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Ömer Haluk TURANLI
UGM EDUCATION CONSULTANT
The 'January 24, 1980 Decisions', a turning point in the Turkish economy, marked the end of statism. These decisions led to the liberalization of exchange and interest rates, a reduction in public expenditures, and a shift of incentives towards the private sector. They also encouraged exports and liberalized imports. However, it's worth noting that some protectionist practices, similar to those in the early years of the Republic, have resurfaced. For instance, there is now an obligation to track export prices and sell them to the Central Bank, and a ban on making contracts in foreign currency. These recent developments highlight the ongoing evolution of foreign exchange transactions in Türkiye.
Dear readers, in this special issue of our magazine commemorating the 100th anniversary of the Republic of Türkiye, I invite you on a fascinating journey through the history and significance of foreign exchange transactions. Let's delve into this topic together.
The term' foreign exchange' is derived from the Italian word 'Cambio', which means change or transformation. In the context of economics, it refers to the process of converting one currency into another. In our country, the term' foreign exchange' is commonly used to describe both foreign exchange transactions and foreign trade transactions. According to the Turkish Language Association, 'foreign exchange' is a term that encompasses the buying and selling of foreign currencies, exchange rates, payments, and other similar financial transactions.
As we explore the foreign exchange system, it becomes evident that it is not just a component of our country's general monetary policy, commercial structure, and financial system. It is a cornerstone, a vital element that cannot be isolated from the last periods of the Ottoman Empire and the overall economic and financial developments during and after the establishment of the Republic of Türkiye.
BANK-I DERSAADET…
We see a foreign exchange system in the Ottoman Empire, but "it was not in an institutional and systematic structure." A banking system or a similar institution was not encountered in the 623-year-old Ottoman Empire until the Bank-ı Dersaadet (Istanbul Bank-Banque de Constantinople) was established in 1847 during the Tanzimat Period1.
The reason for the establishment of this bank is related to foreign exchange. It is based on financing the increasing imports of the Ottoman Empire with policies to be written in foreign financial markets at a fixed exchange rate2. With this decision, it was fixed as 1 Pound = 110 Kurus and 24 Francs = 100 Kurus. The bank's involvement in speculation while trying to keep the exchange rates stable led the bank to bankruptcy3.
With the establishment of the Republic, modern foreign exchange legislation began to be established, and various legal regulations were made in line with the development of national and international trade.
The Republic of Türkiye's economic policies were first determined at the Izmir Economic Congress in February 1923, before the Republic was established.
DERISE OF 1929…
The economic crisis of 1929 put even more significant strain on the already fragile financial structure. So, The depreciation of the Turkish lira, which lost 6% against the pound sterling and 5% against the dollar between 1925 and 1928, reached 5% in just one year during the economic shock experienced in 19295.
Within these dilemmas, the first step taken to ensure stability in the value of the Turkish currency was the enactment of the Securities and Exchange Exchanges Law No. 1447 dated May 16, 1929, which can be said to be the predecessor of the Law on the Protection of the Value of the Turkish Currency5. This Law prohibited speculation on foreign currency and stipulated that individuals and institutions could not buy or sell foreign currency directly or indirectly unless needed. Accordingly, foreign exchange requirements would be determined in advance as a list. This regulation, which established partial control over foreign exchange transactions, still could not prevent the crisis (we see similar practices today in countries such as Argentina, Ethiopia, and Egypt).
TURKISH CURRENCY VALUE PROTECTION LAW…
The inadequacy of the measures taken and the general situation led to the entry into force of Law No. 1567 on the Protection of the Value of the Turkish Currency (TPKK) dated 25 February 1930, 285 days after the enactment of the Law mentioned above (the Law was accepted by the Turkish Grand National Assembly on 20.02.1930). The validity period, determined as three years in Article 6 of the Law, has been continuously extended by many laws over time and is still in force.
Thanks to the entry into force of TPKK and the termination of the agreements mentioned above that prevented the state from establishing banks, T.R. The establishment of the Central Bank (with law no. 1715, dated 11.06.1930) and the implemented policies began to show their benefits in the short term; Despite the adverse effects of the 1929 crisis, by reducing its imports in quantity and increasing its exports in quantity, Turkey eliminated its foreign trade deficit despite the development of the terms of trade against it. By 1932-33, it had become a significant foreign trade surplus. In this sense, the Law has become one of the building blocks of the financial recovery process.
EXPORT PRICE MEASURES…
Another measure in practice in those years that was similar to today's practices was related to export prices. Accordingly, exporters can either sell the export proceeds they collect to a bank within 15 days or transfer them to the Republic of Turkey. They were obliged to deposit money into accounts opened in their names at the Central Bank. In line with another practice that followed, banks and bankers in Turkey were obliged to transfer all foreign currency belonging to third parties to the Central Bank within ten days. Owners of this deposit could only use it for the goods on their need lists5.
2. WORLD WAR…
While all these regulations put the financial system on track, World War II, which broke out in 1939, strained the fragile structure created with difficulty. So much so that, during the war years, as the production of some products decreased to levels that could not even meet Turkey's own needs, exports were first registered with some products, and then all export transactions were subject to preliminary permission, regardless of product discrimination, and customs duties were also collected from exports6. Apart from this, factors such as interruptions in international transportation and the use of production elements for war purposes have caused our imports and exports to decrease in quantity. The practice of limiting exports ended only after World War II ended.
LIBERAL POLICIES
With the war's end, imports and exports increased significantly, and protectionist and statist policies began to be replaced by liberal and open-to-foreign policies, although not immediately. However, the emergence of freedom like today did not occur until 1982. Likewise, between 1945 and 1982, people were prohibited from holding foreign currency other than their savings. In this sense, there were such strict rules that if you were caught with foreign currency on you, you faced severe penalties such as fines from 500 TL to 10,000 TL, imprisonment for up to 1 year, and sanctions such as being detained and confiscation of the foreign currency you had on you. The ban on holding foreign currency was abolished by the Foreign Exchange Consolidation and Sale Law No. 2633, enacted in 1982.
JANUARY 24 DECISIONS
The accurate and rapid liberalization started with the economic program, also known as the "January 24 Decisions," which was one of the turning points of the Turkish economy and marked the end of statism. In line with these decisions, the exchange rate was liberalized, interest rates were released, public expenditures were reduced, incentives were shifted to the private sector, exports were encouraged, and imports were liberalized.
However, the end of recording and tracking practices in import and export transactions occurred in the 2000s. Likewise, the obligation to close accounts in both imports and exports has been wholly removed from practice with Decision No. 2008/13186 on the Amendment of Decision No. 32 on TPKK dated February 8, 2008, and the Communiqué No. 2008-32/34 on the Decision No. 32 on TPKK published on February 28, 2008, respectively. Has been removed. As of this date, the only duty of banks has been limited to reporting information regarding transfers abroad exceeding 50,000 USD or foreign currency, excluding imports, exports, and invisible transactions, to the authorities determined by the Ministry within 30 days from the date of transfer, and no sanctions have been imposed by the Ministry.
IMMEDIATE EXPORT PRICE MEASURES
On the export side, this freedom could have been lived more freely. With the communiqué no. 2018-32/48 published on September 4, 2018, the obligation to bring export proceeds to Turkey within 180 days and to have 80% of them cashed to the bank was restored. Then, with the communiqué numbered 2019-32/56 published on December 31, 2019, the obligation to exchange export proceeds was abolished, but the commitment to bring them to the country within 180 days continued. With the amendment made to the Export Circular on December 31, 2021, the obligation to sell 25% of the export proceeds brought to the country and tied to IBKB* or DAB* to the Central Bank was reintroduced. With the change made on April 18, 2022, this rate was updated to 40%, and as of now, 40% of the export proceeds brought to the country and tied to IBKB* or DAB* must be sold to the Central Bank.
The current economic situation is known to all of you, and we observe together that practices similar to the protectionist practices of the first years of our Republic, such as the obligation to follow up export prices and sell them to the Central Bank and the ban on making contracts in foreign currency, are on the scene again. Commenting on this in the coming days will take a lot of work.
resources
1)Apak, Sudi and Arzu Tay (2012:12). “The Place and Activities of the Ottoman Bank in the Financial System of the Ottoman Empire in the 19th Century”, Journal of Accounting and Financial History Research, July
2) Bulut, Mehmet (2017). “Modern Economics-Finance Tradition and the Ottomans,” Islamic Economy and
Journal of Finance, 1: 33-58.(2(Bulut, 2015: 6)
3)https://www.dogrulukpayi.com/bulten/turkiye-nin-tarihsel-olarak-kur-degisimleri (Koray Kaplıca)
4)Yay, Gülsün Gürkan, 1998:291 (İlkin and Tekeli, 1977:68)
5)https://ataturkansiklopedisi.gov.tr/bilgi/turk-parasinin-kiymetini-koruma-hakkinda-kanun/?pdf=3308 (Günal Seyit)
6)Sicilli Kavanin (Laws Register), vol:23, p.365.
*İBKB: Export Price Acceptance Certificate
*DAB: Foreign Exchange Purchase Document
