Despite the tumultuous state of the Turkish economy and the resulting cost-of-living crisis, President Recep Tayyip Erdogan was reelected last month. Economists are pointing to his unconventional economic policies as a significant contributor to the worsening conditions for many Turks.
In an attempt to address the economic struggles, Erdogan appointed a highly respected former banker as finance and treasury minister earlier this year. In a move that grabbed international attention, he then named a former co-CEO of a U.S.-based bank as head of Turkey’s central bank.
The appointment of this new leader, who comes from outside the ranks of career bureaucrats, has raised some concerns among those who worry about political interference in the central bank’s decision-making process.
The Turkish lira has recently experienced a sharp decline against the United States dollar due to several factors, including uncertainty over Erdogan’s economic strategy and a perceived attempt to reduce government regulations on foreign currency exchange.
This represents a record low for Turkey’s currency and an approximate 20% decrease in value versus the dollar since the beginning of the year. Many are concerned that this will exacerbate inflation problems and make it even more difficult for those struggling to afford necessities such as housing and food.
Sureyya Usta, a 63-year-old resident of Ankara expressed feeling anxious and unhappy about the current state of the Turkish economy.
With the falling value of the lira, Usta is concerned that her income will no longer be sufficient to cover her rent.
The declining currency coupled with high inflation has had a significant impact on the lives of many Turkish citizens. It remains to be seen what lies ahead for the Turkish economy as it continues on its current trajectory.
ERDOGAN’S ECONOMIC POLICIES
Turkey has indeed been facing a currency crisis and high inflation since 2021, which many economists attribute to President Erdogan’s unconventional economic policies. Erdogan has been reluctant to raise interest rates, despite conventional economic wisdom indicating that doing so could help control the country’s inflation problem.
By contrast, central banks in other countries typically employ rate hikes as a tool to stabilize prices. Erdogan’s approach has been criticized by some experts who say it is contributing to Turkey’s ongoing economic struggles.
It is true that Erdogan has been pressuring Turkey’s central bank to lower borrowing costs. The bank has indeed cut its key policy rate from around 19% in 2021 to 8.5% presently, despite inflation rates soaring last year to a staggering 85%.
While official figures suggest that inflation has eased to 39.5% as of last month, independent analysts claim that the actual number may be more than double that figure.
In addition, some economists have argued that the government has intervened quite aggressively in the markets to bolster the lira prior to the elections by draining the nation’s foreign currency reserves, taking unorthodox measures to keep the exchange rate stable.
These controversial policies have contributed to ongoing concerns about the country’s economic stability among investors and citizens alike.
According to economist Ozlem Derici Sengul from Istanbul Spinn Consultancy, although there has been significant pressure on the lira for some time now, excessive interventions by the central bank have prevented it from skyrocketing in recent weeks or months.
After his inauguration, Erdogan announced that Mehmet Simsek, a former Merrill Lynch banker who previously served as his finance minister and deputy prime minister, would return to the Cabinet after a five-year absence from politics.
This move might represent a potential shift towards more conventional economic policies and could help bring Turkey back to what some analysts refer to as “rational ground.” However, whether this will be the case remains to be seen, and the country’s economic challenges continue to persist at present.
Former finance minister and deputy prime minister Mehmet Simsek has stated that Turkey has no option but to return to “rational ground” and that there are no quick or easy solutions to the country’s economic challenges. He also promised to take a transparent, consistent, accountable, and predictable approach to overseeing Turkey’s finances.
Moreover, President Erdogan appointed Hafize Gaye Erkan to serve as governor of Turkey’s central bank, replacing the current chief who had been advocating for rate cuts in 2021. Erkan is the first woman to hold this position in Turkey, and this move indicates a potential shift towards more conventional economic policies that prioritize stability and transparency.
Nevertheless, only time will tell whether these changes will be effective in addressing the country’s ongoing economic issues.
Economists have expressed uncertainties over the extent to which Turkey’s President Erdogan, who has a reputation for a tight grip on the country, will allow new appointees like Hafize Gaye Erkan and Mehmet Simsek the freedom to institute more traditional economic policies.
Some observers believe that the central bank may not be granted full independence to operate as needed.
In terms of the Turkish lira’s sharp decline against the dollar, some economists suggest that the government’s loosening control over the currency following Simsek’s appointment led to the drop. However, it appears that the plunge was steeper than what they had expected, and there are still concerns about the stability of the lira in the long term.
It appears that state banks resumed selling foreign currency on Thursday as a way to stabilize the lira, with limited success as the currency weakened by only 0.5%. However, the lira continued to drop on Friday, reaching another all-time low against the dollar.
Economists have suggested that earlier loose interventions and uncertainties surrounding government policies contributed to the sharp decline in the lira earlier in the week. However, ongoing bank interventions may help prevent a similar drop in the future. Overall, the situation remains uncertain, and it’s unclear how effective these interventions will be in stabilizing the lira over the long term.
HOW ARE PEOPLE AFFECTED?
The high inflation in Turkey is causing financial difficulties for both households and businesses, with rising costs for essential items such as groceries and utilities. The weaker currency is compounding the issue since imports, such as raw materials and energy, become more expensive when priced in dollars.
One individual who is feeling the impact of these economic challenges is Usta, a 63-year-old Ankara resident who works at a company that sells cash registers to supplement her retirement pension. Despite her efforts, she is struggling to make ends meet due to the high cost of living, and she’s concerned that the recent sharp decline in the lira will lead to further price increases and financial instability for herself and others.
Usta’s situation highlights the harsh reality that many people in Turkey are facing due to high inflation and the weakened currency. Despite cutting back on expenses, she is still struggling to afford basic necessities like gas and electricity, and even social activities have become a thing of the past.
As if that weren’t enough, Usta also faces increasing rent costs, which have already doubled this year. Sadly, moving out isn’t an option for her because rents have increased significantly across the board, including within her own low-income community.
According to economist Sengul, while the recent sharp decline in the lira may not have an immediate impact, uncontrolled depreciation could lead to further market instability and pricing behavior. The future remains uncertain, and it’s unclear how much worse economic conditions may become for those like Usta who are already struggling.