3-leg program needed for inflation: Kaslowski 


Turkey needs a 3-pronged strategy to fight against inflation, according to Simone Kaslowski, President of the Turkish Industry and Business Association (TUSIAD). Speaking to daily DUNYA, Kaslowski said these three prongs are the right monetary policy, the fiscal policy to comply with the right monetary policy, and structural changes to support production. 

Discussing correct monetary policy, Kaslowski stated that a country’s currency unit sharply devaluates when over-expansionary monetary policy is implemented and that this raises inflation. “Then you become obliged to fight against this. It’s the summary of the last five months in Turkey. This is the key reason behind high inflation in Turkey in the last five-six years,” the TUSIAD President added. 

The fiscal policy, which is the second prong of the program proposed by Kaslowski, should comply with the monetary policy. “Turkey changes taxes too much. Measures will be temporary if measures are taken for the price at first. If a country affects prices with tax reduction in the first stage, this will be an expansionary fiscal policy. To reduce taxes will create demand and inflation in the medium term,” Simone Kaslowski noted. Stressing that Turkey has a deepening inflation problem, the TUSIAD President said: “With the impact of the value-added tax (VAT) reduction, which has been implemented in food in the recent period, we’ll see a decline in prices, albeit limited. But how will we prevent inflation from health to education, from restaurants to transportation?”

Kaslowski described the structural changes, the third prong of the program, as micro-steps. “For instance, which structural steps did we take to support supply and production in food and agriculture? Could we resolve the problem in storage and transportation? The ratio of loss is obvious. Has the law on the wholesale market halls been enacted?” he noted. As Kaslowski says, Turkey should adjust all aspects of the supply chain from field to market, as many industries, including energy, are experiencing the same issues. 

Excess demand is effective on inflation

The most important issue is to understand the structure of inflation to fight against it, according to Kaslowski. Stressing that foreign exchange (FX) rates aren’t the only reason for inflation, the TUSIAD President added: “Although FX rates are influential, Turkey doesn’t have just cost inflation. There is also inflation created by excess demand. We think that the cost side is the only cause of inflation. However, excess demand is also very effective. Inflation has been rising for years as we don’t use the monetary policy in this scope.”

Estimated an 11% growth for 2021

TUSIAD estimates that the Turkish economy will grow by 11% in 2021 and 3% in 2022. “However, there is a different composition in 2022 than 2021. We are proceeding with consumption and exports more. We are experiencing a period when investments slow due to uncertainties. Turkey’s exports have also slowed with the decelerating demand in Europe. We’ll track and see the impacts of supports such as the Credit Guarantee Fund (KGF),” Kaslowski noted. The TUSIAD is optimistic about tourism revenues for 2022 but the Russia-Ukraine crisis poses a risk, according to Simone Kaslowski. 

Need for continuous modification

The FX-protected TRY deposit account (KKM), which buys time in the short term, should be considered in terms of sustainability for the medium and long term, according to the TUSIAD President. KKMs total nearly TRY 370bn at present. TRY 185bn of this has been converted from FX deposit accounts and corresponds to over USD 13bn. “For instance, the first period of the KKM for real persons will be completed within three months. FX rates will probably hover at the current levels, while interest rates will be 17% and inflation will see 50-60%. Won’t depositors head towards FX accounts as their savings decline due to inflation? We may try to make TRY attractive with another short-term product in that period. But this doesn’t end. You have to implement new instruments with new incentives once every three-six months. You can’t make the national currency unit of a country attractive if you can’t control inflation.”

Kaslowski also stated that a demand was created for legal persons to use KKM with incentives. “Because there wasn’t a financial benefit. Now there is a need for the continuous modification of the KKM system with many new communiques in the interim period. We can’t proceed how we started at the beginning, as the system isn’t sustainable. A six-month maturity is long for our companies,” Kaslowski added.

Investment appetite may be lost due to operating capital problem 

There is a serious problem in operating capital due to the price hike, according to the TUSIAD President. “Those who sell goods to Turkey have cut the maturity after Turkey’s credit default swap (CDS) increased. This has raised the need for operating capital,” Kaslowski said. “The price of everything has doubled in TRY terms due to the FX shock, even if prices remained steady. Loans used by enterprises contracted in USD terms in the last four-five years. Investment appetite may be partially lost in 2022, though there are opportunities in the supply chain,” Kaslowski noted.  

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