Did Washingtons Floating Currency Magic Go
The expensive lira is creating pessimism among Turkish tourism operators and exporters; causing banks to borrow dollars excessively and escalating open positions.
This situation seems to be worrying the International Monetary Fund (IMF) and World Bank authorities in Washington too.
Stating that the real exchange rates have reached pre-crisis levels, World Bank Country Director Ajay Chibber, said, "This will start to affect tourism and exports adversely some time."
A couple of days ago, in a report about the economic situation in Turkey, the Executive Board of the International Monetary Fund (IMF) stressed the need for watching closely the competitiveness of Turkish goods overseas in light of Turkish lira's recent rise.
In the same report, the IMF Executive Board called on the Central Bank to take advantage of the better-than-expected developments in the balance of payments and increase its foreign currency reserves to recompense the situation.
This would also improve confidence according to the IMF Executive Board. The report also stated that the Executive Board was pleased about the government's decision to carry out foreign currency auctions.
What is going on? What's wrong if the Turkish Lira is appreciating excessively? Can't the floating currency regime, that is capable of anything, rasp all extremities? Wasn't the floating currency rate system supposed to shape the market with its own mechanisms and stabilize the lira without the need for any intervention?
But, look! That's not what's happening. Turkish lira is getting more and more expensive. The March 2002 real exchange rate level is the same as the August 2000 level, which was a month of import booms.
Real exchange rates, calculated by the Central Bank on the basis of 100 in 1995, increased to 130.4 percent in January 2002, to 135.7 percent in February, and to 135.3 percent in March.
The March 2002 real exchange rate level is the same as the August 2000 level, which was just before the September 2000 crisis, and which was a month of import booms that resulted in a huge current accounts deficit.
Because of the excessive appreciation of the Turkish lira, the profits of Turkish tourism operators and exporters face the danger of dwindling. The real exchange rate had peaked in January 2001, at 148.1 percent, just before the February crisis and the devaluation that followed it. Real exchange rates declined quickly following the devaluation, and went down to 98.9 percent in August.
However, the real exchange rates have been recovering speedily since November 2001, as the Turkish lira started appreciating against foreign currencies. The increase in exchange rates is actually higher than the general price level increase in March.
If the currency's risky rise against the dollar continues, this will become a problem for the tourism and export activities. If the tourism and export activities scale down,let alone an economic growth, the Turkish economy will shrink awfully in 2002!
Why doesn't the Central Bank and the Banking Regulation and Inspection Board (BDDK), do something about the banks which open positions that exceed their limits, instead of using an iron hand in a velvet glove? Moreover, why does the IMF and the World Bank literally call for a capital flight by preparing reports and announcing to everybody that there is an excessive appreciation of the Turkish lira?
Will the IMF and the World Bank take responsibility if there are new capital flights causing excessive demand for the dollar again, and if the interest rates soar?
It seems that Washington's magic has failed once again. The "magical formulas" went wrong. Wasn't it IMF that said, "The floating currency rate system is the best method that enables the currency to freely settle in the level it is supposed to be, without any need for intervention?
Will you be surprised if Washington causes a new road accident in Turkey, and says, "No, you were not successful in doing this," and then comes up with another magical formula to replace the floating currency regime?
I wouldn't be surprised. Neither would the people who are like me. But it is certain that Turkey is going through a conjuncture that will fail the magic of some others, along with Washington...(MS/FA/SA/NM)