Nicholas Birch -

Huseyin Ciftci is fairly typical of the businessmen who helped transform Konya from an agricultural town to one of the giants of industrial Anatolia over the past 20 years. He began in trade before moving into production; he's maintained the religious conservatism of his forefathers; and he can't remember a time when business was as hard as it is today.

It's not just that energy costs and wages are up: the main problem is the Turkish lira, 1.6 against the US dollar when he set his prices in 2004, just over 1.3 today. “Exporting for profit has become almost impossible,”

Ciftci complains. He's too busy to leave his small spare car-parts factory on the northern outskirts of Konya to make his voice heard, but for several months now more influential businessmen have been bringing the same gripes to the capital Ankara. Turkey's newly independent central bank may have won the admiration of the world's financial markets for its unprecedented reduction of inflation from 70% to today's 7.9%, but by leaving its overnight borrowing rates relatively high at around 13.5%, it has encouraged excessive financial inflows. That, some economists say, has overvalued the lira by as much as 30%.

“I can't see myself being able to hold out more than a month or two, and I'm not the only one having trouble,” says Cavit Caglar, who employs around 15,000 workers in one of Turkey's biggest textile plants. “If things go on this way, we're talking one million, two million people losing their jobs.”

WE WANT A LOWER LIRA! WHEN DO WE WANT IT? NOW!

Like other lobbyists for the manufacturing sector, Caglar is demanding a reduction in interest rates and, above all, more decisive intervention by the central bank in the foreign exchange market to help keep the lira down.

It's not for nothing that the voices demanding changes in policy are strongest in the textile sector represented by Caglar. Figures released in March by Turkey's Statistical Institute show that while total industrial production in January was down 6.1% from the year before, textile manufacturing fell a massive 17.9%, with the prét-a-porter part of the sector 35.4% lower. “Textiles are sinking fast,” sighs Hursit Gunes, an economist at Istanbul's Marmara University.

Employer of an estimated 17% of Turkey's 22-million-strong workforce, textiles are too important a sector to be ignored by the government. In mid-March, Turkish Prime Minister Tayyip Erdogan responded to increasingly strident calls for action by announcing big VAT cuts on textiles and cotton.

Despite the surprise intervention of former Turkish finance minister Kemal Dervis in support of manufacturing sector calls for currency intervention, the likelihood of more radical support was always going to be minimal. The central bank intervened six times in 2005 to buy dollars for lira, soaking up some $14.6 billion, but the interventions had no discernible effect on the lira's value. Larger interventions, analysts say, risks violating the inflation-targeting programme that Turkey officially adopted at the start of this year. The Bank is targeting a consumer price index level of 4% for 2007.

Above all, a devaluation of the lira would not be in the interests of the Treasury.

Interest payments still make up a significant proportion of the government's budget and since much of the debt is denominated in dollars, a fall in the lira would immediately push up debt servicing costs.

SCAPEGOAT

In any case, blaming the plight of Turkey's exports solely on the over-valued lira would be wrong, argue most analysts. More than anything else, the strengthening currency has been a means of shedding light on structural weaknesses latent for years. “They call the textile sector the locomotive of the Turkish economy,” says Zeynep Gogus, a columnist for the financial daily Referans. “But this is a locomotive that has been pushed from behind for years.” Those words might seem a little harsh, but the view is sadly backed up by the statistics. While textile exports have showed a steady increase in real terms over the past decade, their share of total exports has fallen from 34% in 2000 to 25% last year.

To a large extent, the reduction is linked to the growth of cheaper markets further east in India and China, but analysts argue Turkey's textile market has also been weakened by a preponderance of small, low-tech firms incapable of competing internationally.

Of an estimated 19,000 textile firms, just 500 do 80% of the exporting.

“Over-capacity has created incredible competition domestically, plus a very negative atmosphere,” says Huseyin Celebi, a research director for IBS Research & Consulting, who has just completed a study of the sector.

And then there's the over-dependence on Europe as a source for imports. An economist at Istanbul's Bogazici University, Deniz Gokce, reckons 40% of Turkey's total textile and clothing exports go to Germany alone.

“Not much of a strategy”, he comments. “If Germany sneezes, we catch tuberculosis.”

Rather than complaining about high currency rates today, the newspaper columnist Gogus argues the leaders of Turkey's textile sector would do better to concentrate on a strategy they should have begun developing more than a decade ago. “They could start by turning their attention to new markets in the former Soviet Union,” she says.

Time will tell whether a change of direction will slow years of decline. An economist at Morgan Stanley, Serhan Cevik, thinks the real moral of the row between exporters and the Treasury lies elsewhere, as just another milestone on Turkey's road from “low valueadded manufacturing sectors to a modern service-based economy.”