Growing inflation has always been a controversial topic in Turkey, and the inflation data for January, which was released earlier in the week, points to a trend that should be thoroughly assessed.
It is important that consumer prices fell below expectations but what is more important is the considerable decline in the producer price index, which fell to 12.14 percent from 15.47 percent on a yearly basis. Consumer prices also plummeted to their lowest in six months.
According to the Central Bank of the Republic of Turkey (CRBT), many factors have an impact on inflation entering a downward trend in the first quarter of the year.
The CRBT's insistence and emphasis on the tight monetary policy, domestic demand dynamics, exchange rate effect and the course of external pricing are important factors.
However, it is noteworthy that the decline in overall trend is on the production side. Here, we can see that the inflation decline moved together with the increase in the capacity utilization rate and turnover index in the industry, especially in manufacturing. It was accompanied by the Purchasing Managers' Index (PMI), which started to accelerate as of November 2017, and continued to increase in January 2018.
Another remarkable data set is the one that reflects the credit expansion trend in the banking sector. The total credit expansion in the banking system started to rise rapidly since March 2017, when the Credit Guarantee Fund (CGF) started to provide credit support. Exchange rate and parity-adjusted corporate sector loans also increased 24.6 percent by the end of the year. Here, personal loans increased only 14.9 percent by the end of the year, but personal loan growth fell below zero in January 2018.
On the other hand, credit expansion continued on the basis of companies. Again, in the same period, we see that unemployment started to fall and that exports started to rise and contribute positively to the growth trend, even if they were affected by parity.
This rapid rise in the industry pushed up imports, but it did not increase the foreign trade deficit in a problematic way as it was not a consumption-based increase. That is, the current account deficit did not expand dangerously, even though imports grew faster than exports.
Meanwhile, credit card debts of households continued to be horizontal and smooth last year. That is, the positive contribution of the consumption side to growth was due to the net income of households, and household borrowing did not increase despite rapid growth. We also see relative improvement in income distribution during the same period.
On the other hand, the deposit-loan conversion rate in deposit banks also declined to 117 percent, showing a relative improvement. So, CGF loans, in particular, started to turn into deposits, and we see improvement in fund problem stemming from deposits. The sectoral average of loans that fall under the follow-up is 2.92 percent, the lowest in recent years. Not even 1 percent of the CGF loans were currently under follow-up.
These figures were not written down to bore readers or to show how everything is going well in numbers, but all this quantitative progress confirms our assumptions.
Hypothesis 1: The inflation in Turkey is not a case that is realized on the monetary-consumption side. It depends on structural problems on the supply-production side and the most important dynamic here is high funding (interest) costs. If you provide cheap and easy credit access to producers and support production, inflation will fall with unemployment.
Hypothesis 2: You can make the banking sector support production within the market conditions, and if you do this, credit expansion will not have an inflationary effect, but rather deflationary. If you are a little patient, you will see that this production-oriented credit expansion will pave the way for an anti-inflationary process, push up capital adequacy in the banking system, and banks will survive in other ways than lending to the state and collecting pensioners' deposits and pensions at high-interest rates. Moreover, their main job is to support production. That is exactly what we have done with the CGF.
Hypothesis 3: If you step toward creating a financial system that supports production, you will see that this will reduce inflation along with unemployment and lead to a permanent improvement in the current account deficit.
Hypothesis 4: If you start to get out of being a slave of neoliberal fallacies, then you will both theoretically and practically understand that the central bank cannot target interest and exchange rates and hence inflation. Nothing will happen if the central bank abandons covered currency targeting. Thus, the country will get rid of the confusion that inflation will emerge as a result of the high exchange rate and believe that they have to increase interest rates for the exchange rate, inflation and everything else.
Hypothesis 5: Increasing production and the industry's efforts to increase its market share in global competition and to compete will boost technology efficiency against labor productivity. Profits will rise while wages and general prosperity will increase. This in return will prevent tax inspectors from plucking the geese by indirectly imposing consumption taxes. So, big earners will pay higher taxes and small earners will pay lower taxes. The budget improves in a healthy way and the country does not transfer funds to abroad with interests.
Consequently, we proved all these hypotheses in 2017 with the implementation of the CGF and many production-oriented reforms. In other words, these are no longer hypotheses, but theses. In this context, Turkey will continue to grow inclusively and steadily by enacting more production and market-friendly reforms in 2018.
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