Lira is getting too strong

ISTANBUL – The strong appreciation of the Turkish lira in the last two years has unsettled local exporters but analysts said it will not present a problem for the economy while high productivity levels are maintained. According to an index prepared for Reuters by Bilkent University professor Faruk Selcuk, the lira has appreciated 36.7 percent in real terms against the dollar since January 2000 when Turkey began a loan deal with the International Monetary Fund. At that time, the Fund said the lira was at an ideal level. Selcuk said the impact of the currency appreciation was offset by the rise in productivity and fall in unit costs over this period. «The increase in production, which justifies the appreciation of the currency, must be lasting. If it is lasting, there will not be a problem,» Selcuk said, adding that achieving this depended on completing structural reforms. According to a productivity index produced by the State Statistics Institute and taking 1997 as a base of 100, productivity increased to 137 in the third quarter of 2003. The index stood at 105.1 in the first quarter of 2001, when Turkey was hit by a major financial crisis. Related to productivity Bender Securities economist Emin Ozturk said the levels of the exchange rate and productivity can form a cycle feeding into one another. «At times when domestic demand is not very strong, appreciation of the currency makes companies more productive. While firms are more productive they can maintain exports. As exports continue the exchange rate falls further,» Ozturk said. Lira appreciation enables Turkish producers to lower their input costs as they use significant amounts of imported raw material or intermediary goods in their production. The appreciation also encourages producers to use imported input instead of domestically produced goods as they become cheaper once the lira strengthens. Imports of intermediate goods in the first 11 months of last year increased 31.3 percent from a year earlier. The level of wages, an important source of the increase in productivity, has been kept under pressure in recent years as a result of a fall in domestic demand. Economists said productivity improvements may be eroded to a certain extent if the downward pressure on wage levels comes to an end. «The (increase) in productivity which is not lasting is down to wages. If the productivity (increase) is not lasting, the appreciation of the currency may be a problem,» Ozturk said. Large-scale layoffs in the wake of the 2001 crisis resulted in considerable increases in production, notably in the manufacturing and financial services sectors. Real wages in these sectors also decreased after the crisis. «The current level of the exchange rate does not represent a problem for foreign trade and the balance of payments,» a senior economy official said.