Author: Vedika

Categories
Analysis

Turkey’s Financial Setback

What happened?

Istanbul: State data revealed that the annual inflation rate in Turkey has surged to a 20-year high of 48.7% despite months of assurances by President Recep Tayyip Erdogan that the soaring figures were just temporary and that his government could ease the pain on Turks weighed down by rising living costs. Turkish citizens are the most affected since prices of consumer goods rose by 11.1% from December to January, according to the Turkish Statistical Institute. Analysts predicted that the prices of consumer goods increased between 9% and 10%.

Moreover, the Turkish lira (Turkey’s currency), lost 44% of its value in 2021 in a rout driven by the president’s refusal to raise interest rates as the inflation consistently climbed. Evidently, the currency’s turbulence has hit Turks hard, as the value of their salaries dropped and costs of goods and energy dramatically increased. The president has prioritized credit and exports, while constantly arguing against economic orthodoxy that raising interest rates worsens inflation rather than taming it. 

How did this happen?

Nations around the world have been grappling with price spikes caused by supply chain snarls and shortages of raw materials due to COVID-19. However, inflation in Turkey has been exacerbated by a dramatic fall in the value of the Turkish lira, which lost more than 40 percent of its value against the United States dollar last year. The lira’s crash in the final quarter of 2021 was triggered by a series of central bank interest rate cuts championed by Turkish President Recep Tayyip Erdogan, who still insists that lower interest rates combat rising inflation – a view that runs opposite to mainstream economic theory, which holds that lower borrowing costs typically increases price pressures thus leading to lower purchasing power in all.

“We are in sorrow to see our yearly inflation hitting 36 percent,” said Erdogan. “Nevertheless, as a government that managed to decrease inflation to 6 percent, we will repeat our success to protect Turkish citizens from financial troubles.”

Attempt to combat inflation by increasing minimum wage

To help cushion the blow of rising prices, the Turkish government raised the minimum wage by 50 percent and boosted the government match on private contributions to public pensions. 

However, the minimum wage hike was also accompanied by price increases in regulated sectors of the economy. Electricity tariffs have shot up by 125 percent for higher-demand customers and 50 percent for lower-demand residential customers. Natural gas prices have gone up 50 percent for industrial use and 25 percent for residential use. The cost of public transportation in Istanbul has also seen a drastic increase by 36 percent.

Therefore, the government has attempted to assist the poor in this financial crisis while the burden has partially fallen on middle-class consumers.

Politics and Inflation

Turkey’s opposition parties have seized upon the variation between official TurkStat inflation numbers and what many members of the public and experts think. Ali Babacan, a former Erdogan ally who served under him as finance minister and now heads the Democracy and Progress Party, called TurkStat the “Institute for Adjusting Numbers” in a tweet shortly after the December inflation figures were announced.

Last month, during a live television broadcast, the head of the largest opposition party, Kemal Kılıçdaroğlu, attempted to visit TurkStat’s head offices in the capital Ankara to inquire about how inflation is being calculated, only to be turned away. Thus, it is evident that the Turkish government  is trying to hide their numbers while reassuring the citizens through futile attempts.

A new economic model?

Treasury and Finance Minister Nureddin Nebati outlined Turkey’s new economic path to investors in London, pledging to keep the exchange rate stable, bring inflation down to single digits and keep dollarization at bay.

Speaking to investors and bankers in meetings, Nebati also said that the government would soon announce a new scheme to get households to convert holdings of gold into Turkish lira.

President Recep Tayyip Erdoğan has been endorsing a model based on lower borrowing costs, which he says will boost production, employment and exports, and also eventually help Turkey solve its chronic current account deficit problem and contribute to stabilizing the Turkish lira.

Gold Savings Scheme

Two investors who attended meetings said the minister had told them about the plans to ensure part of the $250 billion-$350 billion worth of gold held by Turkish households would find its way into the domestic savings system.

“The important thing for us is the stabilization in the exchange rates. With this package, we will have put the gold under-the-mattress into the system, which is estimated to be around 5,000 tons of gold equivalent to 250-350 billion US dollars (the “under-the-mattress” term refers to a long-held tradition in Turkey of turning to gold to safeguard wealth and storing it at home).

A certain amount of this will support the Central Bank of the Republic of Turkey (CBRT) and meet the need for foreign exchange, he noted. “But most importantly, it will shore up the Turkish lira, which forms the basis of our model.” The government will make announcements soon on how to convince people to let go of their gold holdings. An investor stated that if the gold finds its way back into the banking system, it will certainly help to broaden the monetary base in terms of the Turkish lira.

Borrowing

Investors are also eyeing Ankara’s foreign borrowing plans. The Treasury did not immediately comment on the possible sale. According to Refinitiv data, Turkey is due to pay off a $2 billion eurobond on February 21th and a $1.1 billion domestic bond on February 25th.

Nebati also said at investor meetings that the government had held very productive talks with Abu Dhabi, Saudi Arabia and Israel in recent days, and swap lines were being agreed upon. He declined to give further details.

In conclusion, more details on the new economic model are yet to arrive. Most of the government’s efforts have gone in vain – the Turkish citizens have been hit hard due to this crisis with a hike in the prices of basic necessities such as gas, food and transportation.

Sources

https://www.dailysabah.com/business/economy/turkey-pitches-new-economic-model-signals-new-steps-to-shore-up-lira

https://www.aljazeera.com/economy/2022/1/7/just-how-bad-is-inflation-in-turkey-it-depends-on-who-you-ask#:~:text=The%20lira’s%20crash%20in%20the,ho

https://www.dailysabah.com/business/economy/turkeys-inflation-highest-since-2002-hitting-487

Categories
Analysis

Meet the Doughnut!

Introduction

“The Doughnut” offers a vision of what it means for humanity to thrive in the 21st century – and Doughnut Economics explores the mindset and ways of thinking needed to get us there. First published in 2012 in an Oxfam Report by Kate Raeworth, the concept of “Doughnut Economics” rapidly gained traction internationally. Examples are the UN General Assembly and the Occupy movement. Released in 2017, “Doughnut Economics: seven ways to think like a 21st-century Economist” by Kate Raeworth further explored the economic thinking needed to bring humanity into the Doughnut, drawing together insights from diverse economic perspectives in a way that everyone can understand. The book soon became an international bestseller and has now been translated into over 20 languages.

What is “Doughnut Economics?”

They say a picture speaks a thousand words, so let us see the state of humanity just in a single image – the Doughnut of social and planetary boundaries is just the compass we need for creating a safe 21st century.

The outside of the doughnut economic model represents the unsustainable impact on the environment while the hole in the centre reveals the proportion of people worldwide falling short on essentials, such as food, water, healthcare and political freedom of expression. Thus, the challenge here on the part of humanity is to get everyone out of that hole. At the same time, we cannot afford to be overshooting the outer crust of the doughnut, so that we safeguard the life-giving systems of the Earth – such as a stable climate, healthy oceans and a protective ozone layer, on which all our well being fundamentally depends.

The 21st Century Mindset

The starting point of Doughnut Economics is to change the aim of endless GDP (Gross Domestic Product) growth to thriving in the model of the Doughnut.

 At the same time, begin the economic analysis by seeing the big picture and recognising that the economy is embedded within. An embedded economy emphasises the interdependence of economic activities and the social world. Doughnut Economics highlights the fact that all economies are fundamentally dependent upon society and the living world. Moreover, this theory recognises that human behaviour has the potential to be nurtured – to be cooperative and caring, just as it can be competitive and individualistic. Therefore, a shift from capitalist thinking to a more collaborative approach is desirable. It also recognises that economies, societies, and the rest of the living world, are complex, interdependent systems that are best understood through the lens of systems thinking. Lastly, Doughnut Economics recognises that growth is a healthy phase of life, keeping in mind of course that nothing grows forever.

The Case of Amsterdam Embracing this Economic Theory

In April 2020, during the first wave of COVID-19, the city government of Amsterdam announced that it would recover from the crisis and avoid future ones by embracing the theory of “doughnut economics”. Amsterdam has the vision to become a thriving, regenerative and inclusive city for all its citizens while respecting the planetary boundaries, which makes the city a pioneer of such systemic transformation. In this spirit, the City of Amsterdam has joined the Thriving Cities Initiative (TCI), a collaboration between C40, Circle Economy, and Doughnut Economics Action Lab, which works with cities pursuing such a transformation.

The key tool of the TCI is a City Portrait based on the Doughnut of social and planetary boundaries. It is a holistic snapshot of the city and serves as a starting point for big-picture thinking, co-creative innovation, and systemic transformation, rather than as a comprehensive assessment of the city. In the past, the city has been recognised for its ‘Amsterdam Approach’ to collaborative innovation, which connects neighbourhood initiatives, start-ups and civil society with the established institutions of government, business and knowledge institutions. Furthermore, the city is home to a dynamic network of changemakers that have already begun using Doughnut-inspired thinking to drive systemic change. With such an opportunity, Amsterdam can be a pioneer of what it means to become a thriving city and in doing so inspire cities worldwide on their journeys of transformation.

How will Amsterdam implement this theory?

Amsterdam is using this framework to explore what it would mean for Amsterdam to:

  1. Thrive within its natural habitat
  2. Respect the wellbeing of people worldwide
  3. Respect the health of the entire planet

Having the ambition to bring all of its 872,000 residents inside the doughnut, Amsterdam wants to ensure everyone has access to a good quality of life while at the same time not putting pressure on our planet. Guided by Raeworth’s organization, the Doughnut Economics Action Lab (DEAL), the city is introducing massive infrastructure projects, employment schemes and new policies for government contracts to that end. Meanwhile, some 400 local people and organizations have set up a network called the Amsterdam Doughnut Coalition to run their programs at a foundational level.

What Would it Mean for Amsterdam to Thrive?

What defines whether the population of a city is thriving or not? The best answer surely comes from the people themselves – based on their local context, aspirations, culture, and values. The many components of wellbeing are clustered into the following four areas: 

What defines whether the population of a city is thriving or not? The best answer surely comes from the people themselves – based on their local context, aspirations, culture, and values. The many components of wellbeing are clustered into the following four areas: 

  • healthy: food, water, health, housing
  • enabled: education, energy, income and employment
  • connected: mobility, community, digital connectivity, and culture 
  • empowered: social equity, political voice, equality in diversity, and peace and justice

Looking into the thoughts of the residents of Amsterdam and their visions and priorities for a thriving Amsterdam, several valuable insights emerged.

When asked “what makes you thrive?” the most popular response from participants focused on connecting with nature. One of Amsterdam’s residents stated: “I hope that the City can create more green spaces while the city is growing so rapidly. It helps biodiversity and gives the possibility of meeting other Amsterdammers.”

In terms of thriving in its natural habitat, urban designers in Amsterdam are integrating biomimetic designs into the fabric of their buildings. Some are creating habitats for species directly in the fabric of buildings, such as by using bee-hotel bricks, and ensuring retaining walls include places for nesting birds. Incorporating green roofs and walls that help to connect fragmented habitats supports more native species, and creates pollinator corridors. The City of Amsterdam is likewise taking action to significantly reduce air pollution with its Clean Air Action Plan, expanding the current low-emission zones, culminating in a complete ban on petrol and diesel cars and motorbikes in the city by 2030. The Clean Air Action Plan would encourage the city to set goals that match the ability of a nearby thriving forest to capture particles and create clean air. Pursuing such aspirational and scientific aims could restore the sense of purpose of the community and ensure the wellbeing of all.

Sources

https://doughnuteconomics.org/about-doughnut-economics

https://time.com/5930093/amsterdam-doughnut-economics/

Roworth, Kate. “The Amsterdam City Doughnut,” March 2020: Amsterdam.

Categories
News

The fate of Afghanistan’s economy after the Taliban takeover

Introduction

Afghanistan is one of the poorest countries in the world due to the destruction of its limited infrastructure through wars, predominantly after the Soviet Invasion (1979- 1989). Along with political instability and high dependency on foreign aid, this state of depravity is perpetuated.

The biggest news in the world from the past few weeks stems from the Taliban takeover of Kabul, the capital of Afghanistan, and effectively replacing the Afghanistan government. With most government officials and Former President Ashraf Ghani fleeing the country, the Taliban has now taken complete control of the presidential palace and declared that the war is over. How will this impact the economic conditions of Afghanistan?

Foreign Investments

As mentioned earlier, Afghanistan is greatly dependent on foreign aid. However, international aid flows are under a cloud of profound uncertainty. German Foreign Minister Heike Maas told the ZDF broadcasting program, “We will not give another cent if the Taliban takes over the country and introduces Sharia law.”(Sharia Law is the Islamic legal system, which governs religious rituals and aspects of day-to-day life, including finance and banking).

Moreover, following recent unrest and the toppling of the government, investor confidence in Afghanistan could drop to an all-time low.

 So, now that the Taliban has taken complete control of Kabul, international trade and business will soon come to a halt as the militant group has stopped all exports and imports, particularly with India. India imports about 85% of its dry fruits from Afghanistan. The Federation of India Export Organisation expressed concern that dry fruit prices may go up in the coming days due to the turmoil in Afghanistan.

 Hence, the Afghanistan economy has the potential to experience a significant downfall, since international aid accounted for ~43% of their GDP (Gross Domestic Product) in 2020, per the World Bank. Thus, considering the following in terms of foreign investment, the nation has a bleak future.

Mineral Resources

According to WION, while Afghanistan may be one of the poorest nations in the world, it is a region of vast mineral resources. In 2010, American geologists said the resources in this region are worth about – $1 trillion.

Valuable minerals such as iron ore, copper, gold, lithium, sulphur, and various gemstones, to name a few. A 2010 report of Afghanistan’s Ministry of Mines recorded the country’s copper resource at almost 30 million tonnes. Further, another report in the same year said that 28.5 million tonnes of copper lay hidden in undiscovered deposits, bringing the total to roughly 60 million tonnes. Given current rates at the London Metal Exchange, the mineral resources would amount to ~$500 million. Moreover, Afghanistan has a gold resource of at least 2700 kilograms, making gold the most favourable hedge ever since inflation. (Inflation is the rate at which the general level for the price of goods & services rise, resulting in a sustained drop in the purchasing power).

However, one mineral has particularly a striking potential. Lithium is a metal used in the batteries of mobile devices and electric cars. The latter application will be crucial in the future, as the automobile sector is quickly transitioning towards zero-carbon forms of transport.

Today, lithium is also facing unprecedented demand, with an annual market growth of 20% compared to just 5-6% a few years ago. According to the International Energy Agency, global demand for lithium is expected to grow by over 40 times by 2040. Additionally, The Pentagon memo designated Afghanistan as “The Saudi Arabia of Lithium”.

China Takes Interest?

Back in 1996, when the Taliban first took control of Afghanistan, China refused to recognize their rule and left their embassy shut for years. This time around, Beijing has been one the first to embrace the Islamist militants next door.

But, what prompted such a change of heart?

Director of the China Program at the Washington-based Stimson Center Yun Sun said: “Twenty years ago, China was not a global power and what was happening in Afghanistan did not bother China.”

Today, China commands an economy worth $14.7 trillion—more than 17 times its size in 1996—in addition to a massive trade-and-infrastructure initiative that stretches across the Eurasian landmass. Although China has not officially sought ties with the militant group, there are hints that it will provide financial assistance to Afghanistan.

 China is currently eyeing the mineral resources of Afghanistan, which are worth $1 trillion. Moreover, the large reserves of copper and lithium specifically will be highly beneficial for the Chinese electronics industry.

The Taliban will need significant assistance to rebuild Afghanistan. Because Western countries and financial institutions are unlikely to assist, China, with its massive reserves of capital and proximity to Afghanistan, can play a supporting role in the survival of a future Taliban government.

Conclusion

In conclusion, Afghanistan may have a chance to grow its economy under such grave circumstances with Chinese assistance.

The exploitation of the rare earth minerals would bring foreign currency to Afghanistan, whose weak economy relies on subsistence agriculture, services, and international aid. However, some observers are calling not to overestimate China’s interests in Afghanistan.

Their statements imply that the idea of a China which would get its hands on the mineral wealth of Afghanistan is a fantasy. Researchers say that the recent investments that China will specifically be for the exploitation of pine nuts (Pine nuts are one of the more expensive nuts on the market). It can be said that Chinese interest and collaboration with Afghanistan under Taliban control may be short-lived.

Sources


1.What next for Afghanistan’s economy? – BBC News
2. Financial News – Forex News, Stocks Market News (fxempire.com)
3. The fate of Afghanistan economy under Taliban rule | Business News (timesnownews.com
4. Minerals worth trillion dollars: So really how big is Afghanistan’s economy under Taliban control? (msn.com)
5. What next for Afghanistan’s economy? – BRIGHT NEWSROOM
6. Why China is interested in Afghanistan (linkedin.com)
7.Taliban to reap $1 trillion worth of Afghanistan’s mineral wealth – Frontline (thehindu.com)