Industrialists Discussed “The Importance of Price Stability and Confidence for a Qualified and Sustainable Economic Growth” in ICI Assembly

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The Assembly of Istanbul Chamber of Industry (İCI) convened for the month of October on October 27, 2021 via video-conferencing. Presided by Mrs. Zeynep Bodur Okyay, the president of ICI assembly, the main agenda item of the assembly was “the importance of price stability and confidence for a stable qualified and sustainable economic growth".

Erdal Bahçıvan, Chairman of the Board of Directors of ICI made a speech at ICI Assembly and drew attention to the difficulty of making a prospective projection due to the changes in the indicators of inflation- currency rate - interest. "The reason why we always emphasize the importance of price stability and financial stability is that we are aware of the fact that an inflationist growth pattern will not elicit a qualified and sustainable growth” said Bahçıvan. “We should never renounce our valuable achievements concerning the fight against inflation for the last 20 years even for the sake of economic growth. Economic growth at the expense of inflation is not an approach for the good of our country.

İSO Yönetim Kurulu Başkanı Erdal Bahçıvan
Erdal Bahçıvan, Chairman
of the Board of Directors of ICI

“We have moved away from price stability which is the main goal of our Central Bank and furthermore financial stability which is its supporting purpose was also put at risk. Although all of us desire reducing interest rates, we must not forget that there are pricings occurring under free market conditions. Positive effects of low interest rates will be short-term and the risks of financial stability will increase in the mid-term as long as you do not remove uncertainty and increase confidence and predictability. We believe that the increase in exports achieved in return for a continuous devaluation of Turkish Lira will not bring along a long-term success. We do not want to act like the industrialists and exporters of the old times who had the mentality of "devaluate the currency and increase the exports!", moving away from financial stability and hoping for help from devaluation.

“We make these statements not for the present day, but for the future of our industry" he said.

Assembly meeting for October was opened by Zeynep Bodur Okyay, president of ICI Assembly. Mrs. Okyay made the following evaluation concerning the agenda of the meeting:

İSO Meclis Başkanı Zeynep Bodur Okyay
Zeynep Bodur Okyay,
president of ICI Assembly

"In the current environment of the Turkish economy, the reduction of policy interest by 200 basis points by a new decision taken by the Central Bank last week introduced new subjects of discussion to the agenda of all of us. While our eyes were inevitably focused on the currency rate on one hand, we began discussing at every platform issues like whether the government has renounced the fight against inflation, whether the new goal was to reduce current deficit and what this new attitude meant for the domestic and international investors on the other hand. Apart from all these discussions, it is well known by all of you that confidence is the sole factor that lies behind economy. Confidence and stability are two important conditions needed for directing the ship in which we all travel towards to its real route. Ensuring price stability is a significant component of this infrastructure of confidence.

As in all over the world, the main goal of our Central Bank is to ensure and maintain price stability. Central Bank also supports the government’s goal for growth and employment, provided that this does not conflict the price stability. This mission of the Central Bank is also explicitly stated in the Law of Turkish Central Bank. The concept of independence comes to the fore in the name of ensuring the success of central banks in line with that goal.

When we have a look at the history of modern economy, we see that the fight against inflation becomes more successful; the price stability is ensured and maintained as the independence of the Central Bank grows.

Economy is a concept of balance. Think of a chair with the feet of production – consumption – distribution and trade. It becomes difficult to speak of a real economy as long as that chair is not in balance. And the balance between these four factors requires confidence and price stability. Thanks to such a balance, a strong, stable and sustainable growth may be achieved”. 

After the speech of Mrs. Okyay, President of ICI assembly, ICI Chairman Erdal Bahçıvan took the floor. Bahçıvan said that a serious wave of inflation is rising all over the world also with an impact on Türkiye, emphasizing that they were having difficulties to make a prospective projections due to the changes in the indicators of inflation – currency rate – interest rate. 

“The demand that has strengthened with the impact of vaccination made under the scope of the fight against Covid-19 pandemic, disruptions in the supply chain, the trend of increase in the raw material prices and the increase of energy prices to record high levels fueled inflation” said Bahçıvan. “We see that the global inflation is expected to rise to 4.8% at the end of 2021, the highest level in the last 14 years. There is a differentiation between the developed and under-developed countries in terms of inflation, namely 3.5% and 5.8%, respectively. Inflation forecast for 2021 is 2.9% for Euro region and 5.1% for USA. Economic policies are also reshaped naturally against this inflationist environment. A change attracts attention in the statements of big central banks like FED and European Central Bank. These institutions emphasized that this increase of inflation would be temporary until before a few months, but have adopted a more prudent approach now. Central banks of the developed countries on the other hand either increased the interest rates or kept them constant depending on the changing expectations. When we have a look at our country at this point, we see that inflation was settled in the range of around 20 percent and policy interest dropped to the level of 16% together with the final reductions. After these developments, we witness new records of interest rates different from other countries and feel the global inflationist pressure much more with the multiplier effect. 

In this challenging period of many challenges and increased uncertainties, we must proceed with an understanding totally different, much more painstaking and careful than the understanding of a central bank in normal times. However, we observe that the central bank is moving away from price stability which is its main purpose and this situation also puts into risk the financial stability which is the supporting purpose of the bank. How nice it would be if the problems that we face today regarding price stability and financial stability could be solved only through the reduction or increase of interest rates by the central bank. Although all of us wish drops in interest rates, we must not forget the pricings occurring under free market conditions. We must never forget that the positive impacts of low interest rates would be short lived and the risks of financial stability in the mid-term would increase as long as we do not remove uncertainty, enhance confidence and predictability. 

“We openly see the reflections of this situation in CDS values measuring the risk premium of Türkiye. In the last three years during which Turkish Lira lost value, the CDS risk premium of Türkiye rarely dropped under 300 points. CDS which is currently around 450’s puts forward the fact that the confidence in Türkiye and its financial stability has been seriously impaired. Here, I would like to state a fact that I already expressed from time to time. Both Turkish industrialist and real sector does not deserve this CDS score. We must somehow find a way of dropping that figure to under 300’s and remedy this erosion in the environment of confidence in this way. Because these fluctuations that we experience not only shakes the confidence of the markets, but also impairs the prestige of our central bank to which we entrusted Turkish Lira. However, we think that the reputation and value of our central bank must be higher than ever during a period during which the developments in the world is very likely to have a negative impact on our economy”.

The Chairman Erdal Bahçıvan underlined that this process that they named as a process of loss of confidence and prestige is not limited to a single institution and added that another striking example of the same situation was also observed in the economic program containing the goals for the upcoming three years which were announced with the names of “Mid-term Program” or “New Economy Program” in the recent years. “For example, when we have a look at the estimations on inflation and exchange rates which are very important for our industrialists, we witness that the discrepancy between the goals set and actually realized was increasing more and more. In the past, in the program announced in 2018, the USD/TRY rate which was taken as a basis in the estimations of GDP in USD was 6.20 for 2021. 

That estimation was updated as 6.41 in the program announced in 2019 and as 7.68 in 2020. The estimations were 8.30 for this year and 9.27 for 2022 as stated in the last program announced last September. When we have a look at the situation today, the exchange rate has already exceeded the latest estimations. As for the inflation, we see that the inflation rate for consumer price index for the year 2021 was set as 6% in the programs announced in 2018 and 2019, but later revised as 8% in the program announced in 2020; and finally as 16.2% in the last program announced last month. We do not consider it very likely for the inflation that approached 20% in September to drop down to 16.2% at the end of the year even if it decreases due to basis effects. Furthermore, the further widening of the discrepancy between the producer price index and consumer price index increases the worries that the difficulties faced by our industrialists concerning pricing might be persistent and inflation could be frozen at a high level. It is painful but true: just these mistakes about the targets set for exchange rate and inflation alone is enough to upset the whole macro-economic goals. And this in turn impairs the consistency of the plans leading to the loss of their credibility in the eyes of the public”. 

Bahçıvan further reminded that as ICI, they for years expressed that it would be the most valuable gain for the Turkish economy to ensure price stability and financial stability in a lasting manner just as they did for the economy programs announced for the periods September 2018, 2019 and 2020. “The reason why we emphasize the importance of price stability and financial stability so much is the fact that from the very beginning, we were aware of the impossibility of achieving a qualified and sustainable growth based on an inflationist growth pattern. For that reason, never give up the valuable achievements in the fight against inflation that we have realized in the last twenty years even in return for economic growth. I want to underline this once more: I think that economic growth at the expense of inflation is not an approach for the good of our country and we must absolutely disavow it. Because as people from the same generations we altogether went through the periods during which we tried to increase exports by devaluating our currency and achieved a high level of economic growth under high inflation rate and sacrificed price stability to growth. At the moment, we remember those periods not with the growth performances but with the three digit inflation rates and incessant crises.

“The traces of the high inflation environment of 1980’s and 1990’s are still in our memory. Let us never forget it! Transition of our country to a one digit inflation path is only an achievement of the last 20 years. Unfortunately, we must accept that our company has a social vulnerability against inflation. As people who went through the experiences of those periods, we are concerned about the prospect of a return to that process that separated us from the high end economies of the world as a result of which we may be dissociated from the world league.

“We also do not believe that the increase in exports achieved at the expense of the constantly devaluated TRY would not bring in a long-term success. We do not want to act like the industrialists and exporters of the old times who had the mentality of ‘devaluate the currency, increase the exports!’, moving away from financial stability and hoping for help from devaluation. We make these statements not for the present day, but for the future of our industry" he said.

Mr. Bahçıvan drew attention to the fact that inflation which is a significant source of uncertainty and concern for all social segments has today transformed into a sociological problem besides being an economic problem. “On one side, there are the justified expectations of the working people for higher wages due to the weakened purchasing power caused by cost of living and on the other side, there is the pressure of squeezed profit margins incurred by the producers due to the increasing costs. This situation will be one of the hot topics of the agenda of the upcoming period. We must also not miss the fact that it is important for all the parties not to break away from economic rationality when dealing with this hot process. We all want to live in a civilized and prosperous country with peace of mind. When we have a look at the developed countries, we ask ourselves how they managed to achieve this. How was this miracle created? Indeed, it is not a miracle at all. Their richness and peace of mind is only the result of an accomplishment achieved as a result of making applicable and realistic long-term plans based on principles of rationality. As ICI, our main goal is to make a contribution to the solution of the problems of our industry and to increasing its competitive power with a rationalist and realist approach. Under this scope, we try to act as pioneer for the generation of solutions in all areas that we consider as an obstacle against the competitive power of our industry and also directly become a part of the process of producing solutions to achieve that end.

“In moving forward with this attitude, we will take care to maintain our approach in the past: we will call right what is right and wrong what is wrong. On the other hand, as all our industrialists produce food and work with a view to create the prosperous Türkiye of the future with an unshakable love for their motherland, I firmly believe that this love will always exist in the future as well” he said.

After this speech, the members of the assembly took floor and shared their views with the participants of the meeting.