Floating exchange rate ’should be abandoned’
Güncelleme Tarihi:
by Pınar Sungur - Referans
Oluşturulma Tarihi: Aralık 16, 2008 00:00
ISTANBUL - Instead of signing a new agreement with the International Monetary Fund, an economist suggests that the government should implement radical changes. The current floating rate system should be replaced with a fixed rate system, he says
Turkey needs to change its exchange rate policy and abandon the floating rate system as soon as possible, according to the former program manager at the United Nations Development Programme in Turkey.
A fixed rate system is a must for a predictable foreign exchange market, said economist Bartu Soral, arguing the floating rate system created uncertainty. "For instance, when the dollar is YTL 1.20, investors establish factories and get into debt for five years. If the rate reaches YTL 1.70 in four months, however, the investment gets into trouble. In such an uncertain climate, Turkey cannot implement a floating rate."
Commenting on a possible deal with the International Monetary Fund, or IMF, Soral said he strongly believed Turkey should not sign a new deal with the IMF. Turkey should instead focus on implementing radical changes, such as the consolidation of foreign debt.
Soral said the Turkish floating rate system was a "Tahtakale floating exchange rate." Tahtakale is the center of the pushcart stock market, where exchange rates of the free market are determined.
Unlike the floating rate system, a fixed rate system would create a predictable foreign exchange market and would hand over control to the Central Bank, he said.
The crisis has not hit its peak yet, therefore it also is not descending, said Soral. The public will start to feel the impact of the crisis at the beginning of 2009, he added. Soral also said Turkey might witness negative growth next year. The fact the global crisis has not affected the Turkish banking system does not guarantee there will never be an impact on the system, Soral said.
Bankruptcies and layoffs
"Aside from several bankruptcies and layoffs, I know there are some real economy firms that have been forced to cut staff salaries by half, rather than introducing an increase for the New Year."
"Many people rolled over their debts through bank loans. With rising unemployment and reduction in income, paying back those loans will be much harder," he said, adding that he currently did not see a need for banks to provide full deposit guarantee.
If a new deal is signed, then the IMF will ask Turkey to guarantee its external and internal debts, as well as demanding a reduction in education and health investment, Soral said. "Resources attained from the IMF would only be a sequel to a system that does not work well," he said, and added the correct move would be to not sign a new IMF deal. Turkey should accept inflation and focus on increasing demand, he said. "If demand drops, then supply is also at stake. The IMF may bring cash liquidity, but due to the program they envisage, demand may drop and stagnation may expand."
Diverging from an IMF deal, Turkey should focus on consolidation of foreign debt just like Russia did after the crisis in 1998, Soral said. "The Customs Union should be revised."
It is also crucial to monitor China carefully during the crisis period, Soral said. "China grows in production rather than by financial games. Despite the stagnation in its closest trade partners, the country is not likely to face distress."
A fixed rate system is a must for a predictable foreign exchange market, said economist Bartu Soral, arguing the floating rate system created uncertainty. "For instance, when the dollar is YTL 1.20, investors establish factories and get into debt for five years. If the rate reaches YTL 1.70 in four months, however, the investment gets into trouble. In such an uncertain climate, Turkey cannot implement a floating rate."
Commenting on a possible deal with the International Monetary Fund, or IMF, Soral said he strongly believed Turkey should not sign a new deal with the IMF. Turkey should instead focus on implementing radical changes, such as the consolidation of foreign debt.
Soral said the Turkish floating rate system was a "Tahtakale floating exchange rate." Tahtakale is the center of the pushcart stock market, where exchange rates of the free market are determined.
Unlike the floating rate system, a fixed rate system would create a predictable foreign exchange market and would hand over control to the Central Bank, he said.
The crisis has not hit its peak yet, therefore it also is not descending, said Soral. The public will start to feel the impact of the crisis at the beginning of 2009, he added. Soral also said Turkey might witness negative growth next year. The fact the global crisis has not affected the Turkish banking system does not guarantee there will never be an impact on the system, Soral said.
Bankruptcies and layoffs
"Aside from several bankruptcies and layoffs, I know there are some real economy firms that have been forced to cut staff salaries by half, rather than introducing an increase for the New Year."
"Many people rolled over their debts through bank loans. With rising unemployment and reduction in income, paying back those loans will be much harder," he said, adding that he currently did not see a need for banks to provide full deposit guarantee.
If a new deal is signed, then the IMF will ask Turkey to guarantee its external and internal debts, as well as demanding a reduction in education and health investment, Soral said. "Resources attained from the IMF would only be a sequel to a system that does not work well," he said, and added the correct move would be to not sign a new IMF deal. Turkey should accept inflation and focus on increasing demand, he said. "If demand drops, then supply is also at stake. The IMF may bring cash liquidity, but due to the program they envisage, demand may drop and stagnation may expand."
Diverging from an IMF deal, Turkey should focus on consolidation of foreign debt just like Russia did after the crisis in 1998, Soral said. "The Customs Union should be revised."
It is also crucial to monitor China carefully during the crisis period, Soral said. "China grows in production rather than by financial games. Despite the stagnation in its closest trade partners, the country is not likely to face distress."