Turkey in Trouble!
The Turkish economy positioned itself as a gateway, one of the most common connection points for accessing the markets of Russia, the Middle East and Central Asia. What’s more, the country was a respected member of the international community: It was – and still is – a member of NATO (North Atlantic Treaty Organization) and the OECD (Organization for Economic Cooperation and Development), and it also has, since 1995, custom agreements with the European Union, which gives it preferential access to the substantial European common market.
So, with all this, it was all natural that we found news reports like: Turkey: the great “success story” of the international economy (CaixaBank; 11 October 2018). Since then, however, things have changed a lot.
For around two decades now, the economic boom that lifted millions of people into the middle class has begun to turn into a bust. And it seems that the Turkish economy is facing a very severe currency crisis.
In 2021, the Turkish lira lost around 50% of its value against US dollar. This is a nightmare that threatens all the progress made by the Turkish economy in recent years. But what has caused such a debacle? Mind that this is not typical of government forcing its central bank to print a lot of new money to finance its level of public spending. In the case of Turkey, we are dealing with an entire political and economic strategy, a totally deliberate plan.
So, what exactly is happening with the Turkish economy?
Let’s take a look on the monetary debacle.
Throughout 2021, the Turkish lira lost 50% of its value against the US dollar, and this is not an isolated case.
Since President Recep Tayyip Erdogan assumed the presidency of Turkey in 2014, the lira has depreciated by almost 90% – a situation that obviously has consequences. Following are some highlighted ones:
The inflation has skyrocketed. Official figures point to the inflation rate at around 20%, but private estimates indicate that it could have already exceeded levels of 60%. This means that the families had to cut back on essential goods such as meat or even bread. At the same time, they are also having problems getting hold of imported products, such as medicines.
The savers are trying to exchange the lira they learn as fast as for dollars and gold. This is causing significant damage to the local financial system. On the one hand, this process accelerates the depreciation of the lira. On the other hand, when it comes to cash withdrawals, it contributes to consuming the country’s foreign currency reserves – Something that, in itself, may end up causing the government to establish tough capital controls.
The collapse of the Lira has led to a huge flight of foreign capital, so much so that, for example, holdings of bonds and shares in the hands of foreign investors have plummeted by more than 70% in recent years. It does not end there.
In an attempt to support the lira, the Turkish central bank has intervened several times in the market by selling foreign currencies, which has depleted the country’s net reserves. In other words, the Turkish economy is facing severe problems, and there are more investors, analysts, and economists who expect things to get even worse.
Even though inflation is skyrocketing and the lira is plummeting, Turkey’s central bank is lowering the interest rates. In fact, the plan seems to be cut them even further, precisely the opposite of what is usually done in these situations. Because, in order to curb inflation, prevent capital flight, and prevent the dollar from getting stronger – which for example, makes foreign currency debts harder to repay – central banks usually raise interest rates.
Turkey is doing exactly the opposite; the question is, why? This all comes down to a kind of economic policy that is already known as “Erdoganomics”. This is the key factor that explains the tremendous crisis that the Turkish lira is going through. Turkey’s all-powerful president is convinced that if the central bank lowers the country’s interest rates, this will eventually lead to a lower level of inflation. From his perspective, the “process” would be as follows:
Lower interest rates encourage investment; investment increases production, which, in turn, makes products cheaper, boosts exports, and makes the country richer. In short, for Erdogan, lowering interest rates is tantamount to subsidizing investment.
Never mind what happens to supplies, raw materials, foreign investment, or the purchasing power of Turkey’s own savers.
“What we call exchange rates rise today and fall tomorrow. What we call inflation rises today and falls tomorrow. Production and employment are permanent.” (Erdogan)
That is exactly why this president has been asking the Turkish central bank to lower interest rates for his entire term in office, and particularly in 2021. In fact, the president’s ultimate goal is to set interest rates at zero eventually. For the said reason, Erdogan dismissed five central bank top officials for not agreeing to follow his plan.
What is wrong with Erdogan? Where does he get the idea that the cheaper the interest rates, the better? According to several economists, the lowering interest rates’ idea he got from the ideology of Islamic economics, which he described many times.
“There is a nass – a Koranic decree – on this issue, so it is up to you or me?” — Erdogan
In other words, he has defended his political program as a religious obligation that no good Muslim should question. This is the great challenge Turkey faces that is causing so many problems.
A president who has taken control of every major institution in the country, including the central bank, the universities and the vast majority of the media; a president who is committed to a type of economic policy, the results of which are getting worse and worse, and a president who does not seem willing to change his mind. In December 2021, the news came out: Turkey’s finance minister resigns amid the plunge in lira (Financial Times). What’s Erdogan’s next resolution: Erdogan announces the drafting of a new constitution in Turkey in 2022 (Europa Press). Whether developments on the verge of financial crisis escape the loop or not, it is up to the coming months.
The writer is pursuing his BS in History from the Department of History, QAU Islamabad.
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