BY ALAATTIN AKTAS
The Treasury’s domestic debt is increasing so much that Turkey’s future is being ‘hypothecated’.
The hike is rapid while the Central Bank’s (CB) interest rate, which is essentially non-functional, is kept low. The interest rate for the Treasury’s borrowing increases when the policy rate is cut below the ideal figure.
The interest rate burden of the Treasury’s domestic borrowing exceeded the principal payment burden in April, the first time in the history of the Republic. The difference between the principal payment and interest rate is gradually increasing, according to the Treasury and Finance Ministry.
The total principal to be paid for the domestic debt hovered around TRY 1.6tr in July.
The interest rate burden of the domestic debt reached TRY 2.2tr in July.
The Treasury’s principal payment for domestic debt was TRY 1.3tr and the interest rate burden of it hovered around TRY 795bn in December 2021.
The principal payment rose by 22%, or TRY 294bn, and the interest payment jumped 174%, or TRY 1.4tr in seven months.
The actual interest rate doesn’t decline when the CB’s policy rate is cut contrary to the needs of the economy.
The Treasury’s borrowing rate rose in the distrusting environment that emerged after the CB cut the policy rate.
This situation has created a burden for the Treasury as it had to give weight to inflation and foreign exchange (FX) indexed borrowing.
No one wants to lend to the Treasury at a fixed interest rate after FX rates and inflation started to increase following the CB’s policy rate cut. Thus, it started to concentrate on CPI (Consumer Price Index) and FX-indexed securities as it needed money. Lenders acted wisely and didn’t experience losses. The Treasury did.
Why? Because the CB cut the policy rate!
The Treasury’s burden rose as the share of securities, for which interest rate remained lower than inflation, in borrowing decreased. The bank borrowed more with inflation and FX indexed securities, and inflation and FX rates synchronously increased.
The FX-protected TRY deposit account (KKM) is an ‘unpinned grenade’!
The hike in the Treasury’s interest rate burden for domestic borrowing is an ‘unpinned grenade’!
The guarantees given for the public-private partnership (PPP) projects are an ‘unpinned grenade’!
It’s unknown when the election will be held and who will win. But it’s known that these grenades will start to explode by 2023.
First, the KKM…
Then, the Treasury borrowing with a higher interest rate to manage domestic debt…
We won’t feel the burden of the guarantees given for the PPP projects at once as implementation will happen over the course of several years.
These are economic bombs. There is another growing ‘bomb’ that may cause an internal disturbance: refugees and asylum seekers.
The CB kept the interest rate constant at 14%.
But the decision not to change the policy rate hasn’t been given by the CB because the CB no longer has the power to set the policy rate.