Pakistan has seen its currency depreciate considerably during the current tenure of this government; some rightly to compensate for the policy of the previous government of keeping the rupee grossly overpriced. But the depreciation of the rupee in recent months, and in a very volatile way, shows a lack of adequate intervention from the State Bank of Pakistan (SBP) and a similar kind of non-influencing role of government when inflation is high – as a result of strong and substantial increases in oil prices due to the significantly low supply releases by OPEC-plus countries and, overall, due to a severe global shock to the supply of commodities – required a cheaper US dollar to control the imported inflation associated with the importation of these commodities.

Moreover, failure to realize the traditionally important fiscal nature of determining inflation, as well as inflation caused by a substantial world supply shock, a sharp and significant increase in the policy rate – with two upward revisions made in less than 30 days – put a heavy burden on the momentum needed to offset the negative impact of the pandemic causing the recession by making it expensive to import machinery and materials primary growth drivers, reduced aggregate demand by making it difficult to increase public and private investment to meet both stimulus and development spending needs, and manage debt sustainability and reduce the current account deficit in a way that does not compromise growth and reduce poverty and inequality.

On the contrary, Turkey, whose lira had suffered a hard blow against the US dollar in recent months, following a significant loss of investor confidence due to the fall in key rates, continued this monetary policy. accommodating unlike Pakistan. A recent Bloomberg article “Turkey’s hidden rate hike saves 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 as President Recep Tayyip Erdogan relied on the central bank to cut borrowing costs in an attempt to attract investment and consolidate its declining 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, required stimulus, not pro-cyclical policies, as, for example, are pursued in Pakistan from a seemingly consensual point of view of the government, the SBP and the IMF, on whose agenda the country is currently on. Such a procyclical view is also quite contrary to the evidence of most IMF programs where austerity has led to an excessive sacrifice of growth for rather lasting and insignificant gains made in terms of macroeconomic stabilization, mainly through the fight against inflation and the current account deficit on the side of reducing aggregate demand, not reducing the cost surge enough inflation to stimulate aggregate supply adequately, he allowing it to play its necessary role – in particular in developing countries – in achieving macroeconomic stability in a much more consistent manner.

Consequently, given the context of the pound having lost a significant part of its value over the last few months, and allowing to facilitate investment and generally in terms of distributive consequences by lowering the key rate, the Turkish government is intervened through a recently announced policy. increase confidence in the pound by curbing investment flows mainly in US dollars and gold. According to a Bloomberg article from December 21, 2021, “How Erdogan’s Plan to Stop the Pound’s Fall Is Supposed to Work,” said: “Turkish President Recep Tayyip Erdogan unveiled contingency plan to curb depreciation unprecedented pound and protect investors against wild fluctuations in the currency. . A measure ensures that the yields on lira-denominated deposits will not be lower than bank interest rates, with the aim of ending the current spot demand for foreign exchange. ‘

This policy had an immediate positive effect, in which a recent Financial Times (FT) article “Turkish currency soars after Erdogan unveils lira savings plan” stressed in this regard: “The pound Turkey rose sharply after President Recep Tayyip Erdogan unveiled a new savings plan. … Turkish currency soars after Erdogan unveils lira savings plan. The currency rose more than 40 percent to trade at 12.84 TL against the dollar on Tuesday, dramatically reversing the price after hitting a record low of 18.36 TL the day before. … The intense volatility was sparked by a new Erdogan plan to distract Turkish savers from the dollar and gold by compensating them for exchange rate 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 pushing the policy rate down, during unprecedented times pandemic, seems to make a lot of sense in terms of pursuing an important policy of managing macroeconomic stabilization and economic growth. The project will weigh on the Turkish government’s public finances. But it is “a new savings plan that analysts have described as a disguised interest rate hike that could erode public finances.”

Yet this appears to be a much smaller 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 in the same These payments from the government kitty to cover the difference in exchange rates and interest rates, than to endure the costs in terms of high domestic and foreign debt, and this from a base of weak growth and high inflation. The same FT article noted 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, investment and job creation, he has put enormous pressure on the Turkish lira. The currency had lost about 50 percent of its value against the dollar in the three months before Erdogan’s announcement. ‘

Therefore, it makes a strong case for the government to take 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 Pound from Falling Is Supposed to Work” pointed out: “The Treasury will make up for losses suffered by holders deposits in pounds if the pound falls against hard currencies exceeds bank interest rates.For example, if banks pay 15% for one-year lira deposits but the currency depreciates 20% against the dollar during the same period, the Treasury, i.e. the taxpayers, would pay the differential to deposit holders. The instrument will apply to persons holding lira deposit accounts with maturities between three and 12 months. The minimum interest rate will be the central bank benchmark rate and no withholding tax will be applied. ‘

(The writer 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