BY ALAATTIN AKTAS
The official data announced by the Ministry of Treasury and Finance shows that some of the steps taken by the economy management are not working well, and have even had the opposite effect, at least for public finances.
The interest rate journey, which started at 19% a year ago in September, will stop at 9% for the time being, after the latest cut made last Thursday. But how come the interest burden of the domestic debt to be paid by the Treasury moves in the opposite direction, increasing even though interest is being pulled down? Maybe the reason is the lowered interest rate itself!
The domestic debt principal burden of the Treasury, which was TRY 1.2tr at the beginning of November last year, increased to TRY 1.8tr on the same date this year. The 50% increase is a very reasonable one considering the inflation in this period.
What about the interest burden? The total interest burden of the principal debt, which was at TRY 1.2tr at the beginning of November last year, was TRY 781bn. This TRY 781bn demonstrated the debt payment projection. It’s now November 2022 and the principal is still TRY 1.8tr but the interest burden is now TRY 2.6tr.
A 228% increase in the interest burden of this principal when the principal only increased by 50%! Why? Because interest rates have dropped!
When the interest rate of the Central Bank was lowered, the Treasury had to borrow at higher interest rates for a period. Then, the Treasury, which could not borrow with fixed interest rates, started to index domestic borrowing to foreign currency and CPI.
INTEREST BURDEN MAY DECREASE
Fortunately, we can find solace in this. The payment projection, calculated as TRY 2.6tr for the domestic debt interest at the beginning of November, does not necessarily show the amount that will be paid. This amount is an estimate based on the current principal debt structure and taking into account the assumption of future inflation and exchange rate increases.
Therefore, if we can reduce inflation in the future and if we can prevent an increase in the foreign exchange, even reduce it a little if possible, we will have a chance to alleviate the TRY 2.6tr interest burden
The domestic debt principal burden and the interest burden traded places for the first time in April this year. Until April, naturally, the principal debt was hovering above the interest rate. With the interest rate cut that was initiated last year, the balance was disturbed, deteriorated, and, finally, this imbalance emerged in April.
As inflation increased and the exchange rate continued to rise, the gap between principal and interest gradually widened. If there are no developments that reduce the interest rate, TRY 142 of interest will be paid for each TRY 100 of domestic debt principal.