Why Türkiye restricts gold imports as it rolled new economic measures?

Al Monitor has published an article aeguing that  Türkiye’s new economic leadership is unlikely to take strong measures to curb inflation before Erdogan gets through local elections in March 2024. Caliber.Az reprints the article.

Two months after the appointment of a new team to fix the inflation-plagued Turkish economy, price increases are on the rise, and Ankara continues to rely on market interventions and restrictions to ease economic woes instead of restoring free market functionality.

The government moved this week to limit gold imports in a bid to curb Türkiye’s widening current account deficit, which reached nearly $38 billion for the first five months of the year. The high level of gold imports has played a major role in expansion of the current account gap as Turks have come to view gold, along with hard currency, as a refuge against inflation and the depreciating Turkish lira.

Gold imports totaled 181.1 tons in the first seven months of the year, compared to an annual average of 192.3 tons for the period 2013-2022, according to official data. The gold imported this year through July was worth $15 billion, the equivalent of the cost of 20 per cent of all imports. 

A presidential decree published on August 8 introduced a 20 per cent additional fee for some gold imports on top of existing duties. It covers gold jewelry and parts as well as some metal products plated with precious metals originating in non-European Union countries and countries without a free trade agreement with Türkiye. Trade Ministry officials, quoted by the state-run Anatolia news agency, said the measure aims to curb the current account deficit and help achieve local production and employment targets.

Anatolia also reported that the Treasury and Finance Ministry has decided to impose a quota on the import of unprocessed gold. After consulting representatives from the sector, the relevant authorities are expected to complete work on the measure, which according to Anatolia is designed to “ease the adverse impact of gold imports on the current account deficit and bolster Türkiye’s foreign-currency reserves.” The quota will apply to unprocessed gold imports by precious metal brokers on the Istanbul stock exchange.

Efficiency unclear

How efficient the planned measure will be is unclear, but jewelry sector representatives are worried about its possible ramifications, including a surge in gold smuggling.

In remarks published on August 10, Burak Yakin, head of the Jewelry Exporters Union, warned, “This would eventually raise the cost of access to gold, given the [strong] demand for gold. And due to the increased cost of access to gold, the overall cost of [jewelry] exporters would rise, so this would have a negative impact on our competitiveness on global markets. With the introduction of a quota, contraband gold would flow into Türkiye through all our borders, which would be detrimental for our sector and our country alike.”

Meanwhile, Ankara has continued to control  financial markets through restrictive measures instead of letting market dynamics prevail. According to Kerim Rota, a former senior banker now with the opposition Future Party, Türkiye’s financial markets remain far from appealing to foreign investors despite the appointment of a new economic leadership, which includes Treasury and Finance Minister Mehmet Simsek and Central Bank Governor Hafize Gaye Erkan, after years of controversial policies driven by Erdogan’s unconventional view that high interest rates cause high inflation. 

“Two months have passed since the Erkan-Simsek duo came in, but Türkiye remains without a free market where foreigners can trade, except for the stock exchange,” Rota told Al-Monitor. “The foreign currency market remains under control. The swap market is closed to foreigners. The deposit and credit market is under heavy restrictions, and the sums coming on to the stock exchange are often very limited,” he said.

Under Erkan, the Central Bank has hiked its policy rate to only 17.5 per cent (from 8.5 per cent), while inflation has resurged, reaching nearly 48 per cent in July. The bank has more than doubled its year-end inflation forecast to 58 per cent. Anyone putting money on lira deposits and government bonds in the past three months has seen their investment overtaken by inflation, with a real-income loss of nearly 10 per cent. Still, few expect the Central Bank to implement a drastic rate hike at its next meeting, on August 24.

Part of election strategy?

On the currency front, the government has continued to intervene in the forex market via state banks to prop up the lira. The banks had halted their regular interventions after the appointment of the new economy team, but reportedly reentered the market in July. While inflation rose 10 per cent on a monthly basis in July, the dollar rose in price only 3 per cent in the past month. The lira has remained stable for the past three weeks after losing more than 20 per cent of its value in the first month and a half after the May presidential elections.

With local polls looming in March, the government's economic decisions appear designed to do no harm to Erdogan’s election strategy rather than restore market functionality. Such interventions and restrictions, however, threaten to exacerbate Türkiye’s economic fragilities.

Rota believes that Simsek has surrendered to Erdogan’s election calendar. “The previous economic management made wrong diagnoses and applied wrong remedies," he said. "The current one improved the diagnosis a bit, but there is no remedy in place. Inflation is left unchecked. There is no real fight against inflation.” According to Rota, Simsek’s recent statement that inflation would begin to decrease in the middle of next year is a sign that real measures to curb inflation will come only after the elections.