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Soaring inflation and a crashing currency: Turkey's economic woes

According to recent data published by the Turkish Statistical Institute, Turkey’s annual inflation has surged to a 19 year high. The price of consumer goods has risen by 36.08℅ which is much beyond the average forecast of 30.6℅. This has further led to an increase in the price of staples such as transportation, foods, and drinks mounting pressure on household budgets. December’s producer price index rose 19.8℅ month-on-month and 79.89℅ year-on-year. Annual transportation prices have soared by 53.66℅ while the price of foods and drinks has jumped by 43.8℅. Annual CPI reached 37℅ in September of 2002, two months before Erdogan's Justice and Development Party (AKP) came to power.

Economists predict that inflation could reach 50℅ by spring of this year if the current monetary policy path is not reversed immediately.

In 2021, Turkey’s currency, Lira, was the worst-performing currency as it lost 44℅ of its value because of unorthodox economic policies being pursued by its long-time leader Recep Tayyip Erdogan.

The Türkiye Cumhuriyet Merkez Bankası’ (TCMB), Turkey's Central Bank, has announced various rate cuts giving the rationale that such rate cuts would boost exports, employment, and economic growth. However, economists have called these rate cuts reckless and called upon the Central Bank and government to immediately raise interest rates to combat rising inflation.

Last year, Turkey's government said that the Inflation rate is around 20℅. But economists disagreed saying that it must be around 30-40℅. The TCMB has blamed inflation upon supply constraints (cost-push inflation) and hence, assured that the situation is transitory. However, economists have pointed out that inflation is being primarily driven up by demand-pull factors and hence, low-interest rates aren’t helping.

Turkey has witnessed prolonged high inflation rates throughout the Erdogan regime. Since February 2017, CPI has largely remained in double digits.

Turkey faced a similar situation in 2018 when inflation rates reached 25℅ in October. Back then, the Central Bank went against the will of President Erdogan and increased interest rates pushing up the one-week repo rate to 24℅.

Conventional economic theory suggests that when inflation rises, Central Banks should raise interest rates. However, Erdogan, declaring himself an enemy of interest rates deriding them as the “mother and father of all evil” has chosen the opposite path. He once said, “I am an enemy of interest earnings. I see it as a tool of exploitation.” He even blamed a shady “interest rate lobby” aiming to profit from economic instability. Many believe Erdogan's unconventional view on interest rates is being informed by Islamic teachings. In Islam, the word Riba prohibits usury which is a practice of charging exorbitant interest rates.

Erdogan has already sacked four of his five central bank governors in two and a half years for not agreeing to his demands and is losing faith in his current governor.

Since, March 2021, Turkey's key policy rate, or what the country calls the ‘one-week repo rate has been cut by 400 basis points (from 19℅ in March to 15℅ in November 2021). In December 2021, the Monetary Policy Committee cut its one-week repo rate by another 100 basis points to 14℅, also assuring that it was wrapping up its cycle of interest rate cuts.

The Turkish Lira jumped by 40℅ for a brief moment in December 2021 when President Erdogan pledged to compensate savers for inflation that has eroded the value of bank deposits held in the Lira.

Erdogan through these moves aims to move Turkey on the path of an export-led economic model based on cheap credit, cheap currency, and low labor costs that will make Turkey a manufacturing hub like China, but closer to European markets. The President has argued that a volatile Lira will stabilize because of increased tourism revenue which will help inject hard cash into the economy.

Many economists believe that Riba is just one of the factors behind Erdogan’s moves. Mustafa Metin Basbay is a teaching fellow at SOAS University of London, Erdogan. He wanted to end the foreign dependence of Turkey even at the cost of the Lira.

In his words, “Turkey was running a huge current account deficit since long and was financed via excessive foreign borrowing. Neither, global liquidity conditions nor Turkey’s geopolitical position allows the country to continue borrowing at similar rates.” Basbay stated, “The choice that Turkey is facing is either to hike interest rates dramatically only to continue attracting capital inflows or to end its needs for foreign financing. This can be done by closing its account deficit at the cost of depreciating the Turkish Lira and thus declining purchasing power of Turkish citizens. Erdogan seems to be choosing the latter.”

Turkey being an import dependant economy has been hard hit by a crashing Lira that has made imports very expensive. This has pushed up the price of domestically produced goods. Producers have no choice but to reflect the increased price of imported commodities in their produced goods.

Turks have seen their savings and purchasing power severely eroded over time and are cutting back on everyday costs to tide the situation. Long queues are being witnessed outside petrol pumps and local municipalities for cheap subsidized pieces of bread. Prices of daily consumer goods are increasing every week.

Many Turks are safeguarding their savings by turning them into non-Lira assets like Gold and other foreign currencies. 62.2℅ of Turkish bank deposits are reported to be held in foreign currencies as of December 3 – the highest since 2001.

The political fallout of Turkey's economic woes is being witnessed in widespread protests on the streets calling for the President and his AKP Party-led government to resign. Opposition parties are calling for snap elections. Turkey is expected to go to elections by mid-2023. President Erdogan’s approval ratings have also suffered. According to the latest monthly survey by Turkish Pollster Metropoll, only 38.6℅ approved of the way the President is carrying out his duties with 57℅ of the ratings in negative.


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