Turkey’s tumbling Economy : Soaring Inflation, currency crisis and government policies

Once visible as a thriving 21st century economy, matters are not looking so promising in Turkey. The country is currently in the midst of a financial crisis characterised by means of the Turkish Lira plummeting in value, excessive inflation, rising borrowing expenses, and mounting debt defaults. Despite the fact that Turkey has previously faced economic difficulties, the past year has been particularly difficult.


Collapse of Lira:

Turkey’s economy is rapidly deteriorating, and the country is currently experiencing a currency crisis. Turkish lira’s value plummeted at an accelerated rate. The Turkish lira has lost over 45% of its value against the US dollar since the start of the year 2021 and more than 11 percent since the start of January 2022, making it the world’s worst-performing currency. The latest issues with the Turkish Lira were sparked by Turkey’s central bank cutting interest rates by four percentage points for the third time since September 2021. When a central bank reduces interest rates, money becomes less expensive to borrow and thus less valued in comparison to other currencies. Interest rate cuts aren’t necessarily a negative thing, especially when inflation is low and a country is trying to jumpstart its economy. Customers with low interest rates are more likely to borrow more money to recruit more employees and expand their businesses. Lower rates also make a country’s exports less expensive and hence more competitive when compared to goods from other countries, encouraging economic growth. When interest rates are decreased when inflation is already high, additional inflation is almost certain to follow.


High Inflation and rise in food prices:

Because Turkey’s economy relies significantly on imports for everything from food to textiles, the dollar’s increase against the lira has a direct impact on consumer prices. Businesses are suffering rising costs, while people, particularly those with lesser incomes, are left to grapple with higher prices for goods like as food and electricity. The official inflation rate in Turkey reached about 70% in April 2022, above forecast and at a two-decade high; the highest level since Erdogan’s AKP party swept to power in 2022. The largest price increases in April were in the transportation sector, which increased by 105 percent, while food and non-alcoholic beverage costs increased by 89.1 percent. The data given by a Turkish Statistical institute shows the price jumps 7.25 percent in April, on a monthly basis. The depreciation of the Turkish currency has increased the cost of energy imports, and international investors are increasingly fleeing the once-promising emerging economy.

The Turks have been struck severely by currency volatility, as their earnings have lost value and their living expenditures have skyrocketed. The Russian invasion of Ukraine, which resulted in a jump in gas, oil, and food prices, as well as the corona virus pandemic, has worsened the energy price hikes, further complicating the situation in energy-reliant Turkey.

Erdogan’s economic policies, which favour decreasing interest rates to encourage development and exports, are blamed by critics and analysts in Turkey. High borrowing costs, according to the Turkish leader, promote inflation, a position that goes against conventional economic reasoning. According to Erdogan, Lower rates will combat inflation, improve economic growth, boost exports, and generate jobs. Economists, on the other hand, considered Erdogan’s rate risky and a premature economic experiment, given the currency’s rapid depreciation and rising inflation.


 Government policies:

Despite months of assurances from Turkey’s administration that the high figures were just temporary and that the agony felt by Turks would be relieved soon, growing living costs have weighed down the country.

According to the government, inflation would decrease under the new economic plan, which prioritises low interest rates in order to stimulate production and exports in order to achieve a current account surplus. Turks, on the other hand, appear to be dissatisfied with the current situation, claiming that the frantic currency crash has disrupted their household budget and future plans. With weekly price changes, individuals are finding it increasingly difficult to acquire food and other needs and are struggling to make ends meet. Even though Turkey has reduced taxes on some commodities and provided subsidies on power tariffs for vulnerable people, inflation has continued to rise.

Erdogan’s government has responded by advocating “permanent liraistation,” in which the state bank buys liras to reduce currency losses. There’s also talk that the central bank is selling dollars through hidden channels to keep the lira from falling further. The strategy, according to analysts, is costly and unlikely to be conceivable in the long run.

While the initial phases of the crisis were marked by waves of major currency devaluation, subsequent stages were marked by corporate loan defaults and economic contraction. Excessive debt buildup has had serious consequences in Turkey’s economy, causing major imbalances. Excessive leverage has aided Turkey’s economic growth. The gross non-financial sector debt of the country has increased from $221 billion in 2000 to $861 billion in 2020. In US dollar terms, the country’s GDP has only grown by 270 percent. As a result, the entire debt burden has risen from 77 percent of GDP in 2000 to 129 percent of GDP in 2020. Furthermore, much of this debt is sourced from abroad. The total debt of the country amounts to almost 60% of GDP. This debt trajectory is quite unsustainable for a country sustaining twin deficits.


Criticism on Erdogan’s economic policies:

Turkey’s economy has had a rough year as its currency has depreciated and inflation has risen dramatically. The rising prices have put a strain on households and fuelled criticism of President Recep Tayyip Erdogan, who is running for re-election next year. Financial experts and commentators inside and outside Turkey, as well as opposition parties, blamed Erdogan’s unconventional economic thinking for the economic downturn. Economists say the central bank should boost interest rates to combat growing inflation, but Erdogan opposes this method, claiming that low interest rates cut inflation and promote growth. According to Timothy Ash, an emerging market sovereign strategist, Turkey’s current strategy is unsustainable, and inflation will certainly soar to 50% in the next months.

Erdogan’s AKP is thought to have suffered a considerable drop in popularity as a result of the economic crisis. Despite the government’s efforts to safeguard the crumbling lira, the country’s rates for everything from energy to natural gas to highways and bridge tolls surged at the start of the year. However, President Erdogan began by saying that the worst was gone and that now was the time to reap the rewards of government efforts. Experts, on the other hand, have argued that this will not be the case. Experts predict that the economy will continue to dominate Turkey’s political agenda in 2022, stating that the country’s economic state would raise the likelihood of early elections, as the opposition continues to demand for them. Economic professionals warn that Erdogan must shift course and abandon his divisive monetary policy. Either Erdogan adjusts his policies, or he loses elections due to a loss of public support, and a new administration takes over and changes them. However, the present government tactics suggest that the situation in Turkey would only worsen.


Published in Global Affairs June 2022 Edition

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Hadia Ibrar

Written by Hadia Ibrar

Hadia Ibrar is a former intern at Global Affairs and a student of Peace and Conflict Studies at National Defence University Islamabad.

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