While Dollar/TL is rising rapidly, Advice from Steve Hanke: Money Board Needed!

Steve Hanke, a professor of applied economics at John Hopkins University, known as the “Money Doctor”, explained the solution scenario for the TL, which accelerated after the elections, in a post he shared on Twitter.

Drawing attention to the rapid depreciation of the Turkish Lira in his post, Steve Hanke pointed to the system known as the “Money Board”, which he implemented in Bulgaria in 1997 as a solution.

The Depreciation of TL Accelerated After the Election

Turkey has been trying to announce an economy model called “low interest, low inflation, low current account deficit” to the world under the title of “Turkey Model” for a while. According to the model, high interest rates not only slowed down the economy but also reduced exports, and falling exports suppressed the amount of foreign currency entering the country. The current account deficit was increasing, and inflation and interest were moving in a direct proportion. The economic policy that President Recep Tayyip Erdoğan put into practice with the words “Interest is the cause, inflation is the result” was ended with the appointment of the new cabinet.

Although it has been the subject of debate for a long time and has received a lot of reaction from both domestic and international academic circles, the system that continues to be implemented resulted in the rise in inflation in Turkey, the current account deficit breaking a record and the rapid depreciation of the TL.

After the “stability” message from the ballot box after the 13th Presidential elections, Mehmet Şimşek, who took the helm of the economy, shelved the policy of “Interest is the reason, inflation is the result” with the words “Turkey has no choice but to return to a rational ground”.

The exchange rate, which tried to be kept at a certain level before the election, accelerated its value gain with the effect of Mehmet Şimşek’s “rational” policy discourses. After the second round of elections held on 28 May, the TL has lost nearly 10% of its value until today, and its performance in the last 2 years points to a meltdown exceeding 150%.

Bulgarian Model for Turkey: Currency Board is a Must!

The rapidly depreciating TL and its economic policies, which are far from a rational basis, caused a wide-ranging debate both in the global finance community and among famous economics professors.

The last answer to the debates from the scientific world came from John Hopkins University professor Steve Hanke, who proposed a model that was used in the past to prevent the currency depreciation in Turkey.

In a post on his Twitter, Hanke suggested Turkey’s own model, the “Money Board” system, which Bulgaria had implemented in 1997, and pointed out this as the only way.

The Turkish Lira is depreciating and continues to lose value… The only way to save the collapsing lira is to use a “Money Board” model like I practiced in Bulgaria in 1997. The model worked great for Bulgaria

Steve Hanke

What happened to the lev when the Bulgarian Currency Board implemented it?

From the end of 1996 to February 1997, when Steve Hanke pointed to the implementation of the Currency Board, the Bulgarian Leva experienced an incredible depreciation against the US dollar, and within two months the dollar rate in the country had doubled (from 0.40 to 3.18). to Leva). With the period when Hanke stated that the Money Board implementation started, the dollar was once again withdrawn to the level of 1.39 Leva, in the period that Steve Hanke described as “successful”.

What is a “Money Board”?

So what is the “Money Board” model that Hanke had implemented in Bulgaria in 1997 and said it worked?

The currency board arrangement represents a strict fixed exchange rate model. In this system, when the national currency is requested at a fixed rate determined by the government or the central bank, a conversion is made between the reserve currency and the national currency. Accordingly, a full and unlimited convertibility should be ensured between the national currency and the foreign currency used as an anchor.

The main feature of the currency board is the use of a stable commodity such as a convertible foreign currency or “gold” held as reserve currency.

While the central bank holds domestic currency assets, the currency board does not. However, the “currency board” system ensures a stable parity between the national currency and the reserve currency, thus creating an environment of trust. This high credibility pulls interest rates internationally and lowers the risk premium as uncertainty disappears. It also provides easier access to international markets and contributes to an increase in foreign trade in the long run.

When this system was implemented in Bulgaria, which was in crisis in 1997, in the words of Steve Hanke, it “achieved success”.

At the beginning of the crisis, factors such as excessive government spending, corruption and mismanagement were effective in Bulgaria. While this situation shook the economic balances of the country and caused a great loss of confidence in the financial system, the national currency was faced with a rapid depreciation.

In 1996, the exchange rate of Bulgaria’s national currency, the Lev, came under pressure against the dollar and began to depreciate continuously, resulting in the government spending large amounts of foreign currency reserves to protect the currency. At the same time, the size of the government’s guarantees to support the banks also increased the economic imbalance.

The Bulgarian government had decided to take urgent economic reforms and austerity measures to mitigate the effects of the crisis. One of these reforms was the tying of the national currency to another stable currency that served as an anchor, called the “Money Board”. At that time, it was a matter of great debate to which currency the Leva would be pegged to, but Bulgaria, which is likely to join the European Union in the future, decided to peg the Liva to the German Mark at a 1-to-1 ratio.

Türkiye Leg of the Model

Professor Steve Hanke has been recommending the “Money Board” model to Turkey for a long time. Hanke, who openly criticized the government’s decision to cut interest rates in his previous statements, said in a statement after Recep Tayyip Erdogan’s statement at the 79th General Assembly of the Union of Chambers and Commodity Exchanges of Turkey, “We are firmly committed to our policy not to crush our citizens with inflation”. If he wants to realize what he said, the only way for this is to index the Turkish currency as an anchor currency to another internationally stable currency or gold, and to establish a “Money Board” for this.

Explaining his principles on the “Money Board” in his book “Money Boards for Developing Countries”, Hanke stated that he proved that the convertible monetary system, which acts as an anchor, works when he was in charge of the Currency Board in 1992 Estonia, 1994 Lithuania, 1997 Bulgaria and Bosnia-Everyone. .

Hanke, who frequently emphasized the importance of indexing the rapidly depreciating TL against a strong currency, mostly accused the CBRT of printing money at a very high speed and in large amounts.

His way of solution, on the other hand, proceeds in a simple way, as he has explained emphatically in his frequent statements. First of all, Hanke pointed out Bulgaria in his statements and stated that they stopped inflation within 30 days with the “Money Board” system, saying that the system had a negative effect on interest rates and therefore would be in line with Erdogan’s “anti-interest” views.