Turkish President Recep Tayyip Erdogan has openly strengthened his idiosyncratic economic policies since his re-election.
“If anyone can do this, so can I,” he declared in his victory speech last Sunday, referring to the country’s ability to solve its dire economic problems.
His cocky confidence is not widely shared by most analysts and economists.
Turkish lira fell temporarily record low Foreign investors have been disappointed by the president’s refusal to deviate from what is widely considered a novel economic policy as the dollar has surged this week.
Instead of raising interest rates and making borrowing more expensive to combat dizzying inflation, as most economists recommend, Erdogan has repeatedly cut interest rates. He argues that cheap credit encourages manufacturing and exports.
But his strategy has fueled inflation, currently at 44% per annum, eroding the value of the Turkish lira. The government’s attempts to prop up a weakening currency are drying up its dwindling foreign exchange reserves.
As the lira depreciates, imported goods such as medicines, energy, fertilizers and auto parts become more expensive, helping consumers meet their daily expenses. And the amount of debt repayments for companies and households borrowing from foreign financial institutions will also increase.
The national budget is also getting tighter. A devastating February earthquake that tore through much of southern Turkey is estimated to have caused more than $1 billion in damage, about 9% of the country’s annual economic output.
At the same time, Erdogan increased pre-election spending to attract voters, increased salaries for public sector employees and retirees, and provided each household with a month of free natural gas. Spending has boosted growth, but economists fear the spending will fuel inflation.
Efforts to encourage Turkish citizens to keep their savings in the lira by guaranteeing balances against currency depreciation further increase the government’s potential debt.
Critics of the president’s economic approach have been given some encouragement by reports that Erdogan will name his next president this weekend. Mehmed SimsekFormer Finance Minister and Deputy Prime Minister, in the cabinet. Simsek is well-respected in the financial world and has long supported tightening monetary policy.
“What Turkey really needs now is more exports and more foreign direct investment, and we need to send a signal to do that,” said Henri Barkey, professor of international relations at Lehigh University. He said one signal could be Simsek’s appointment.
Mr. Barkey argues that Mr. Erdogan will have to make a U-turn on policy before the winter, when the cost of energy imports will rise and some debt payments will be forced.
Others are more skeptical that Mr. Erdogan will drop his claim that high interest rates drive inflation. Kadri Tastan, a senior fellow at the German Marshall Fund, a Brussels-based public policy think tank, said he did not believe a policy change was imminent, regardless of the composition of the government.
“Of course, I’m pretty pessimistic about big changes,” he said.
To deal with huge external deficits and depleted central bank reserves, Mr. Erdogan has turned to allies such as Russia, Qatar and Saudi Arabia to keep dollars in central banks, extend payment deadlines, and do things like: We are asking them to increase their reserves by offering discounts on imported goods. Natural gas.
Capital Economics said in a memo to investors this week that optimism about policy change is likely to be short-lived. Giving banks a license to raise interest rates to restore economic balance. “
Turkey’s economy is over $900 billion, making it the eighth largest country in Europe. And since the start of the Ukraine war, Erdogan’s efforts to establish himself as a power broker between Russia and its European allies have further underscored Turkey’s geopolitical clout.
Erdogan, who has been in power for two decades, has built his electoral success on growth-oriented policies that lift millions of Turks into the middle class. But the booming expansion was not sustainable.
The debt frenzy sent prices skyrocketing, adding to the cost of living crisis. Yet Erdogan persisted in his interest rate cuts and dismissed central bank chiefs who disagreed with him. The pandemic has exacerbated the problem by reducing demand for Turkey’s exports and limiting tourism, a major source of income.
Erdogan is likely to continue his expansionary policy until next year’s local elections. Hakan Kara, former chief economist at Turkey’s central bank, said until then Turkey would probably just “get through it”.
“The Turkish authorities will have to make tough decisions after the local elections because something will have to yield eventually,” Kara said. “Turkey needs to either return to its traditional policies or further deviate from a free market economy where central authorities control the economy through fine control measures.”
“Either way, the adjustment will be painful,” he added.
