Inflation Steals Almost 30 Percent of Buying Power in Turkey

Released from Ankara and Washington, D.C.

Inflation robbed Turks of 30 percent of their purchasing power over the past five years even after large increases in income, according to a new analysis by The Central Bank of Turkey.

For example, in the last year, the average Turk received a 64 percent increase in income, but the inflation rate was 80 percent in 1996, leaving an “inflation gap” of 16 percent.

However, the inflation burden is not shared equally. For example, government employees received a 94 percent pay increase last year putting them 14 percent above the rate of inflation. Cement industry workers received a 69 percent increase — with an inflation gap of only 11 percent. Chemical and sugar industry workers received a 66 percent increase — an inflation gap of 14 percent. Public sector workers, those who work for state-owned enterprises, received only 38 percent in wage increases, leaving an inflation gap of 42 percent.

For the poor, the unemployed and those retired on small or fixed incomes, the situation is much worse, because they cannot shield themselves from the rapid upward spiral of inflation. They continue to get poorer and poorer.

For example, a couple getting a 1,000,000 lira-a-month pension in 1991 had an increase in pension and get 18,000,000 lira per month in 1996. The result was a loss in real purchasing power of 15 percent even with that large increase.

Since 1993, people who earn only minimum wage lost 11 percent of their purchasing power, despite a six-fold increase in the minimum wage.

In the last five years, the purchasing power of the Turkish lira has dropped nearly 46 percent per year.

“Over the last two decades, inflation has become the most disruptive force in the economy, responsible for many of the major problems facing Turkish society,” says Gazi Erçel, the Central Bank Governor.

“It’s like a tax; it takes something from everyone’s real income. The level of the ‘take’ varies, however. In Turkey, inflation hurts the poor and middle class worst.”

The ultimate aim of the Central Bank is to reduce inflation to the single-digit level. “Now is time to act,” says Governor Erçel. “Fighting inflation cannot belong to a single political party’s program. It should be the first priority of all politicians.”

Prices are escalating fastest among those things of which Turks buy the most — food, housing and transportation. For example, the cost of feeding a family of four per month is 44 million Turkish lira (TL) now, compared to 22 million TL a year ago. A small car now costs 1.8 billion TL, compared to 0.85 billion TL last year. Similarly, a liter of gasoline costs 157,000 TL now, versus the 72,000 TL it cost a year ago.

From 1970 to 1995, The Central Bank says the average Turk could have increased his or her income in real terms 10 times, from $520 to $5,200, if the nation had not suffered from double-digit inflation.

According to the analysis, Turkey’s high rate of inflation causes:

  • The massive growth of the unregistered economy where transactions are done in cash and are beyond the tax system.
  • Dollarization of the economy where accounts are kept, or sums are hoarded, in foreign currencies.
  • Extensive unemployment and underemployment;
  • Shrinking corporate profits and a rising number of business failures.

“When inflation comes under control, it’s good for everyone,” says Mr. Erçel. “Foreign companies will invest heavily in Turkey — as they did in Brazil and Argentina after those countries cut their high inflation — ultimately creating new jobs and higher pay, which is good for the average Turk.”

The “Shrinking Lira”

As the prices of many goods and services continues to rise, the value of the Turkish lira dwindles. One thousand lira in 1990 was worth 60 lira in purchasing power in 1995, and 18 lira in 1997. If inflation persists at the current rate, 100 lira in 1990 will only be worth 3 lira in 2000.

The average Turk must earn more just to stay even with the higher living costs and taxes. For example, assuming that each year prices and exchange rates rise by 90 percent, a Turk who earns:

  • 760 million lira ( $5,000 US) in 1997 must earn 5.2 billion lira just to break even in 2000.
  • 1.5 billion lira ( $10,000 US) in 1997 must earn 10.5 billion lira just to break even in 2000.
  • 3 billion ( $20,000 US) in 1997 must earn 21 billion lira just to break even in 2000.
  • 4.5 billion ( $30,000 US) in 1997 must earn 32 billion lira just to break even in 2000.
  • 7.6 billion ( $50,000 US) in 1997 must earn 52 billion lira just to break even in 2000.

Why the bias toward “perpetual inflation” in the Turkish economy?

  • Deficit spending by Government. The Budget has been in the red every year since 1970.
  • Low productivity. Inflation is outstripping productivity and thus, the cost of goods has risen sharply to producers.
  • Inflationary expectations. Because inflation has risen for 22 years, businessmen, consumers, investors and government officials are making decisions based on expected inflation. Inflation becomes a self-fulfilling prophecy.

“To fight against inflation, we need to have an inflation reduction program that will last at least three years, with some painful measures for the first eight to 12 months,” warns Governor Erçel.” These measures are not as painful as living with a 90 percent inflation rate over the long run.”

“Success of any inflation fighting program depends on credibility and continuity of the program and the political will to reduce inflation,” says Governor Erçel.

The broad outlines of the plan to lower inflation in Turkey are well-known. Some positive steps are already being put into place:

  • Reducing the budget deficit within 3 to 5 years from its current 8.4 percent of GDP to 3 percent, the European Union’s benchmark of eligibility for monetary union.
  • Broadening the tax base and reforming the tax laws, because of widespread tax avoidance. Also social security, social protection programs and the financial systems need to be reformed.
  • Reducing the monetarization of the deficits is an important element of combating inflation. This means that the Central Bank should have strict control over the expansion of domestic assets and the autonomy in controlling the volume of currency issues. With a new protocol with The Treasury, this is beginning to happen.
  • Increasing the pace of privatization. Selling off state-owned enterprises will generate income for the Treasury and therefore lower the deficit. Such sales will also save money from each year’s government budget, since many of these enterprises lose money and require government subsidies to keep operating.

“The average Turk can really benefit if we can beat this inflation problem,” says Governor Erçel.

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