2016 started with two pieces of data being released that signify worrying times ahead for the Turkish economy.
The Consumer Price Index (CPI) increased by 1.8 percent in January and yearly inflation reached 9.6 percent, ranking Turkey among the top high-inflation countries. As for exports, they declined by 14.4 percent compared to January 2015.
The yearly CPI increase rate was 7.2 percent in January 2015, and it hit 8.8 percent in December 2015.
In fact, an upward push in inflation has been expected as Turkish Central Bank Governor Erdem Başçı stated recently that two-digit inflation might emerge during the first quarter. The monthly increase of CPI in February 2015 was limited to 0.7 percent, thus two-digit inflation could easily be predicted for the month this year. This February the price level could easily go over 1 percent given the existence of inflationary dynamics. Let me point out that two-digit inflation has already emerged in the regions of Adana and Gaziantep, which has received the largest number of Syrian refugees as it is so close to the border.
The main cause of the strong push in inflation is the 4.3 percent monthly increase of food prices. Yearly inflation in food prices has reached 11.7 percent, yet world food prices continue to decrease. According to the Food and Agriculture Organization (FAO), food prices decreased by 16 percent in 2015. The opposite trend in Turkey is caused by structural factors, mainly related to very low productivity. The worrying thing is that monetary policy may do little to solve this problem. It is worth noting that higher food prices continue to increase the gap between lower and median income households. The other factor has been the depreciation of the Turkish lira, over 20 percent in 2015, causing a strong pass-through effect, which despite easing is ongoing.
The Turkish Central Bank has projected year-end inflation of 7.5 percent, exceptionally far from the target of 5 percent. However, there is even a risk that this high-inflation forecast will be missed since a vicious circle seems to have been triggered. Indeed, pass-through effects of high depreciation of the Turkish lira have not completely stopped, while wage-push inflation is ready to enter the scene along with wage increases driven by the minimum wage hike of 30 percent implemented in January. As a result, cost-push inflation is expected to start from February onwards. Accordingly, inflation expectations are on an increasing trend: Year-end expectation has already hit 8.2 percent and even the 24-month projection is at 7.5 percent.
The Turkish Central Bank considers its actual monetary policy tight enough to curb inflation and bring it down to closer to 5 percent within three years, hoping for stabilization of exchange rates thanks to the decreasing current account deficit. Recent developments on the front of foreign trade do not justify this optimism.
The current account deficit narrowed last year, despite exports decreasing by 8.8 percent, as imports decreased (17.5 percent) to a greater extent due to the collapse of energy prices. Nevertheless, the narrowing of the current account deficit risks stopping and even reversing this year, with potentially further decreases in export figures and the trend of declining imports just about ending. The yearly decrease of exports hit 11.1 percent in December of last year, and dropped further to 14.4 percent in January, according to data from the Exporters Council. We do not yet know the imports figure from January, but seasonally adjusted monthly figures of the Turkish Statistics Institute (TurkStat) already indicate that shrinkage in imports has ceased. According to its figures from November to December 2015, exports diminished by 1.3 percent while imports rose by 2.9 percent.
If the current account deficit starts growing again, exchange rate stability might not be long lasting. Let me recall that this stabilization coupled with high inflation means the appreciation of the Turkish lira, which is already under way. This appreciation is not sustainable. To sum up, a combination of various inflationary factors, which will be difficult to tame, presents the main challenge for the Turkish economy today.