Erdoğan adviser says high growth doesn't cause inflation

Turkish President Recep Tayyip Erdoğan’s senior economic adviser said high economic growth is not the source of Turkey’s economic ills, such as accelerating inflation.

The relationship between above average growth in Turkey – namely more than 5 percent – and inflation is marginal, Cemil Ertem said in his regular column for Daily Sabah newspaper.

Inflation showed a downward trend following the global financial crisis of 2008, when Turkey grew 8.5 percent in 2010 and 11.1 percent in 2011, Ertem said. Inflation slowed to 6.16 percent in 2012.

“In 2013 and 2015, we again grew above the average with 8.5 and 6.1 percent, and inflation rates remained at 7.40 and 8.81 percent, respectively,” he said. “There is an inverse correlation between inflation and growth over these years.”

Turkey’s lira slumped to a record low of 4.92 per dollar last month, forcing the central bank to hike interest rates by 425 basis points to 17.75 percent. Inflation in Turkey accelerated to 12.2 percent in May from 10.9 percent in April after economic stimulus measures by the government. The economy grew 7.4 percent in the first quarter, the statistics agency said this week, after a 7.3 percent expansion in the fourth quarter of 2017.

High inflation in 2017 – 11.7 percent – was mainly due to volatility in energy and food prices, rather than consumer-driven, Ertem said. If Turkey had not taken stimulus measures last year, including introducing a loan guarantee scheme, Turkey would have experienced stagflation and the economy would have collapsed rapidly, he said.   

Producer prices had peaked at 16 percent in March 2017 just when the economy was paradoxically heading for a possible recession, Ertem said. The high increases in producer prices were not due to high economic growth, but big productivity losses and the cost burdens on industry, he said. Producer prices rose again in the last quarter of 2017 due to energy, industrial input prices climbing on a dollar basis, stockbuilding and rising financing costs, he said.

“We have always said that if you are stuck in the 20th century IMF orthodox policies, then pro-growth economic policies will lead to inflation and current account deficit,” Ertem said. “That is because this understanding sees inflation as a monetary phenomenon, and accordingly, monetary tightening with high interest is the only remedy of inflation.

“After the June 24 elections, Turkey will quickly make structural reforms on the manufacturing side, eliminating both inflation and the current deficit as a problem. Years of experience have shown that monetary tightening-driven steps alone do not provide a lasting solution to inflation and current account deficit.”