Türkiye: Lira’s downward pull continues

“The lira is at a new record low” – that’s the message the day after Turkish President Recep Tayyip Erdoğan was re-elected. This continues a long-standing trend. Since the beginning of the year, the value of the lira has fallen by around six percent against the world’s leading currency, the dollar. And in the past five years of the president’s tenure, the lira has plummeted by 80 percent.

The result: rampant inflation. Turkey has to import many goods and raw materials, which is becoming more and more expensive due to the shrinking currency. Last year, the price increase in Turkey officially climbed to 85 percent; according to official data, it is currently around 44 percent. However, observers assume even higher values.

Poorer households in particular suffer from the rising prices because they have to spend a large part of their modest income on everyday necessities. According to a study by a Turkish trade union published last year, food prices had almost tripled within a year, and the increases for vegetables were even higher.

Undermining the independence of the Turkish central bank

“With increasing political uncertainty and the introduction of an absolute presidential system from 2018, Turkey has entered a serious economic downward spiral,” summarizes Professor Erdal Yalcin from the Kiel Institute for the World Economy (IfW). Erdogan’s “unorthodox” economic and monetary policy is also to blame.

Because central banks usually counter excessive inflation with rising interest rates. As a result, loans and investments become more expensive, the economy and demand cool down and prices fall again. Only Erdogan prevented this by intervening at the Turkish central bank and condemning it to lower interest rates even further despite high inflation. This is not only unorthodox and contrary to conventional economic doctrine; it also cost trust because there is no longer an independently operating central bank in Turkey.

The President’s argument that this would give companies more freedom to invest, which in turn would help the Turkish economy. “The core of the whole problem is that Erdogan continues to think that low interest rates can bring inflation down,” Janis Hübner told DW. He is an economist at Deka Bank and specializes in emerging markets such as Turkey. “And as he will remain in control of the central bank, we have to assume that confidence in the lira will not return either and inflation expectations will remain high.”

The Erdogan government’s unorthodox approach to economic policy also includes the accumulation of debt. According to data from the International Monetary Fund (IMF), Turkey’s national debt has more than quadrupled in the past five years of his presidency. Raising interest rates would be poison for financing this rising national debt.

Türkiye’s economy had survived the pandemic well

Turkey is doing comparatively well in terms of economic growth: After the corona pandemic, growth in 2021 was around eleven percent, and in 2022 it was still three percent – despite the consequences of the Ukraine war and rising energy costs. For example, tourism is back in full swing after the end of the Corona travel restrictions.

The economic situation in Turkey was clouded by the earthquake in the south of the country in February, which killed more than 50,000 people. Three million people were displaced by the disaster.

Another problem: Due to the high level of uncertainty about the political and economic situation, hardly any direct investments – from the EU, for example – flow into the country. The foreign trade deficit has widened and the central bank’s foreign exchange reserves have dwindled. In the week before the elections, the Turkish central bank’s net reserves reached their lowest level since 2002.

Aid from the Gulf region and Russia

The country apparently received support from states in the Gulf region. “Our economy and the banking and financial system are quite strong. Meanwhile, some Gulf countries have put money into our system – even if it’s only for a short time,” Erdogan said in an interview with CNN Turkey. He therefore wants to thank the donors after the election, also by going to these partner countries first instead of taking the traditional inaugural trip via countries such as Northern Cyprus or Azerbaijan.

The government in Ankara should also be grateful to Russia. The country received a $24 billion loan deferral and a discount on gas exports from Moscow. In addition, there is 20 billion US dollars in the form of project financing for the construction of a nuclear power plant in southern Turkey.