Rapid inflation and the collapse of the Turkish lira have put millions of Turks at risk of economic ruin. But what exactly happened to the Turkish economy?
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Türkiye’s economy is in tatters. Runaway inflation and the collapsing lira are pushing millions of Turks to the brink of financial ruin and hurting factories, farms and retailers across the country.
More than two-thirds of Turkey’s citizens are struggling to pay for food and rent, leading to soaring rates of mental illness and debt, according to a study by the Yoneyrem Social Research Center.
But it wasn’t always like this. Turkey’s economy has grown exponentially over the past two decades, with GDP growing at an average annual rate of 5.8% from 2002 to 2021.
So what went wrong?
“Currency devaluation spiral”
If you ask anyone who goes to Turkey every year, they will tell you that the Turkish lira is in crisis. Since 2013, the value of the Turkish lira has steadily declined, with a sharp decline over the past 12 months.
In September 2021, 1 US dollar was worth around 8 Turkish Liras, but by December 2022 this had soared to nearly 19 Turkish Liras.
One of the main effects of this currency devaluation is inflation.
When the value of a currency falls, the price of goods brought in from abroad rises. Because most countries import goods such as fuel, materials, and technology, a weaker currency means higher prices.
This has fueled record inflation in Turkey, one of the highest in Europe.
The Turkish Statistical Institute reported that inflation reached a 25-year high of 85.5% in October, but many argue that real inflation is likely to be even higher. ENAG’s independent analysts estimated that the annual CPI inflation rate was actually 176.0%.
Turkish businesses have been hurt by the fall in the value of the lira, causing production costs to soar, while people’s wages have eroded as money can buy less.
“The situation is even worse for skilled workers.” Dr. Sem Oybata lecturer in economics at the University of Greenwich, sparked a devastating “brain drain”.
Losing such talent, he said, “could damage the Turkish economy for years to come as the economy loses the jobs and business that these people could have created.”
“The economy is too hot”
There are also other factors at play.
According to Dr. Oyvat, the strong GDP growth that Turkey has experienced over the past few decades has not been “sustainable” to begin with.
This is partly due to deeper structural problems, such as Turkey’s large current account deficit (which means it exceeds exports), but there is also another factor at play: interest rates.
When economies grow too quickly, central banks often raise interest rates to cool the economy, by making borrowing costs higher, which reduces economic activity.
However, in Türkiye the opposite happened. Interest rates are kept so low by Turkey’s central bank that the economy is spiraling out of control.
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“It’s always getting too hot” Timothy Ash, an emerging markets expert at BlueBay Asset Management. “Growth is too high, domestic demand is too high, imports are too expensive. Everything is overheating.”
As a result, confidence in the economy all but collapsed, and foreign and domestic investors pulled their money out of Turkey as the lira plummeted.
Ash argues that low interest rates are primarily due to President Recep Tayyip Erdogan’s “unconventional” understanding of monetary policy.
He said Mr. Erdogan had won elections in the past by injecting cheap money into the economy. “But in the end, it pays off.”
Asch also argued that minimum interest rates are “beneficial” to Erdogan’s AK Party’s “big financiers” such as construction and real estate, who can profit more from cheaper loans. are doing.
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Erdogan’s religious background is something the Turkish leader himself frequently points out, Ash said.
He was one of the first Turkish leaders in the post-Kemal Atatürk era to attend the religious school Imam Hatip, and is credited with sharing Islam’s aversion to usury, which considers lending money with interest sinful. Cited as one of the reasons for the Turkish leadership in 2021. Lower interest rates.
“At the end of the day, it’s a combination of all of these things,” he added.
Erdogan’s traditionalist views and so-called “neo-Ottoman” policies have seen Turkey invest heavily in mosques and other religious sites at home and abroad, endearing him to his long-time conservative supporters.
But critics have repeatedly argued that they may also have been part of a populist ploy to sway voters in a country with almost a century of institutionalized secularism.
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Why hasn’t the situation changed in Türkiye?
Turkish authorities are aware of what is happening and have repeatedly criticised the current situation.
Unlike other developed countries, Turkey’s central bank is not independent from the government, making it difficult to address this issue.
To make matters worse, Asch said, Erdogan has appointed several finance ministers and central bank governors “mainly to resist the president” and to challenge the president’s unconventional policies. He was dismissed from office.
“President Erdogan is blaming others,” he told Euronews. “He has a team of yes-men around him. They don’t speak truth to power. It’s like the emperor’s new costume.”
The centralization of power in the hands of the Turkish president is at the heart of this problem.
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“For the first 10 years of the AKP government, the AKP had fairly orthodox policies, and the government was more like a church,” Ash said. “Right now, it’s essentially just Mr. Erdogan, to the exclusion of all other power centers within the party.”
“There are no more checks and balances,” he added.
None of this is lost on the Turkish population.
President Erdoğan and his AK Party have plummeted in opinion polls due to the economic downturn, and lost control of Turkey’s two largest cities, Istanbul and Ankara, in local elections in 2019.
“People are pretty upset,” Ash said. “They’re seeing their standard of living go down.”
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Judgment day for President Erdoğan will come in 2023, when Turkey plans to hold general elections, but there is potential to turn things around, especially through public spending.
“Erdogan can spend a lot of money to isolate certain segments of the population, such as pensioners and those who pay social security contributions.” [and] “He’s definitely going to use the budget to help people that he thinks are key to winning elections,” Ashe explained.
Turkey recently doubled its legal minimum wage in response to rising inflation.
But there is also a risk that he will resort to other tactics.
Alarmingly, Turkey’s president has begun to suppress opposition voices, and in December accused the mayor of Istanbul of drafting a controversial media law that would “insult” officials and criminalize “disinformation.” Ekrem Imamor was imprisoned.
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Still, with poor poll numbers and no change to economic policy, the administration’s long-term prospects look bleak.
“It’s hard to predict elections,” Ashe said. “But this vote will be the closest in 20 years. “The stakes are high and Erdogan has a lot to lose.”
“It’s going to be interesting,” he added.
