Turkey’s economy had a rough year, with its currency depreciating and skyrocketing inflation. Experts have warned that unless President Recep Tayyip Erdogan changes course and changes his controversial monetary strategy, the situation could worsen.
Last week, the country’s official Turkish Statistical Institute (TUIK) reported that inflation rose to 36% last month, the highest figure in Turkey in nearly two decades.
Opposition parties claim that the actual situation is worse than the official numbers show.
After a series of interest rate cuts by the Turkish Central Bank last year, the Turkish currency lost more than half its value before recovering slightly following a package of measures announced by the government in the last weeks of 2021.
Finance experts inside and outside Turkey, as well as opposition parties, blame Erdogan’s insistence on continuing to cut interest rates.
Most economists believe that central banks should raise interest rates to curb rising inflation. But Erdogan rejected that strategy, arguing that low interest rates reduce inflation and encourage growth, despite his policy not working.
Experts predict higher levels of inflation
In an effort to protect the collapsing lira, the government announced plans to shield lira deposit holders from potential losses due to the currency’s depreciation. In December, it increased the minimum wage by more than 50%.
Despite the government’s efforts, Turkey started the year with an increase in prices ranging from electricity and natural gas to road and bridge tolls and taxi charges. Electricity cost increased by about 125% for commercial customers and 50% for residential customers. The cost of public transport has increased by more than 30% in Turkey’s largest city, Istanbul.
Erdogan recently said that the worst was over and it was time to take advantage of the government’s efforts. However, experts who spoke to Voice of America predict that will not happen.
Timothy Ashe, sovereign strategist for emerging markets at Bluebay Asset Management in London, estimates that inflation in Turkey is likely to rise above 50% in the coming months.
They claim that the relative stability in the local currency is due to state-backed foreign exchange interventions rather than confidence-building measures such as the deposit guarantee scheme. According to figures from Turkey’s central bank for December, the government sold about $19 billion to back its currency.
Aish predicts that the government will not be able to protect its currency with that strategy for very long.
“Turkey’s central bank doesn’t have infinite reserves of foreign exchange reserves. Turkey’s net reserves are minus 60 billion. They’re spending money they don’t have,” he said.
Steve Hanke, a professor of applied economics at Johns Hopkins University, who says he measures Turkey’s annual inflation on a daily basis using high-frequency data, tells VOA that it takes standard analysis to make accurate forecasts in cases like Turkey. Hard to access, where there is a major currency crisis, he predicts that inflation will remain very high.
‘Turkey forging its own path’
Turkey’s central bank announced last week that it has asked exporters to sell 25% of their hard currency revenue to the bank for the lira to support a falling currency.
Hanke describes the move as the first aspect of foreign exchange controls and says it is a “bad sign” for Turkish businesses and investor confidence.
Turkey’s finance minister, Nureddin Nebati, said last week that the government would prioritize the fight against inflation, but added that it had “abandoned conservative policies and was charting its own course” as far as related to economic policies.
Early election talks amid 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 chances of an early election.
Elections in Turkey are due in 2023. But rising prices have had a huge impact on the lives of Turks, from food prices to medicine and utilities. As Erdogan sees his opinion ratings drop amid economic pressure, opposition parties see political opportunities in economic policy struggles.
But economist Aish has warned that there will be dire economic consequences if the country does not change its course.
“Unfortunately, Turkey is increasingly looking at what looks like a devaluation-hyperinflation scenario like Argentina or Venezuela,” he said.
“Monetary policy is not sustainable. Therefore, either Erdogan changes course or he loses the election, and a new administration comes in and changes the policy. But if these policies are continued, Turkish economic and financial faces a crisis,” said Aish.
Erdogan said last month that Turkey would not resubmit its political and economic future to the prescription of global institutions such as the International Monetary Fund, making Turkey’s economic future highly uncertain.
This story is originated in the Turkish service of the VOA.