When you don’t learn from a mistake from 30 years ago


Let’s remind what happened in the last months of 1993 and the first months of 1994 which paved the way for the decisions taken on April 5, 1994. There were important fragilities in the economy. The borrowing need of the public sector corresponded to 10.3% of the GDP in 1993. Inflation averaged 66%, the interest rate for the Treasury’s borrowing hit 87%, and the current account deficit accounted for 3.6% of the GDP. The Treasury had an opportunity to use a loan from the Central Bank (CB). The Treasury could borrow with a maturity of 12 months at most. The administration of that period complained about the high level of interest rates. 

What would you expect within the frame of these complaints? A program to reduce high borrowing and remove the fundamental reason for high-interest rates and very short-term borrowing. On the contrary, the thing was done that must never happen in a country where the borrowing need is so high, and the borrowing interest rate exceeds inflation that much. Instead of reducing the financing need, it was chosen to meet this need using short-term advances from the Central Bank. Borrowing auctions were called as the interest rates demanded by banks were high in auctions. For example, the Treasury didn’t approve any borrowing bids in auctions with a maturity of three and six months in November and December 1993 (There was a borrowing with a maturity of three, six, nine, and 12 months in those years). The interest rates offered in auctions were minimum at 86.7% and maximum at 91.8%.

Before the removal of six zeros from the Turkish Lira, USD/TRY, which stood at 11.8m, rose to 14.5m at the end of December 1993 and jumped to 23.1m on April 4, 1994. The CB continuously sold FX, and its reserves melted. A stabilization package was announced on April 5, 1994. But the interest rate obsession continued. Although it was stated that the interest rates would be determined at the market, the CB lowered the overnight interest from around 150% to 90% on April 6, when USD/TRY soared to 39.9m. The market settled only after the Treasury borrowed at extremely high-interest rates. For example, the compound interest rate offered by the Treasury to banks hit 400% in a 3-month maturity auction on June 7, 1994. Let’s pay attention to the following factors: The Treasury had to offer the interest rate itself by changing the auction system, and the interest rate, which was considered by it high four months ago, hovered around 90%. FX rates almost quadrupled, the interest rate reached an incredibly high level, and inflation soared by 47 points to 116% compared to the end of 1993. The economy contracted.

The interest rate obsession is like this. Unfortunately, we couldn’t learn from what we experienced around 30 years ago. The interest rate obsession recurred towards the end of 2021. The point we have reached today is obvious: an economy under unsustainable conditions.

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