MTP Inflation and Exchange Rate Conflict: How Will Inflation Go Down While the Exchange Rate Goes Up?

Today the Medium Term Program (PMP) was announced, which includes goals for basic macroeconomic data levels such as inflation, national income, growth and unemployment, in the 2024-2026 range.

However, the contradiction in the government’s exchange rate and inflation targets is striking.

According to the objectives announced with the MTP, the government foresees that the average dollar/TL rate will be 23.88 in 2023 and 36.78 in 2024.

Inflation will rise to 65 percent in 2023 and fall to 33 percent in 2024; In 2026, it is expected to drop to single digits, at 8.5 percent.

The question that economists are drawing attention to is how inflation will decrease to 33 percent, while the dollar rate appreciated by 54 percent and will reach the level of TL 36.78 next year.

‘IF THE CURRENCY RISES, INFLATION WILL NOT BE AVOIDED BECAUSE…’

Associate of Economists. Dr. Orhan Karaca, In his assessment to sozcu.com.tr, he said: “Yes, the exchange rate and inflation forecasts are like a puzzle. It seems that they took the CBRT estimates directly without thinking too much about the inflation issue and only slightly increased their estimate for 2023 compared to the last situation.

“The increase in exchange rates may have been deemed necessary to support exports,” Karaca said, adding: “As you know, there are problems in our export markets as well.”

Regarding how inflation will decrease in this case, Karaca said:

“According to what is said in the PMP, domestic demand will stabilize with the support of a restrictive monetary policy that includes quantitative adjustment and selective credit practices, while the disinflation process will begin with increases in production, competition and the productivity. This seemed to me a continuation of the application of the New Economic Model (SEM). It seems that they once again attributed the drop in inflation to the increase in supply. By strengthening the supply capacity, the factors that cause inflationary inertia will also be eliminated.

If this had happened, it would have happened in the YEM period and inflation would not have arrived here. Once again, if the exchange rate rises as expected, inflation cannot be avoided. Because the main reason for inflation in Turkey is cost increases due to exchange rate increases. If the exchange rate increases, costs will also increase, which will be reflected in prices.

‘CONTRADITIONAL OR Optimistic OBJECTIVES’

Another piece of data that supports this criticism is the growth rate targets.

Economic growth projections, which were previously 5 percent for 2023 and 5.5 percent for 2024, have been cut to 4.4 percent this year and 4 percent next year. Economic growth is projected to accelerate over the next two years and rise again to 5 percent in 2026.

Commenting on sozcu.com.tr on the subject Academic Prof. Dr. Cem Baslevent, “Although the increase in the exchange rate is at this level and the economy is expected to grow around 5 percent, it is unlikely that a significant decrease in inflation will be achieved. In this sense, these objectives announced with the OVP can be described as “contradictory or optimistic”.

‘COMPATIBLE WITH HOT MONEY WITHDRAWAL GOALS’

Talking to Sozcu.com.tr Economist Prof. Dr Hayri Kozanoglu, According to the OVP, he noted that while the exchange rate is rising, inflation reduction targets are in line with Turkey’s hot money withdrawal targets.

Regarding the prediction that inflation will decrease to 33 percent while the dollar rate will increase to TL 36.78 in 2024, Kozanoğlu said: “The main objective of this situation, which includes a severe real depreciation of the TL, is the exchange rate hot money inflows”, which is considered very important for the next period. I think it is to create an attractive environment for people,” he said.

Discussing the government’s goals in today’s PMP, Prof. Dr. Kozanoğlu continued:

‘EVEN IF SUCCESSFUL, EXTERNAL LIABILITIES WILL INCREASE BY 150 BILLION DOLLARS’

“Because to withdraw money, you want your money to depreciate first, and then to stabilize.

From this perspective, the objective of reaching a current account deficit of 95 billion dollars in three years is striking. Taking into account the serious weakening of the Central Bank’s reserves, at least 50-60 billion dollars are needed to supplement this deficiency.

In other words, the PMP was prepared under the scenario that Turkey will withdraw at least $150 billion in three years. But even if this is achieved, it would mean a $150 billion increase in Turkey’s foreign obligations and its reliance on foreign sources.”

‘WHAT WILL HAPPEN, INFLATION WILL LOWER, THERE IS NO ANSWER’

Commenting on sozcu.com.tr The economist Dr. Mahfi Eğilmez On the other hand, he stressed that the announced programs do not mention concrete steps on how to achieve the low inflation forecast for the coming years, rather than contradictions such as the exchange rate-inflation.

Regarding the forecast that inflation will fall to 33 percent next year, Dr. Eğilmez said: “What will happen next month when inflation decreases? Forecasts made without explanation are not a program, but a wish,” he stated.

For his part, economist Dr. Mahfi Eğilmez announced on his social media account that he will not write any articles on the OVP, which was announced today, and included the following statements in his statement: “For me, the MTP is not a document that can be the subject of an article”.

When asked by one of his followers how inflation will decrease despite the exchange rate increase, Eğilmez replied: “If we can get there… What’s left until we get there?”