Will the virus force the printing of banknotes?

On March 31, the Federal Reserve Service (FRS) also added Turkey to its list, taking a new step to allow foreign countries to buy dollars through swaps (Reuters). The slowdown in the global economy due to a viral epidemic has put countries in a difficult position due to the acute need for dollars. With this in mind, the FRS allowed countries with US Treasury bonds to use dollars for this amount.

Earlier this opportunity was provided to developed countries, especially China (which has US $ 1 trillion in treasury bonds) by establishing an exchange line with central banks in developing countries. Turkey has been included in the FRS program since April 6. However, the biggest problem for Turkey is that it has only US $ 2.8 billion of US Treasury bonds. Due to the tension in relations with Washington in recent years, Ankara, in response to pressure from the United States, sold its bonds, which in six years fell from $ 77 to $ 2.8 billion.

Turkey’s current internal and external debt is $ 500 billion, and there are mandatory dollar loans paid by the Treasury for long-term infrastructure projects. If Turkey cannot use the line opened by the FRS to get a sufficient amount of dollars, where can it find them - in the fight against enemies within the country (Covid-19) and abroad (Assad, Haftar) and how will secured loans be repaid? Experts and opposition parties urge the government to postpone repayment of long-term secured loans, not to hold tenders for new projects and to do everything possible to fight the virus, maintain the market and provide specific financial support to employees.

Following the example of the Azerbaijani side of “One nation, two states”, the government decided to collect money from citizens (as Mustafa Balbey from Cumhuriyet wrote, “The state captures the direct assistance of citizens and says: “Give me money, but stay away”).

As announced on April 1, the relief campaign raised about $ 100 million: “How useful will $10-15 million a day be for a state that collects about $ 450 million a day?”

All that citizens primarily want is to receive direct cash assistance and maintain the market. It is impossible to cope with the difficulties with the current mass of banknotes rotating in the market. A “monetary expansion” policy is needed, “printing new banknotes,” and President Erdogan, who directly intervened in the monetary policy of the Central Bank and even forced the bank president to resign without waiting for his term to expire, does not want to. The central bank does not even have 1/5 of the necessary foreign exchange reserves.

Putting currency notes unsecured into circulation is a way to bring firewood into the furnace of “inflationary pressure” that Mr. Erdogan is trying to avoid, therefore, if the market insists on a policy of “monetary expansion”, can Mr. Erdogan continue his stubbornness.

If no other medicine is found, he is likely to take it. If “inflationary pressure” begins to work, a solution will be found: when using the methods of the Soviet era, the monthly and annual inflation rates will be lower, and real market prices will not be reflected in the statistics reports of the Agency. However, here the danger will be new banknotes for the needing market. If there are a lot of them, then everything can get confused.

Turkey is experiencing these difficulties because it has raised public spending far beyond its capabilities. Perhaps one of the conditions for fulfilling the principle of “one nation, two states” was to increase government spending to an astronomical level. Will this virus be an “intermediary” to minimize these costs? Should not this be the first principle to be followed and fulfil?

Mayis Alizade