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Ömer Haluk TURANLI
UGM EDUCATION CONSULTANT
Exchange rate policies are basically divided into three main groups: flexible, fixed and floating (controlled flexible). A strict exchange control regime was implemented in Turkey until the 1980s. Before 1980, carrying foreign currency was a crime in Turkey. Everything was indexed to the Turkish lira. Anyone with even 1 dollar on him would be treated as a smuggler by law and would be tried in high criminal courts.
Although it is thought that it is very good for the national currency to be valuable, what is best in the economy, as in many other areas, is not the "best" but the "optimal". Therefore, the important thing is balance.
I think I wouldn't be wrong if I said that almost everyone has become a financial expert, thanks to the increasing awareness of individuals recently. I wanted to share the concepts related to foreign exchange with you, our valued readers, in this issue of our magazine, saying that we should also have salt in the soup.
Foreign exchange is a word of Latin-Italian origin; It means “to change, to exchange”. If you remember, in the past, not all branches of banks were authorized to conduct transactions in foreign currency. In order to understand that foreign exchange transactions were carried out in a limited number of authorized branches, the words "change, exchange, wechsel (barter- German)" were placed in visible places. Nowadays, these transactions can be done freely from mobile phones. It is even possible to enter international markets with various FX (ForEx- Foreign Exchange) applications.
THE EQUIVALENCY OF THE TERM EXCHANGE IN FOREIGN TRADE…
I will give you more information about the meaning of the term foreign exchange in foreign trade. In our business jargon, the term foreign exchange is generally used in three ways:
-Exchanging documents called bills of exchange that replace money and represent a receivable.
-Another usage is in transactions conducted to collect a receivable in a foreign country, to settle a debt, or to transfer money or movable values in lieu of funds collected from a foreign country to another location.
-Foreign currency is effective in the market.
All kinds of accounts, documents, and instruments that enable payment in foreign currency, including foreign currency and adequate currency. Practical terms represent all foreign country currencies in the form of banknotes. In this context, transactions related to the conversion of a country's currency into the currency of another country are called "foreign exchange transactions or foreign exchange transactions."
LEGAL BASIS OF EXCHANGE LEGISLATION…
In our country, the legislation regulating foreign currency transactions is generally referred to as "Foreign Exchange Legislation," and its legal basis is as follows:
1. Legislation to Protect the Value of Turkish Currency
-Law on the Protection of the Value of Turkish Currency No. 1567, published in the Official Gazette No. 1433 dated 25.02.1930.
-Decision No. 32 Published in the Official Gazette No. 20249 dated 11.08.1989 (89/14391)
-Communiqué No. 2008- 32/34 of the Prime Ministry Undersecretariat of Treasury and Foreign Trade
-T.R. Circular No. 1-M of the Central Bank
2. Foreign Trade Legislation
-Import and Export Regime Decisions
-Import and Export Regulations
3. Customs Law (Law No: 4458 Date of Acceptance: 27.10.1999)
THE EQUATION BETWEEN CURRENCIES…
Since it is a matter of making transactions in different countries' currencies, it is necessary to create equality, some kind of equation, between these currencies. We call this equation or equality "exchange rate" or "exchange rate." When you enter the website of the Central Bank of the Republic of Türkiye, the exchange rates determined for all convertible currencies are the practical equivalent of this equality we mentioned.
WHICH AUTHORITY DETERMINES RATES?
This sentence asks us, "Which authority determines the exchange rates?" It also answers the question. One of the primary duties of the Central Bank is to determine and implement, together with the Government, the exchange rate regime to be applied in Türkiye. The duty and authority to formulate and implement the exchange rate policy within the framework of the determined exchange rate regime belongs to the Central Bank. Let's talk about exchange rate policies from here. Exchange rate policies are divided into flexible, fixed, and floating (controlled flexible). A strict exchange control regime was implemented in Türkiye until the 1980s. Some may remember that carrying foreign currency was a crime in Türkiye before 1980. Everything was indexed to the Turkish lira. Anyone with even 1 dollar on him would be treated as a smuggler by law and tried in high criminal courts. Therefore, a closed economic structure and exchange rate policy were similar to today's North Korea. Although this practice sounded unpleasant and harsh, it protected our economy from the consequences of the principle that "bad money drives out good money," which is one of the basic rules of economics.
IN ECONOMY, THE BEST IS THE OPTIMAL…
According to this theory, known as Gresham's Law, bad money, that is, hot money, negatively affects good money, that is, direct investments. Although it is thought that it is perfect for the national currency to be valuable, what is best in the economy, as in many other areas, is not the "best" but the "optimal." Therefore, the important thing is balance. Likewise, the inflow of hot money causes the value of the local currency to increase. Still, this time, imported goods become attractive because domestic production costs will gradually increase in parallel with the increase in the value of the local currency, thus gradually losing efficiency. As a result of this spiral, imports increase, investments for production purposes cease to come, and even existing production processes stop.
Initially, the presence of hot money may not raise alarm bells, as it is the foreign exchange reserve that provides a sense of security. However, when this reserve is depleted, hot money seeks to exit. This triggers an unreasonable surge in the exchange rate, leading to a sharp decline in the standard of living. Moreover, artificially low-interest rates will inevitably rise, bringing with them a host of economic costs that loom ominously over the treasury.
TIGHT MONETARY POLICY WAS IMPLEMENTED UNTIL THE 90'S
Since the tight monetary policy implemented until the 90s prevented the inflow of bad money, it stopped making money from money (and therefore the risks that came with it) and enabled making money from production. In the 90s, this policy was abandoned, holding foreign currency and trading in foreign currency were allowed, and the free exchange rate regime began to be implemented by switching to a controlled, flexible, and flexible monetary policy, in other words, a floating exchange rate system.
FLAVING EXCHANGE SYSTEM OR VARIABLE EXCHANGE RATE REGIME…
The floating exchange rate system is in which the value of any country's currency in the international environment is determined in line with supply and demand in the domestic and foreign fields, that is, in the market. It is also known as the variable exchange rate regime. It is the exact opposite of the fixed exchange rate system. Although no official intervention is expected in this system, Central Banks try to control the value of the national currency by intervening in the amount of foreign currency in the market by carrying out foreign exchange buying and selling transactions.
Referring to the importance of export revenues, let me finally examine the issue regarding export prices.
IMPORT TRANSFERS UNTIL 2008…
In parallel with the exchange rate regime, until 2008, import transfers, export proceeds purchases, and transfers of invisible items were kept under control and reported to the central bank (in fact, banks still must notify for transfers above certain limits, but what is written in the legislation is that this notification must be made, what happens in line with the notification made). Details such as transactions are carried out or what the sanctions for not notifying are not included in the legislation) On the one hand, foreign exchange accounts were also monitored, and these accounts had to be closed within the periods stated in the bill.
The obligation to convert a significant portion of export prices into the local currency, which creates a lot of trouble for exporters today, was 80% of the export declaration until 2008. This meant that exporters had to convert a large portion of their foreign currency earnings into the local currency, potentially affecting their profitability. Although the exchange rate of export prices was higher than now since the exchange rate was not suppressed due to the difference in the economic structure in those years, This requirement was not putting as much pressure on exporters as it is now.
With the decision numbered 2008/13186 and the communiqué numbered 2008-32/34 regarding the TPKKH Law published in February 2008, the previous practice of controlling and reporting import transfers, export proceeds purchases, and transfers of invisible items to the central bank was terminated entirely. The obligation to close import and export accounts was also abolished. However, this practice ended after ten years, and the control mechanism in the foreign exchange legislation started to work again.
-One of the most notable changes came with the notification 2018-32/48 published in the Official Gazette dated September 4, 2018. It became mandatory again to bring the export proceeds to the country and sell 80% of them to a bank. This regulation had a direct impact on import and export transactions, significantly altering the financial landscape for businesses and individuals involved in foreign exchange.
-With the notification 2019-32/56 published in the Official Gazette dated December 31, 2019, the obligation to sell 80% of the export proceeds to a bank was abolished again. However, the commitment to bring these proceeds to the country within 180 days continued. For instance, if an exporter earned $ 100,000 from a shipment, they were required to bring at least $ 80,000 back to the country within 180 days. This was to ensure that the country had a steady supply of foreign currency.
-Under the regulation of Additional Article 1, which was added to the CBRT Export Circular by the instruction of the Ministry of Treasury and Finance dated 31.12.2021 and entered into force as of 03.02.2022, a new obligation was introduced. It is now mandatory that at least 25% of the export proceeds attached to the Export Price Acceptance Certificate (İBKB) or Foreign Exchange Purchase Document (DAB) be sold to the bank that issued the (İBKB) or DAB. This obligation is crucial for all exporters to understand and comply with, ensuring transparency and stability in our financial system.
-With the instruction of the Ministry of Treasury and Finance dated 15.04.2022, as of 18.04.2022, the obligation to sell the export proceeds tied to IBKB or DAB to the bank regulating IBKB or DAB has been increased from 25% to at least 40%. In summary, the recent changes in the foreign exchange regulations have reintroduced stricter controls on import transfers, export proceeds purchases, and transfers of invisible items. These changes have significant implications for importers, exporters, and individuals involved in foreign exchange transactions, as they affect the movement and conversion of foreign currency.
WHY IS THE OBLIGATION TO EXCHANGE EXPORT PRICES A BORDER NOW?
So, why is the obligation to exchange export prices, which exporters did not raise a voice before 2008, a problem now? In summary, in the 2000s, there was no pressure on the exchange rate; the interest/exchange rate balance managed the system; therefore, since the exchange rates increased at the required levels when the export prices were converted into TL, the profit margin of the exporters did not decrease, and the possible increases in production costs (export revenues also increased thanks to the rising exchange rate). (as it increased) did not melt against inflation. Unlike now, inflation in the West was either non-existent or negative in those years.
INFLATION IS A TROUBLE FOR ALL DEVELOPED COUNTRY ECONOMIES…
First, inflation has become a problem for all developed countries' economies, so the cost of imported goods increases because of the exchange rate and inflation. On the other hand, exporters incur losses when they convert their export prices to TL because the exchange rate is under pressure; in the past, the rising exchange rate was not affected by inflation because it increased the TL equivalent of the export price, but now the situation is reversed, this time exporters are forced to improve their products on a USD/EUR basis. They cannot keep their sales prices constant. In this case, since our inflation rate is higher, the price increases are at unacceptable levels in the buyer markets, and our exporters first lose their competitiveness and then their market.
Another disadvantage of converting export prices into TL is that these prices must be converted back into foreign currency. Exporters, who are also importers, need foreign currency since they have to import most of the materials and raw materials they use for production. In addition to the negatives mentioned above, they also suffer direct financial losses due to the exchange rate difference between purchase and sale.
I end my article by repeating one of my words above. What is essential in economic systems and almost every activity in life is not maximization but optimization, that is, balance. Even if you drink too much water, the source of life, you will be poisoned.
