Pound Crash Hits Turkey’s Factories, Farmers and Retailers | Business and Economy News

Istanbul, Turkey – The Turkish Lira crisis threatens to bankrupt 86-year-old Mehmet Sapci’s pharmaceutical company.

With the onset of the coronavirus pandemic, his company – Merkez Ilac – was able to leverage its production lines to pump disinfectants that have been shown to be essential in stopping the spread of COVID-19. But now, he says, he and other pharmaceutical manufacturers are seeing their profit margins disappear because the pound crash has pushed up the prices of the imported raw materials they need to make their products.

“Cancer drugs, diabetes drugs, surgical disinfectants – all drugs are affected because they are all linked in one way or another to imports,” Sapci told Al Jazeera. “And because imports are affected by the exchange rate, it’s a real problem for us right now to produce drugs. We risk ending up without medicine for the Turkish public. “

The Turkish lira has lost over 45% of its value against the US dollar this year. November was the scene of a total crash, with the Turkish currency losing almost 30% of its value against the dollar.

The free fall of the currency sets off a cascade of problems for the country’s industrial sector, and industry leaders are sounding the alarm bells.

‘It doesn’t work that way’

The recent problems with the lira were triggered after the country’s central bank cut interest rates to 15% on November 18. This rate cut was the third since September and came despite inflation close to 20% in October.

Price pressures continue to intensify. Annual consumer price inflation in Turkey reached 21.31% in November, government data showed on Friday. This is the highest level in three years and more than 4 times the central bank target rate.

Mainstream economics argues that lower interest rates lead to higher inflation, because when money is cheaper to borrow, it loses its value against other currencies and encourages consumers to spend more and businesses. to produce more.

But Turkish President Recep Tayyip Erdogan disagrees. He insists that lower interest rates fight inflation. And despite the crash reading it, it shows no sign of changing position.

In a two-hour television interview on state television on Monday evening, President Recep Tayyip Erdogan explained how his government plans to wage what he called an “economic war of independence” [File: Murad Sezer/Reuters]

In a two-hour TV interview on state television Tuesday night, Erdogan explained how his government plans to wage what he called a “war of economic independence” that would pull him out of an interest-based economy. . Raising interest rates, Erdogan said, was out of the question, as it would stifle industrial production in Turkey and make it harder to attract long-term foreign investment.

To boost local production, Turkey now plans to provide billions of lire in the form of low-interest loans to small businesses and credit opportunities for those who hire new employees.

The reported shortages of consumer goods, Erdogan said, were due to “stockists” – a new term he coined to refer to the hoarders taking advantage of the low prices. While in the short term, markets can be volatile, Erdogan said the country was on the verge of breaking “the vicious cycle” of an interest-based economy and urged the public to hang on.

But currency markets and many economists disagree with Erdogan’s unorthodox views.

“The assumptions of this new ‘model’, if we can call it that, are wrong,” said Harun Ozturkler, professor of econometrics at Kırıkkale University.

“They assume that a fall in interest rates would lead to high exchange rates, and that the Turkish lira would devalue, depreciate, then Turkish goods and services would become cheaper against the currencies of our trading partners.” he told Al Jazeera, adding that Erdogan assumes that the subsequent increase in Turkish exports would ultimately lead to a recovery in the value of the pound.

“But it’s a strange relationship,” he said. “It doesn’t work that way.”

Turkey’s economy, Ozturkler said, is already heavily dependent on materials from outside the country, which account for around 70 percent of all imports. With an extremely fluctuating Turkish Lira exchange rate, producers in the country will slow down production as they can no longer plan for costs and profit margins.

Foreign investors, meanwhile, are unlikely to flock to Turkey given the unpredictability of its financial institutions, Ozturkler said. Erdogan has sacked a succession of central bank chiefs in recent years and replaced the country’s finance minister with a loyalist on Thursday.

Turkey’s exports of goods and services rose 25.6% in the third quarter compared to the same period a year ago, the government’s statistics office said this week. But Ozturkler said the increase was likely due to a reset in pre-pandemic demand levels and foreign buyers turning to emerging markets like Turkey for scarce supplies.

Erdogan’s insistence on a new low-interest economy has drawn strong chastisements from the opposition in recent weeks. “There are people in the world who take the flat earth theory seriously and discuss it, but no one takes Erdogan’s” flat economy “thesis seriously,” Chief Meral Aksener said Wednesday. of the center-right party IYI.

There are those in the world who take and discuss the flat earth theory seriously, but no one takes Erdogan’s “flat economy” thesis seriously.

Meral Aksener, leader of the center-right IYI party

Even conservative leaders in Turkey have challenged Erdogan’s war on interest rates, which the president says is justified by Islamic doctrines against usury.

“In an economy that works on interest, you can’t solve the problem by just saying you’re going to lower the central bank’s interest rates, that from now on I go to an interest-free economy,” he said. Temel Karamollaoglu, leader of the conservative Saadet party, told a Turkish news channel on November 18. He compared Erdogan’s economic plan to a doctor ordering an addict to make cold turkey. “I’m not a fan of interest, but the whole system works on it,” he said. “This is why anyone who has no savings in foreign currency is crippled; all manufacturers, who need foreign currency, are paralyzed.

Manufacturers are sounding the alarm

The fallout from the lira crash is already raining down on the country’s industrial sector.

Medicines in the country are running out, as they depend on imports that are too expensive to buy, according to manufacturers and pharmacists.

I’m not a fan of interest, but the whole system works on it.

Temel Karamollaoglu, leader of the conservative Saadet party

In a statement released last month, the Turkish Pharmacists Association warned that supplies of 645 drugs were dangerously low because the government-imposed price cap had not been adjusted to reflect the drop in the value of the drug. read.

Turkish authorities are currently demanding that prices be set based on an exchange rate that assumes 4.57 lire is worth one euro ($ 1.13). But on Thursday, the exchange rate hovered around 15.45 lire to 1 euro.

Plus, a reality check of the exchange rate isn’t in the cards until February of next year, when a new pricing schedule is expected to be set.

“The significant difference [in exchange rates] is one of the main reasons for the increase in the number of drugs that are not available on the market, ”said the association. “The difference in the exchange rate means that many pharmaceutical companies do not supply medicines to our country, or local pharmaceutical companies producing medicines whose raw materials come from abroad cannot produce medicines. “

In response, Turkish authorities opened an investigation into pharmacies, accusing them of hoarding drugs, a charge denied by the Turkish Pharmacists Association.

The country’s petrochemical industry, which also relies on imported raw materials, has said it faces significant supply chain disruptions due to problems with reading it.

Murat Akyuz, a board member of the Istanbul Chemicals and Chemicals Exporters Association, told a Turkish news channel on November 23 that about 80 percent of products produced in the country depended on imported raw materials – and that while raw material costs have risen globally, Turkey is in even more of a hurry due to the weakness and uncertainty of the pound.

“Even if you adapt to [price] increases, you don’t have the opportunity to bring the containers on time, ”Akyuz said. “Producers cannot produce on time because of the raw material they cannot get on time. “

Farmers have also been hit hard, with the cost of fertilizers rising too quickly for them to buy. Official statistics show that fertilizer prices rose 72% from last year, but in the markets it was even worse, with prices doubling or tripling in a year, depending on the type of fertilizer.

People stand in front of an exchange office in Istanbul [File: Umit Bektas/Reuters]

GübretaÅŸ, one of Turkey’s largest fertilizer producers, withdrew from a major government supply contract last month due to volatile raw material import costs. The company now faces a six-month public procurement ban.

Even Turkish retailers have said the exchange rate problem threatens to drive them out. A survey by the United Brands Association of Turkey, which represents 384 brands and 70,000 national stores, found that more than half of retailers reported a drop in sales of more than 50% from last year, when weeks of closures had thrown a wrench into the Turkish economy.

“Although this is a global problem, we are concerned about the costs of raw materials, which are felt more in Turkey and continue to rise on the basis of foreign currencies,” said the head of the ‘United Brands Association, Sinan Oncel, in a statement.

“The retailer has been sacrificing profits for months and absorbing most of the costs,” Oncel said, “but we don’t have the margin to sacrifice any more, even if we wanted to.”

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