Due to the rapid rise in exchange rates, the repayment of foreign debt became more difficult by the day, and there were concerns that Turkey might impose a moratorium. Istanbul University Economics Faculty, Finance Department Lecturer Prof. DR. Binhan Elif Yilmaz, Noting that foreign debt repayment has become more difficult day by day due to the rapid rise in exchange rates over the past 6 months, he explained that the situation is similar to the moratorium imposed in 1958 during the tenure of Adnan Menderes . YilmazExplaining that the stock of external debt has risen by 106 percent over the past two years, he said, “The rate of increase in exports should be higher than the rate of debt repayment. Even if the increase in 6 months has a positive effect on the export figures, the solvency of the foreign debt is decreasing. A similar relationship was witnessed in the trial before the 1958 moratorium,” he said.
YilmazHe stressed that the central government debt, one of the sub-items of the public debt indicators released by the Ministry of Finance and Finance on June 20, shows that the central government debt has been rising rapidly, with all its risks 2020 was 1.633 billion TL, increased by 106 percent in May and reached 3.364 billion TL in 2022. 68% of central government debt is in foreign currency. Foreign currency debt increased by 237% in 2 years and the exchange rate increase was 135% in 2 years.
“Export should be above debt service”
Emphasizing that the external debt service/export ratio is used as a measure of external debt repayment ability, YilmazHe noticed the deterioration. “Increasing foreign exchange inflows with exports to the country is very important for debt servicing. According to the months, the rate of increase in exports is likely to be higher than the rate of increase in debt service. Yilmazcontinued his words as follows:
“Although the increase in the exchange rate in the last 6 months has had a positive effect on export figures, the ability to pay foreign debt is declining. For example, exports in April were $23.4 billion, but foreign debt service was $2.9 billion. In March, exports were $22.7 billion and foreign debt service was $2.3 billion. However, the increase in imports remains at a higher level. In March, imports excluding energy products and non-monetary gold rose 9.2 percent, rising to $21 billion, 429 million from $19 billion, 615 million. April imports, on the other hand, increased by 35 percent and amounted to $29.5 billion. In other words, the money from exports went to imports. A similar relationship was experienced in the period leading up to the 1958 moratorium. In 1956 the annual increase in debt service far exceeded the annual increase in export earnings, and the share of debt in gross domestic product increased. A decrease in foreign currency inflows has an adverse effect on external liabilities. In addition, the rate of increase in the money supply entails such risks. From 1954 to 1957 it was 30% and from 1958 to 1960 it was 23.6%.”
The stock of external debt increased by $1 billion in one month
According to statistics released by the Central Bank (CBRT), the stock of short-term external debt increased by $1 billion to $182.4 billion by the end of April 2022 according to the residual maturity calculated from the external debt data with a maturity of 1 year or less and broke thus a record. In March, that figure was $181.4 billion. Economists are interpreting this data as a harbinger of a renewed rise in exchange rates on the back of the FX rate, which has risen above 800 by raising credit spread CDS rates to 11 percent. USD 17.8 billion of external debt consists of debts owed by banks and the private sector located in Turkey to foreign branches and subsidiaries. On an obligor basis, the public sector accounts for 19.4 percent, the central bank for 16.1 percent and the private sector for 64.5 percent of the total.
What is the 1958 Moratorium?
The Republic of Turkey (government of Adnan Menderes’ Democratic Party) declared a moratorium on August 4, 1958 due to the country’s financial difficulties and insolvency. This date is also the date when Turkey entered into an agreement with the IMF for the first time. On the one hand, the devaluation made 1 US dollar from 2.80 TL to 9 TL, on the other hand, an agreement with the creditors ensured that the existing debts were settled in installments until 1971.
More interesting than this moratorium and its aftermath is that the amount of external debt available at this point is unknown. Governments of creditor countries have announced how much and to whom Turkey owes foreign debts. The deal included a total of $422 million in debt as of the date the agreement was signed.
An important result of these regulations was the abolition of the practice of borrowing by each public sector administration on its own and the provision that the public sector could borrow only through the Treasury. This development actually corresponds exactly to the proverb “There is good in all evil”. This ended a time when each administration of the central government was responsible for itself and the principle of the unity of budget and treasury was violated.
Note: This department DR. Mahfi EğilmezPosted on October 16, 2021 in the personal blog of “Do states go bankrupt?” Taken from his article.
#Bad #memories #years #awakened #MORATORIUM
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