Amid signals that Turkey’s export performance might be hurt due to the trouble in the eurozone, Turkish economists opposed the idea of “reconsidering the floating exchange rate regime” proposed last week by prominent businessman Bülent Eczacıbaşı. Abandoning the floating exchange rate would be “tantamount to suicide,” according to many economists.
Bülent Eczacıbaşı, the chairman of Eczacıbaşı Holding, brought up the issue Thursday, saying that the floating exchange system is something that should be discussed. “We must see the disadvantages of this system,” he said at a meeting in EskiÅŸehir.
Behind the suggestion lie both a slowdown in exports and a boom in imports. The floating exchange rate system has been in effect since the 2001 crisis.
“There is no alternative to the floating exchange regime,” said Professor Seyfettin Gürsel, chief of BahçeÅŸehir University’s Center for Economic and Social Research. “The country has already tested the fixed-rate regime, which was unsuccessful in solving high inflation,” he told business daily Referans. “Using new monetary and fiscal policies might pave the way to a successful economy rather than considering a different rate system.”
“The Central Bank could increase purchases of foreign currencies,” he said. “But when capacity utilization rates reach normal levels, the problem of inflation will emerge.”
The economist suggested that a form of the “Tobin Tax,” meaning taxation on hot money inflows, may be applied as well. “There is no clear and easy remedy for these kinds of problems,” he said. “For Turkey’s competitive power, labor force reforms should be undertaken courageously. The floating exchange rate regime should continue, but purchases of foreign exchange could be increased and hot money could be taxed.”
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. The idea was to put a penalty on short-term financial round-trip excursions into another currency.
No use in getting out of the global system
Economist Mahfi EÄŸilmez, a former Treasury Undersecretary, agreed. “The fixed exchange-rate regime is utilized only by closed economies such as China and Cuba,” he said. “Despite receiving record amounts of foreign investment and high levels of exports and imports, China is still a closed economy, with almost 80 percent of the economy shut off to the world. It might be easy for China to go on with such a system, but not for Turkey, as many countries use the floating exchange-rate regime. [Such a shift] would push Turkey out of the global system.”
Gökhan Uskuay, strategy chief at Global Securities, said industrialists are right to complain about the current exchange rate regime, as they are devoid of any support. “But to control the exchange rate would be going against the economy’s dynamics,” he told Referans, adding that requests for the Central Bank to increase foreign currency purchases are not realistic. “The Central Bank currently is buying around $100 million every day, this is not a small amount at all. On the other hand, it would not be right to tax hot money flowing into the country, considering the high foreign trade deficit. The whole world is seeking hot money and investments. Why should Turkey push such [capital] away?”
Abandoning the floating exchange-rate regime means suicide to an economy that is open and in which capital can move freely, according to economist Süleyman YaÅŸar, the former acting chairman of the Privatization Administration. Turkey should not leave the current system, but it should also support its exporters, YaÅŸar said.
“A kind of a ‘dirty’ exchange-rate regime could be applied within the floating exchange rate system, in order to support exports of some specific products,” he suggested. “But leaving the floating exchange-rate system as is, is dangerous. Going back to a fixed exchange rate would be a big mistake. From time to time, the Central Bank is partially intervening in the exchange rate. The Tobin Tax, on the other hand, would work only if applied globally."
