Since Recep Tayyip Erdogan first came to power some 20 years ago, his country’s currency, the lira, has lost about 90% of its value against the US dollar.
When a currency falls that steeply, the result is rampant inflation, especially in a country like Turkey, which needs to buy many goods and raw materials on world markets. Currently, official data show the Turkish inflation rate standing at 44% — significantly lower than the 85% recorded last year. However, observers assume that the unofficial rate is higher.
Poorer households, in particular, are suffering from rising prices because they have to spend a large part of their modest incomes on everyday necessities. According to a study published last year by a Turkish trade union, food prices had almost tripled within a year, and the increases for vegetables were higher still.
Trust in Turkish central bank tarnished
“With increasing political uncertainty and the introduction of an absolute presidential system from 2018, Turkey has entered a severe economic downward spiral,” says Erdal Yalcin of the Kiel Institute for the World Economy (IfW). And much of the blame for the slump can be laid at the door of Erdogan’s “unorthodox” economic and monetary policy, he told DW.
Economic orthodoxy and wisdom have it that central banks raise interest rates to counter excessive inflation. Rate hikes make loans and investments more expensive, the economy and demand cool down and prices start to fall.
But Erdogan has prevented this by compelling the Turkish central bank to lower interest rates even further at a time when inflation was already high and accelerating. What most economists around the world have described as “unorthodox policies” have severely undermined trust in the independence of the Turkish central bank and its ability to stem rising prices.
Erdogan has argued that cheap loans would give businesses more freedom to invest, which in turn would help the Turkish economy.
“The core of the whole problem is that Erdogan continues to indulge in the idea that he can bring inflation down with low interest rates,” says Janis Hübner, the emerging market specialist at Germany’s DekaBank.
“And since he will continue to exercise control over the central bank, we have to assume that confidence in the lira will not return either and inflation expectations will remain high,” Hübner told DW.
Erdogan unorthodox economic policy also includes piling up government debt. According to data published by the International Monetary Fund (IMF), Turkey’s public debt has more than quadrupled in the past five years. Any rise in interest rates would be toxic for financing this rising public debt.
Negligible pandemic damage
Yet Turkey is doing comparatively well in terms of economic growth. Despite the COVID-19 pandemic, Erdogan’s cheap credit and excessive government spending boosted economic activity to 11% in 2021, and last year growth came in at 3% despite the fallout from Russia’s invasion of Ukraine, notably rising energy costs. Tourism, for example, is back in full swing after the end of travel restrictions.
This year, however, Turkey’s economic expansion was stalled by an earthquake in the south of the country in February, which killed more than 50,000 people. Three million people were displaced by the disaster.
Moreover, political and economic uncertainty in the runup to the presidential election caused direct investment, especially from the EU, to dry up. The foreign trade deficit widened as a result and the central bank’s foreign exchange reserves have dwindled. In the week before the elections, the Turkish central bank’s net reserves reached their lowest level since 2002.
Erdogan’s foreign sponsors
The country has apparently received support from wealthy Arab countries in the Gulf region.
Ahead of the election, Erdogan told CNN Turkey that the Turkish economy, as well as its banking and financial system, are “quite strong” partly because friendly states in the Persian Gulf have invested money. For this reason, he was planning to thank his sponsors immediately after reelection, he said, including by heading to these partners first instead of taking the traditional inaugural trips to countries such as Northern Cyprus or Azerbaijan.
Erdogan may also be heading to Moscow very soon to thank Vladimir Putin for a credit deferral to the tune of $24 billion (€22.37 billion) and a huge discount on gas imports from Russia — not to mention $20 billion in project financing for a nuclear power plant Russia will build in southern Turkey.
This article was originally written and published in German.
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