Pakistan has seen its currency depreciate sizably during the ongoing tenure of this government; some justifiably to compensate for previous government’s policy of keeping the Rupee well over-appreciated. But rupee’s depreciation in recent months, and in a much volatile manner, shows a lack of adequate intervention by State Bank of Pakistan (SBP) and an identical non-influential kind of role by the government when high inflation — at the back of sharp and substantial rise in prices of oil due to significantly low supply releases by OPEC-plus countries, and overall because of a severe global commodity supply shock — required less priced US dollar to keep in check the imported inflation associated with importing these commodities.
Added to this, not realising a traditionally significant fiscal nature of inflation determination, along with inflation caused by a substantial global supply shock, sharp and significant rise in policy rate — with two upward revisions made within less than 30 days — has put a heavy burden on the momentum needed to undo the negative impact of recession-causing pandemic by making it costly to import growth-causing machinery and raw material, reduced aggregate demand by making it difficult to increase public and private investment for both meeting stimulus and development expenditure needs, and manage debt sustainability, and curtailing current account deficit in a non-growth-compromising, and poverty/inequality reducing way.
On the contrary, Turkey whose Lira had taken a major hit against US dollar over the last few months, at the back of a significant loss of confidence by investors due to reductions in policy rate, continued with this loose monetary policy stance unlike Pakistan. A recent Bloomberg article ‘Turkey’s hidden rate hike buys Erdogan time but raises risks’ pointed out in this regard: ‘The Turkish currency had lost more than 50% of its value against the dollar since September as President Recep Tayyip Erdogan leaned on the central bank to slash borrowing costs in an effort to lure investment and shore up his waning popularity.’
It strongly appears that the elephant in the room, which is quite hidden from the policymakers at home, is rightly quite evident for the Turkish President, and that the recessionary trend that was ushered in by the pandemic, required stimulus, and not pro-cyclical policies, as for instance are being pursued in Pakistan from an apparently consensus standpoint of government, SBP, and the IMF, in whose programme the country currently is in. Such a pro-cyclical standpoint is also quite contrary to evidence of most IMF programmes where austerity has led to overboard growth sacrifice for a rather non-enduring and little significant gains achieved in terms of macroeconomic stabilisation, mainly at the back of largely tackling inflation and current account deficit from the side of curtailing aggregate demand, and not slashing cost-push inflation enough to boost aggregate supply adequately, allowing it to play its needed part — especially in developing countries — in achieving macroeconomic stabilisation in a much more consequential way.
Hence, given the background of lira losing a significant portion of its value in recent months, and allowing making it easier to invest and in a broad-based way in terms of distributional consequences through lowering policy rate, Turkish government intervened through a recently announced policy to increase confidence in lira by stemming flow of investment in primarily US dollars and gold. As per a December 21, 2021 Bloomberg article ‘How Erdogan’s plan to halt the lira’s fall is meant to work’ said: ‘Turkey’s President Recep Tayyip Erdogan unveiled an emergency plan to curb the lira’s unprecedented depreciation and protect investors against wild swings in the currency. One measure guarantees that returns on lira-denominated deposits wouldn’t fall short of bank interest rates, in an effort to end current spot demand for foreign exchange.’
This policy has had an immediate positive affect, whereby a recent Financial Times (FT) article ‘Turkey’s currency surges after Erdogan unveils lira savings scheme’ pointed out in this regard: ‘Turkey’s lira jumped sharply after President Recep Tayyip Erdogan unveiled a new savings scheme… Turkey’s currency surges after Erdogan unveils lira savings scheme. The currency has risen more than 40 per cent to trade at TL12.84 against the dollar on Tuesday, dramatically reversing course after hitting a record low of TL18.36 the previous day. …The intense volatility was triggered by a new plan by Erdogan to lure Turkish savers away from the dollar and gold by compensating them for exchange rate losses if they hold their money in lira.’
Unlike Turkish government’s interventionist policy in terms of influencing local currency against dollarization through lira saving scheme, and also in actively pushing policy rate down, during the unprecedented times of pandemic, seems to make a lot of sense in terms of pursuing a significant pro-cyclical policy to manage macroeconomic stabilisation and economic growth. The scheme will put burden on Turkish government’s public finances. But it’s ‘a new savings scheme that analysts described as a backdoor interest rate rise that could erode the public finances.’
Yet it appears to be a far less burden on taxpayers than making them suffer, as in the case of Pakistan, in terms of both high inflation and high cost of capital, while at the same time such payments from government kitty to cover the difference of exchange rate and interest rate, than enduring the costs in terms of high domestic and external debt, and that is from a base 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. While the Turkish president has claimed that his “new economic model” will boost exports, investments and job creation, it has put huge pressure on the Turkish lira. The currency had lost about 50 per cent of its value against the dollar in the three months before Erdogan’s announcement.’
Hence, it makes a strong case for government to have a close look at the ‘new economic model’ adopted by Turkey. With regard to the details on the lira saving scheme, the same Bloomberg article ‘How Erdogan’s plan to halt the lira’s fall is meant to work’ pointed out: ‘The Treasury will make up for losses incurred by holders of lira deposits should the lira’s declines 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 in the same period, the Treasury — that is, taxpayers — would pay deposit-holders the differential. The instrument will apply for individuals holding lira deposit accounts with maturities between three to 12 months. The minimum interest rate will be the central bank’s benchmark rate and no withholding tax will be implemented.’
(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)
Copyright Business Recorder, 2021