There is what is said and then there are the concrete steps and actions taken in the field. To tell you the truth, we sometimes get confused about “which one is true?” these days. The all too familiar question of “well, what should we believe now?” is always on our minds. We are ambivalent. Then they also ask us why there are no world brands coming out of Turkey, much to our amazement.
In fact, we have similar question marks in our minds about both the green transformation and the sustainability of the process of returning to reasonableness in economic policies after the May 2023 elections. We look at what is happening in the world, the statements made and the limited steps taken in Turkey. We are confused. Let me tell you about it.
“Should I invest in thermal power plants in this environment?”
A hard coal producer in Zonguldak recently asked me the same question. It was actually a very reasonable question. “I supply hard coal to iron and steel plants. I actually need to make new investments at this time,” he said, “Should I plan new investments in this environment?”
According to Sefia’s report on the subject, 75 percent of steel production in Turkey is made directly without the use of coal through electric arc furnaces. Erdemir, İsdemir and Kardemir still produce directly by burning coal. Approximately 25 percent of total production capacity. What happens? They will change, but this is the situation now. This is where the question in our minds and our ambivalence stem from.
The meeting was about a month ago. The environment had changed with Turkey’s ratification of the Paris Climate Agreement and the announcement of the 2053 net zero target. The possibility of setting a coal phase-out date, which was not on the agenda yesterday, was now on the agenda. Moreover, in the energy plan announced before COP27, it was also announced that new thermal power plant licenses would be granted.
Therefore, it is possible to ask the question as follows: Should I invest in new thermal power plants? Ministry bureaucrats say, “Don’t worry, keep investing in coal”. If you asked them now, they would say, “thermal power plant investment is very important for energy supply security, by all means, get into this business”. However, like every experienced citizen of the Republic of Turkey, our business people know better than to rely on the words of bureaucrats and ministers and risk their capital.
Now what is the answer to such a question? It is obvious that hydrocarbon investments with an investment horizon that exceeds a reasonable transition period should be avoided. But what should the private sector do when the public sector does not even have a concrete road map? For example, one should avoid projects where if the public sector changes its mind tomorrow morning, you will not get back the money you invested as compensation.
I say to those who ask such questions, ask the bureaucrats who told you to get into this business: Did they know that the Paris Climate Agreement would be passed by the Turkish Grand National Assembly one day before our President said “We are ratifying the Paris Climate Agreement” at the United Nations General Assembly meeting in September 2021?
I add: “And I wonder if they heard that on the same day, he would say “2053 is our goal for a net zero year” an hour before, let alone a day.” Clearly, there is a deep transparency problem.
It may be easy for politicians to move from one position to another. But the same flexibility is not available for the corporate sector, for the private sector. There is a price to pay for making an investment and then having to abandon it. What is it? The way to pave the way for investments is first of all to have a strong economic program and to lay out the policy steps with transparency.
To tell you the truth, I also remember the version of this question: “How can I be sure that you will not let another company build a port next to the one I am going to build and start operating?” This is what a Singaporean port operator asked me when I asked him why he was not interested in an investment in Turkey. I was silent. My point is that the issue is not new, it is old. It’s always the same, yesterday’s mistakes come back to haunt you.
The same ambivalence still exists on monetary policy. Turkey has decided to stop digging holes right after the elections in May 2023. Let me remind you once again of the first pothole law: If you are in a pothole, you must first stop digging. We stopped digging with the process of return to reasonableness in the economy.
But we quickly realized that it was not possible to get out of the hundreds of decisions taken during the holiday week of irrationality in the economy in one day. For example, if you closed the currency-protected deposits that day, you had to answer the question, “Where will I get 30 billion dollars in one night?” Eventually we realized that the transition would be gradual. But the second pit law was always on our minds: The fact that you have stopped digging does not change the fact that you are in a hole. We were looking ahead and trying to adapt accordingly.
These days, the behavioral effects of the Central Bank having borrowed reserves instead of its own reserves are actually on the agenda. Remember, during the “look, we are cutting interest rates and nothing is happening to the exchange rate” period, we condemned the Central Bank to rely on borrowed reserves through swap agreements. In fact, we accepted this situation as very natural.
Our columnist Fatih Ozatay recently asked a good question: “Is the policy rate of the central bank now 40 percent or 33.4 percent?” While asking this question, he also shared a nice graph with us in our newspaper. Let me remind you of that graph. The Central Bank was now essentially providing Turkish Lira liquidity to banks that brought dollars to it. What is this? Those who contributed to the lending reserve had access to Turkish Lira. The Bank was now using the open market operations (APİ) channel, which normally provides access to Turkish Lira, less.
Borrowed reserves are trouble…
To access Turkish Lira liquidity from the APİ, the bank has to pay the policy rate. But if you bring dollars to the bank and access Turkish Lira through the swap channel, you also earn swap interest from the central bank. What happens is that while those who access Turkish Lira through the APİ channel pay 40 percent interest, to access Turkish Lira through the swap channel, you effectively pay a lower interest rate than the policy rate.
For the sake of collecting lending reserves, the Bank gives banks access to the Turkish lira at a rate lower than the policy rate. What happens then? When a bank wants to access the lira, it is encouraged to access the Central Bank through the swap channel, not through the APİ channel. What does this mean? Those who want lira must first dollarize their balance sheet. What is the point; when we say liraization, we were already in the process of systematic dollarization. And this effect is still continuing.
So, what should be done?
In this case, I think we need to focus on what needs to be done to overcome the ambivalence of the private sector about investments and the central bank’s rapid accumulation of reserves. I tried to emphasize above that transparency is the first thing we need to return to the path of reason. For transparency, we need a strong economic program. Without a strong structural reform agenda, it is not easy to return to sanity.
Actually, the framework is more or less clear. We can start by concretely adding the 2053 net zero target to the Climate Law. Countries that have enacted and announced the target have now swept the world. In this new world, which tends to be divided into trade blocs, being one of the countries that have written it into law is extremely important, if you ask me.
Secondly, we need to set short-medium term targets that are intermediate stops that will take us to the 2053 net-zero target. I’m not talking about targets that say “do whatever you can for the next 15 years and we’ll see what happens afterwards” as in the National Contribution Declaration we announced last year. Intermediate targets that are the least costly, the most effective and that will give seriousness to the 2053 target…
Third, we need to design the administrative reform process required by the 2053 net zero target. European Union countries have generally started by bringing together the Ministry of Environment, the Ministry of Energy and even the Ministry of Economy under the Ministry of Climate Change. We should not reinvent the wheel.
Fourth, it is useful to design a just transition strategy team/institute/mechanism that will bring together the climate change agenda and local development projects. In this way, we need to decide how to use Turkey’s land in consideration of climate change. We need a spatial planning strategy. This is how the State Planning Organization of the new era will be. Keep this in mind.
Fifth, in line with the new space plan, we need to reform development and investment banking in order to be able to use international resources immediately. We need to overhaul the current structure, which can only utilize billions and billions of resources from abroad, and turn development and investment banks, including Bank of Municipalities (İlbank), into institutions that manage the risks on their own balance sheets.
Sixth, we need to design local just transition strategies that cover the whole country, including sectoral transition plans, taking into account the specificities of each place. It is also useful that these plans take into account the restructuring in global value chains.
Seventh, we need to focus on how to transform our entire institutional infrastructure – from logistics to education, from health to coastal protection and rural development – in line with green transformation.
We should not forget that the modernization of the Customs Union process with the European Union is actually Turkey’s decarbonization agenda. In the meantime, we should be aware of the new space of opportunity that the peace agreement between Armenia and Azerbaijan will open up, especially for Eastern Anatolia.
Remember, COP29 will be in Baku in 2024 because Armenia withdrew its COP29 application and supported Azerbaijan’s COP29 application.
The stars seem to be aligning again for Turkey. When viewed in this way, 2024 will be very decisive. Either we will put forward the program needed to make the twenty-first century the Turkish century. We will blend the requirements of the country’s quest for stability with the possibilities of the global green transformation agenda. Or Turkey will become Argentina. The choice is ours.
Let the sun shine in. Turkey’s economy needs transparency and a clear roadmap in 2024. It is both easy and difficult. But we have been through a lot before. Now we are almost ready for it.
