scorched land policy!

18 Dec. 2021 

From the reality of the opinion of my friend Ra'ed Z. Alremony about what is happening in Turkey about that Turkey is a state of institutions and what is happening is a political whirlwind in opposition to the president Recep Tayyip Erdoğan My comment will be a customized detail because I am not an economist and I needed help understanding the economic details in order to explain my idea:

In principle, the Turkish government raised the minimum wage in an unprecedented manner by 50% from 2,850 Turkish liras to 4,250 Turkish liras, meaning that it recognized that the real inflation rate is 50% and not 21% as the rate announced by the government!

Nevertheless, the minimum wage is now equal to $265, compared to $370 last year at 2,850 Turkish liras, when the dollar price was 7.5

This collapse is caused by the loss of confidence in the policy of the Turkish government

The government can save the Turkish lira if it changes its policies and declares the independence of the Central Bank?

But it can't save people from poverty anymore!

Turkey is a country with few savings because it has no natural resources to export (minerals or oil), and the Turkish people tend to consume even if they are in debt because the social standard of living is close to the European level Therefore, in order to build infrastructure and growth, Turkey needs to borrow from abroad in hard currency. The price of the Turkish lira with the dollar is determined based on domestic supply and demand inside Turkey. The greater the dollar amount in Turkey, the greater its supply, so its price fell against the Turkish lira, and thus the lira strengthened and vice versa the greater the demand for The dollar increases its price and the demand for the lira decreases, and thus the lira decreases

To understand the nature of the Turkish economy, it is necessary to understand its resources. The resources for the dollar in Turkey are:

Export, tourism, foreign investment, liquid funds used to buy bonds and stocks that can be sold quickly, investments to buy real estate, factories, companies, and the Turkish banks’ borrowing from abroad The more of these resources, the higher the dollar and the higher the value of the Turkish lira In recent years, investment in Turkey declined due to the politicization of the judiciary, and investment companies began to withdraw their money, as well as because of the increase in interest rates in foreign countries, so the money went to them instead of Turkey In addition, the increase in Turkish foreign debts began to pressure for the exit of the dollar to repay this money abroad, in addition to the decline in tourism due to the pandemic of the #coronavirus #COVID19 pandemic and the survival of imports that Turkey buys in dollars is greater than exports, which makes here a deficit in the balance of foreign trade Accordingly, the quantities of the dollar in Turkey began to decline, and with it the price of the Turkish lira was declining due to the increase in demand for the dollar, which began to become scarce in the market

During the past two years, the Turkish government began selling the dollar from the Central Bank to provide the dollar in the market and compensate the dollar that comes out in order to maintain the price of the Turkish lira, and it spent 128 billion dollars, which were all the reserves of the Central Bank, and then the ability of the Central Bank to intervene to save the Turkish lira declined The Turkish government tried to replace the central bank’s stock of hard currency by borrowing through the SWAP exchange mechanism from a number of countries such as Qatar, China, South Korea and in local banks, and recently Erdogan was personally forced to contact Elon Musk However, the bleeding continued in dollar quantities due to the increase in demand for it

Foreign investors have lost their confidence in government policies, especially with President Erdogan’s announcement of his intention to reduce interest on the Turkish lira, and this means that the foreign investor will not make money if he buys Turkish bonds, so he starts selling his bonds and investments and converting them into dollars and withdrawing this dollar, so the dollar’s ​​exit continued

But with the start of the policy of lowering the interest rate, the internal worker entered the line. The Turkish citizen and resident began withdrawing his money that he deposited in banks in lira because the interest decreased and became less than the price of inflation (the interest that he will earn is 15%, while inflation, which is the decline in purchasing power, has officially exceeded 20% and 50% practically)

Here the citizen and resident in Turkey began to transfer his money from the lira to the dollar in order not to lose its value, and this increased the demand for the dollar locally and increased its price

Last November, the dollar's percentage of the total Turkish savings (the sum of all the money in Turkish banks) became 63%, which is a very large percentage and it is still rising. Thus, Turkey entered a vicious circle. Whenever the bank interest rate drops, the Turks rush to buy dollars to preserve the value of their savings as well, the higher the price of the dollar against the lira (or vice versa if you like, meaning the price of the Turkish lira decreased against the dollar) All imported goods, including gasoline and many foodstuffs, increased in Turkish lira as the price of the dollar increased, and inflation increased with it

With the lack of clarity or the announcement of the ultimate goal of reducing the interest (will it be reduced to 10%, 5% or zero%?), the image has taken root in Turkey that the continued rise in the price of the dollar against the lira will continue, and this calls on more citizens to buy the dollar again. And the local factor became the determinant of the dollar price

Currently, foreign investments have declined to the lowest level, and the withdrawal of the foreign investor's money no longer affects the price of the dollar because there are no longer invested funds in an effective size and the rise of the dollar is linked only to the attack of the Turks and residents on buying the dollar for reserves and facing the high prices Therefore, the attempts of the Turkish Central Bank to sell its dollar (which is borrowed and not owned) are no longer useful in curbing the rise of the dollar because the demand for it is constantly increasing and the government is waiting for this wave to subside without interest. That is, they are waiting for all citizens' savings to be converted into dollars so that there are no pounds left for them to sell!

That is, Turkey has entered a state of what is known as dollarization, and the government is betting on the return of tourism and the return of foreign investors to buy real estate and companies that have become cheap or bankrupt, and the increase in exports of cheap Turkish products for the sake of abroad again, which is a dangerous bet that may or may not be achieved.

But even if things went as well as possible and requests to buy real estate and companies from abroad flooded in, exports increased and imports declined due to weak purchasing power, other obstacles stand in the way of realizing the government’s bet, including: The Turkish citizen, who sees that the interest rate is at 14%, began withdrawing loans in lira at this price and converting this money into dollars in the hope of making profits, and this increased the demand for dollars as well. Rather, the central bank lends the lira to banks at a rate of 14%, but the same banks refuse to lend to the government at an interest rate of less than 22%, and the government’s bet is related to achieving at least $30 billion of export surplus and foreign investment in the purchase of real estate and companies, and the tourism boom, and that this happen. Before the next elections, i.e. 18 months ago, which is difficult But if the government succeeds in realizing its bet, which is a very difficult matter, or if the government changes and a government raises the interest rate, the price of the Turkish lira will rise again against the dollar, the dollar bubble will end and the Turkish lira will return to the rate of 12 per dollar, which is its real price.