The Turkish economy has had a difficult year, with its currency depreciating and inflation soaring. 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 had risen to 36% last month, the highest figure in Turkey in nearly two decades.
Opposition parties claim that the real situation is worse than official figures show.
After 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 package of measures announced by the government during the last weeks of 2021.
Financial experts both inside and outside Turkey, as well as opposition parties, blame Erdogan’s insistence on continuing to cut interest rates.
Most economists believe that to stop inflation from rising, central banks should raise interest rates. But Erdogan rejected this strategy, arguing that lowering interest rates lowered inflation and encouraged growth, despite mounting evidence that his policy was not working.
Experts predict higher level of inflation
In an effort to defend the collapsing pound, the government announced a plan to protect holders of pound deposits from possible losses due to currency depreciation. In December, he also raised the minimum wage by more than 50%.
Despite government 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 have 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 is the time to reap the rewards for the government’s efforts. However, experts who spoke to Voice of America predict it won’t.
Timothy Ash, sovereign emerging markets strategist at BlueBay Asset Management in London, predicts that inflation in Turkey will likely exceed 50% in the coming months.
He argues 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 Turkey’s central bank data for December, the government sold around $ 19 billion to support its currency.
Ash predicts that the government will be unable to continue defending its currency with this strategy for too long.
“Turkey’s central bank doesn’t have an endless pot of foreign exchange reserves. Turkey’s net reserves are minus 60 billion. They are spending money they don’t have,” he said. declared.
Johns Hopkins University professor of applied economics Steve Hanke, who says he measures Turkey’s annual inflation daily using high-frequency data, tells VOA that while it’s difficult to using standard analysis to make an accurate forecast in cases like Turkey where there is a big currency crisis, he predicts that inflation will stay very high.
“Turkey is forging its own path”
Turkey’s central bank announced last week that it had asked exporters to sell 25% of their hard currency earnings to the bank for the lira to support the currency’s fall.
Hanke describes the move as the first aspect of currency control and says it is 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 forging its own course” regarding economic policies.
Early election discussion 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 prospect of early elections.
Elections in Turkey are set to take place in 2023. But soaring prices have had a huge impact on the lives of Turks, from food prices to medicines and utilities. As Erdogan sees his opinion scores drop amid economic pressure, opposition parties see political opportunities in economic policy struggles.
But economist Ash warns the country will face serious economic consequences if it does not change course.
“Unfortunately, Turkey increasingly looks like a devaluation-hyperinflation scenario in Argentina or Venezuela,” he said.
“Monetary policy is not sustainable. So either Erdogan changes course or loses the election, and a new administration comes in and changes policies. But if these policies continue, Turkey faces an economic crisis and financial, ”Ash said.
Erdogan said last month that Turkey would never again subject its political and economic future to the prescriptions of global institutions such as the International Monetary Fund, making Turkey’s economic future very uncertain.
This story has its origins in the Turkish service of VOA.