Economic policy

Erdogan sticks to economic policy as Turkey’s inflation rises and currency sinks

The Turkish economy had a difficult year, with a depreciation of its currency and soaring inflation. Experts warn that unless President Recep Tayyip Erdogan changes course and reverses his controversial monetary strategy, the situation could get worse.

Last week, the country’s official Turkish Statistical Institute (TUIK) reported that inflation rose to 36% last month, the highest figure in Turkey for nearly two decades.

Opposition parties say the real situation is worse than official figures show.

Following a series of interest rate cuts by the Turkish Central Bank last year, the Turkish currency lost more than half of its value before recovering slightly following a set of measures announced by the government in the last weeks of 2021.

FILE – Graffiti on a wall reads: ‘Does finding shelter mean paying most of your salary for rent?’ in Istanbul, Turkey, on October 15, 2021.

Financial experts inside and outside Turkey, as well as opposition parties, blame Erdogan’s insistence on continuing to cut interest rates.

Most economists believe that to stem rising inflation, central banks should raise interest rates. But Erdogan has dismissed that strategy, arguing that lower interest rates reduce inflation and encourage growth, despite mounting evidence that his policy isn’t working.

Experts predict a higher level of inflation

In an effort to defend the collapse of the lira, the government announced a plan to protect holders of lira deposits from possible losses due to currency depreciation. In December, he also increased the minimum wage by more than 50%.

Despite the government’s efforts, Turkey started the year with price increases on everything from electricity and natural gas to road and bridge tolls and taxi fares. Electricity costs increased by approximately 125% for commercial customers and 50% for residential customers. The cost of public transport in Istanbul, Turkey’s largest city, has increased by more than 30%.

Erdogan recently said the worst was over and now was the time to reap the rewards of the government’s efforts. However, experts speaking to Voice of America predict that won’t be the case.

Timothy Ash, emerging markets sovereign strategist at BlueBay Asset Management in London, predicts that inflation in Turkey will likely exceed 50% in the coming months.

He claims that the relative stability of the local currency is due to state-backed foreign exchange intervention rather than confidence-building measures like the deposit guarantee scheme. According to data from Turkey’s central bank for December, the government sold about $19 billion to support its currency.

FILE - Demonstrators shout slogans during a protest against rising consumer electricity and gas bill prices in front of the Energy Ministry in Ankara, January 6, 2022.

FILE – Demonstrators shout slogans during a protest against rising consumer electricity and gas bill prices in front of the Energy Ministry in Ankara, January 6, 2022.

Ash predicts that the government will be unable to continue defending its currency with this strategy for too long.

“Turkey’s central bank does not have an infinite pot of foreign exchange reserves. Turkey’s net reserves are minus 60 billion. They are spending money they don’t have,” he said. he declares.

Applied economics professor Steve Hanke of Johns Hopkins University, who says he measures Turkey’s annual inflation daily using high-frequency data, tells VOA that while it’s difficult to use an analysis standard to make an accurate forecast in cases like Turkey, where there is a big currency crisis, it predicts that inflation will remain very high.

“Turkey is charting its own course”

Turkey’s central bank announced last week that it had asked exporters to sell 25% of their hard currency earnings to the bank for liras to support the currency’s slide.

Hanke describes the move as the first aspect of exchange controls and says it’s a “bad sign” for Turkish businesses and investor confidence.

Turkish Finance Minister Nureddin Nebati said last week that the government would prioritize tackling inflation, but added that it had abandoned “orthodox policies and was charting its own course” when it comes to economic policies.

Speech on early elections under economic pressure

Experts say the economy will continue to dominate the political agenda in Turkey in 2022, arguing that the economic situation could increase the prospects for a snap election.

Elections in Turkey are due to take place in 2023. But soaring prices have had a huge impact on the lives of Turks, from food prices to medicine and utilities. As Erdogan sees his opinion ratings plummet amid economic pressure, opposition parties see political opportunities in economic policy struggles.

But economist Ash warns the country faces serious economic consequences if it does not change course.

“Unfortunately, Turkey is looking more and more like some kind of devaluation-hyperinflation scenario in Argentina or Venezuela,” he said.

“The monetary policy is not sustainable. So either Erdogan changes course or he loses the election, and a new administration comes in and changes the policy. But if these policies continue, Turkey will face an economic crisis and financial,” Ash said.

Erdogan said last month that Turkey would never again submit its political and economic future to the prescriptions of global institutions such as the International Monetary Fund, making Turkey’s economic future highly uncertain.

This story was born in the Turkish service of VOA.