Pakistan has seen its currency depreciate significantly during the current term of this government; some rightly to offset the previous government’s policy of keeping the rupee well overvalued. But the depreciation of the rupee in recent months, and in a very volatile way, shows a lack of adequate intervention by the State Bank of Pakistan (SBP) and a type of identical and non-influential role of the government when inflation is high – as a result of a sharp and substantial increase in oil prices due to significantly low supply from OPEC-plus countries and, overall, due to a severe global shock of the supply of raw materials – required a cheaper US dollar to control the imported inflation associated with the import of these raw materials.
On top of this, failing to realize a traditionally significant fiscal nature of inflation determination, as well as inflation caused by a substantial global supply shock, a sharp and significant hike in the policy rate – with two revisions to the made in less than 30 days – imposed a heavy burden on the momentum needed to undo the negative impact of the recession-causing pandemic by making it costly to import growth-generating machinery and raw materials, reduces aggregate demand by making it difficult to increase public and private investment to meet both recovery and development needs, and manage debt sustainability and reduce the current account deficit without undermining growth and reducing poverty and inequalities.
On the contrary, Turkey, whose lira had suffered a severe blow against the US dollar in recent months, following a major loss of investor confidence due to the reduction in key rates, continued this policy. monetary accommodation unlike Pakistan. A recent Bloomberg article “Turkey’s Hidden Rate Hike Buys Erdogan Time But Increases Risks” pointed out in this regard: “The Turkish currency had lost more than 50% of its value against the dollar since September when that President Recep Tayyip Erdogan was leaning on the central bank to lower borrowing costs in a bid to attract investment and shore up his waning popularity.
It strongly appears that the elephant in the room, which is quite hidden from policy makers at home, is rightly quite obvious to the Turkish President, and that the downward trend that has been ushered in by the pandemic, has necessitated a stimulus, and non-procyclical policies, as for example are being pursued in Pakistan from a seemingly consensual standpoint of the government, the SBP and the IMF, in whose program the country currently finds itself. Such a pro-cyclical view is also quite contrary to the evidence of most IMF programs where austerity has led to an excessive sacrifice of growth for rather unsustainable and insignificant gains achieved in terms of macroeconomic stabilization, primarily by tackling inflation and the current account deficit largely on the side of reducing aggregate demand, not by reducing the cost push inflation sufficient to stimulate aggregate supply adequately , enabling it to play its necessary role – especially in developing countries – in achieving macroeconomic stability in a much more consistent way.
Therefore, in view of the fact that the pound has lost a significant part of its value in recent months, and making it possible to facilitate investment and in general in terms of distributive consequences by lowering the key rate, the Turkish government intervened by through a recently announced policy. increase confidence in the lira by stemming investment flows mainly in US dollars and gold. According to a December 21, 2021 Bloomberg article “How Erdogan’s plan to stop the lira’s fall is supposed to work”, said: “Turkish President Recep Tayyip Erdogan has unveiled a contingency plan to curb depreciation without precedent of the lira and protect investors against wild swings in the currency.. A measure ensures that returns on lira-denominated deposits will not fall below bank interest rates, in a bid to end the current demand for spot currencies.
This policy had an immediate positive effect, as highlighted in this regard in a recent Financial Times (FT) article entitled “Turkey’s currency after Erdogan unveils lira savings plan”: “The Turkish lira has jumped sharply after President Recep Tayyip Erdogan unveiled new savings plan… Turkish currency soars after Erdogan unveiled lira savings plan. The currency rose more than 40% to trade at 12.84 TL against the dollar on Tuesday, dramatically reversing course after hitting a record low of 18.36 TL the previous day. … The intense volatility was triggered by a new plan by Erdogan to divert Turkish savers away from the dollar and gold by compensating them for exchange losses if they hold their money in lira.
Contrary to the interventionist policy of the Turkish government in terms of influencing the local currency against dollarization through a lira savings program, and also by actively lowering the policy rate, during the unprecedented period of the pandemic, seems to make a lot of sense in terms of pursuing a major pro-cyclical management policy of macroeconomic stabilization and economic growth. The program will weigh on the public finances of the Turkish government. But it is “a new savings plan that analysts have described as a roundabout hike in interest rates that could erode public finances.”
Yet that seems to be a much lighter burden on taxpayers than making them suffer, as in the case of Pakistan, in terms of both high inflation and a high cost of capital, whereas in the same time, these payments from the government kitty to cover the difference in exchange rate and interest rate, than to bear the costs in terms of high internal and external debt, and this on a basis of low growth and high inflation. The same FT article pointed out that “Erdogan, a staunch opponent of high interest rates, has ordered a succession of rate cuts in recent months despite double-digit inflation. As Turkey’s president claimed his “new economic model” would boost exports, investment and job creation, he put enormous pressure on the Turkish lira. The currency had lost around 50% of its value against the dollar in the three months before Erdogan’s announcement.
Therefore, it is important that the government takes a close look at the “new economic model” adopted by Turkey. Regarding the details of the lira savings program, the same Bloomberg article “How Erdogan’s plan to stop the fall of the lira is supposed to work” pointed out: “The Treasury will compensate the losses suffered by the holders of Lira deposits if the lira falls against hard currencies exceed bank interest rates. For example, if banks pay 15% for one-year lira deposits but the currency depreciates 20% against the dollar over the same period, the treasury—that is, taxpayers— would pay the differential to deposit holders. The instrument will apply to individuals holding lira deposit accounts with maturities between three and 12 months. The minimum interest rate will be the central bank reference rate and no withholding tax will be in place.
(The author holds a doctorate in economics from the University of Barcelona; he previously worked at the International Monetary Fund)
He [email protected]
Copyright Business Recorder, 2021