was growing, the working people of Turkey were dragged into absolute poverty. All working strata, a large mass including the working class, small shopkeepers and peasants, suffered income losses.

TURKEY WILL BE NEGATIVELY AFFECTED

– Now, can the Russia-Ukraine war be a brake on this?

Yes, those expectations are now collapsing. The Russia-Ukraine war created a shock that would prevent the use of the KKM arrangement as an electoral policy. World markets are adversely affected. Oil and gas prices skyrocketed. The sudden increase in oil and energy will disrupt the current account balance in Turkey. Our foreign trade and tourism relations with Russia and Ukraine are very strong. These will also be adversely affected. All economists were basically in agreement that KKM would not work in the medium term. The Russia-Ukraine shock also destroys the chance of success in the short term. It is doubtful that the KKM will be of use to the government as an election method if the US and West’s sanctions on Russia continue and the Russian economy is affected.

THIS MODEL CANNOT BE TAKEN SERIOUSLY AS INCONSISTENT

– Were such external shocks not taken into account while preparing the KKM?

The economic “model” put forward by Minister Nureddin Nebati while defending this policy, and put forward by some economists in the Palace, is inconsistent; cannot be taken seriously. It is thought of as a magic key that will solve many problems. KKM alone puts an end to the current account deficit and chronic foreign dependency; it drives inflation down; It assumes that Turkey will tend to a sudden growth momentum. This scenario, which brings together inconsistent and sometimes opposing variables in the short, medium and long terms, lacks economic logic and integrity. KKM regulation was limited to only one election calendar; it could work within that framework. Russia’s invasion of Ukraine destroyed this expectation.

SERIOUS BELT-TIGHTENING IS ON THE AGENDA

– Well, if the government goes with this policy, what days await the citizens? Will poverty and suffering increase?

Unless there is a radical change in perspective on the economic policy agenda, Turkey seems to be doomed to a stabilization program that includes elements of austerity in the near future.

– So serious austerity and IMF program is on the way?

If the post-AKP government does not have a left-wing perspective, the victims of today’s social crisis will be condemned to an IMF program that includes heavy austerity methods. Democratization in Turkey remains faulty within neoliberal options. The left option is a search for a grand, radical repair that seeks out from the grip of capital domination and foreign dependency. Its framework, concrete goals and instruments should be included in the economic policy agenda, even at the very center of it.

– With these problems, will the government win the election?

The government cannot win an election if the opposition to the division can be brought to the electoral platform. For this, victims have to become voters. Will people who have been condemned to loss of income and poverty in recent years, workers without security, farmers who are dragged into debt, young people who are locked in their homes, those who are unemployed with diplomas, those who burn their bills, the minimum wage, the pension increase in two months will be taken to the polls as voters? Will the opposition turn the election campaign into a class struggle? Will the victims of the social crisis, that is, directly to the popular classes, be told about the “class source of the victims”? The outcome depends on these questions.

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