It is not the first month or even the first year that Turkey’s economy has been plagued by inflation. Instead of the generally accepted model in the West of raising the key rate to curb rising prices, Turkish leader Recep Tayyip Erdogan demands that the head of the Central Bank lower it. The national currency has fallen even further as a result. Since the start of the year, the lira has depreciated by almost 45%
The reasons for the lira’s weakening are not just the Central Bank’s policy, but also systemic problems for both the Turkish and global economies. It is also worth remembering that the Turkish lira started falling back in 2017, as did the currencies of the vast majority of developing countries – a trend that began with the collapse of the Indian rupee in early 2013.
The Turkish economy is one of the most dollarised. The lira’s appreciation is taking a heavy toll on the well-being of its citizens. The national debt is rising – 2.27 trillion Turkish liras, around 200 billion dollars, as of 22 November. The most dangerous thing is not that the debt has increased by 4.1% compared to last year, but that more than half of it is external debt (1.36 trillion liras). The high dependence on imports adds to the difficulty. The trade balance remains negative. Over the past year, the monthly trade deficit has ranged from minus $1.5 billion to minus $5 billion.
Although the country’s GDP grew by 1.8% in 2020 – the second highest in the G20 after China – this success, firstly, is not enough for a developing economy and, secondly, does not cover the downside of government debt. Furthermore, the growth has been secured at the expense of wasted reserves. Some experts believe that Erdogan’s son-in-law and former finance minister Berat Albayrak may have spent $65 billion to bail out the lira. Erdogan has almost no money to stimulate the economy. The $15 billion economic reform package (1.5% of GDP) seems merely cosmetic compared to the giant measures of Brazil (3.5%), the FRG (4.9%) and the US (11%).
Erdogan’s intervention and pressure on the Central Bank to lower the key rate seemed to make matters worse. After all, it would have been more logical to raise rates and stabilise the lira. However, for the Turkish president, it seems obvious that the lira will already fall because of the abovementioned systemic reasons. Intervention by the regulator would only delay the fall, but not prevent it. Turkey needs to start domestic production, and with high interest rates, businesses will have no incentive to borrow. Furthermore, the government hopes to offset the decline in the lira by boosting exports. Indeed, exports are on the rise because production costs are low in a weak currency. Exports in Turkey rose by a record 33.4% in November compared to the same month in 2020.
The measures currently being taken by Erdogan’s government are designed to stimulate the economy. The president has recently promised to create instruments to preserve the savings of citizens in national currency.
Depositors will be compensated for their deposits if their returns are lower than the current dollar exchange rate. “From now on, none of our citizens will need to transfer their deposits from the Turkish lira to a foreign currency because of fears that exchange rate fluctuations could wipe out the interest payment gains”, – he said. Another issue is that most economists believe this will only exacerbate inflation.
At the same time, Erdogan announced a one-and-a-half times increase in the minimum wage, from 2,825 to 4,250 liras (from around 16,000 rubles to around 24,000 rubles). Which, economists have no doubt, will also push up inflation even further. The President has also asked the public to sell off dollars and his Central Bank to sell off $280bn of reserves in gold. All these measures resulted in the lira beginning to appreciate by December 20, gaining back nearly 20%. The dollar began to value at 11 lira instead of 18. However, by December 21 the lira was already slumping again, confirming the tactical nature of the government’s decisions.
It must be said that in the early years of Erdogan’s presidency it was the economy that was the basis of his political influence. Turkey’s GDP more than tripled between 2003 and 2013, from $300 billion to $957 billion. Then there was a drop, but it was caused by global processes affecting many economies around the world. Today, its elevated economy may become the Achilles’ heel of the Turkish president. His decisions are extremely risky because they are based solely on trust in the authorities. If the trust is lost and the population in a panic rush to buy dollars, Turkey may face the kind of hyperinflation we remember from the 90’s, when the price lists were rewritten almost every day.
Since autumn, Erdogan’s approval rating has fallen precipitously, reaching a record low of 40%. Against the backdrop of the December lira collapse, rallies were held in major cities demanding the resignation of the ruling Justice and Development Party. However, it is clear that no coup d’état is to be expected in Turkey. A man who survived the attempted colour revolution in 2013 and a direct assassination attempt in 2016 knows how to deal with coups. Another thing is that if serious measures are not taken in the field of financial stability, both presidential and parliamentary elections can be lost in 2023. The main challenges for Erdogan are reducing the role of the dollar, import substitution, domestic production and reducing foreign borrowing. This is essentially what Russia did after 2014 – with the difference that Erdogan, unlike his Russian counterpart Vladimir Putin, is doing it in an inherently risky style.
The Turkish crisis and Erdogan’s position are also reinforced by foreign policy factors.
Ankara’s meddling in Libya, Syria and the Mediterranean in general causes undisguised irritation among its NATO allies, the U.S. and the European Union. They have already imposed sanctions against Turkey due to domestic political problems and disputes with Greece over gas deposits. The contradictions with the U.S. are even greater than with Europe. Because of Erdogan’s attitude towards US Kurdish allies in Syria and ‘authoritarianism’ Joe Biden announced his intentions to oust the regime in Ankara before he was elected. All this undoubtedly reduces Turkey’s investment appeal and discourages Western companies from investing in the Turkish economy. In one of his recent speeches, Erdogan criticised attempts to put pressure on Turkey. It “will no longer be a country that holds its economy and politics hostage to outside powers through IMF programmes”, – Erdogan said.
In the emerging situation, the Turkish leader will not only have to run the economy from within, relying less on external financing, but also look for alternatives to the West. Dependence on trade with Europe stands at 50%. The biggest investors are the UK, Holland and the US. In recent years, a passionate Turkey has severely damaged relations not only with the West, but also with the region. But quarrelling with everyone at a time of crisis is dangerous. Ankara has decided to bet on Muslim countries. The UAE, Egypt, Saudi Arabia, Iran – the Turkish Foreign Ministry has normalised relations with all of them in the last six months. There has also been an improvement with Israel. The normalization will make it possible to diversify the sources of investments and open new markets for Turkish goods, which from now on will go under the brand “Made in Turkiye” instead of the American version “Made in Turkey”.
For all the complexity of the situation, it must be admitted that so far it is not catastrophic. If the Turkish leadership manages to keep inflation under control and solve the country’s critical economic problems, a national and personal catastrophe for Erdogan can be avoided. The grandiose projects promised by 2023, in the form of the Istanbul Canal and the first nuclear power plant to be built with Russian participation, will then not be the exception to the rule, but proof that Erdogan’s strategy is correct.
From Russia’s point of view, Turkey’s economic difficulties can be perceived from several angles. On the one hand, a weakened Ankara will have fewer resources for an active foreign policy, which ensures the strengthening of Moscow’s position in Syria, Libya, the Caucasus and Central Asia. On the other hand, if Erdogan’s economic reforms fail, closer to the elections he may take new offensive actions, for example in Syria, to record at least some victories. Turkey may also decide to have closer contacts both with the countries of the Arab League and Turkic-speaking states of the CIS.
For Russia, an economically weakened Turkey can represent both risks and advantages. Just like a strengthened Turkey. A strengthened Turkey is a more reliable trade and investment partner because it can buy more Russian gas through Turkish Stream and Russian military products like S-400, as well as pay back the loans for the Akkuyu NPP more quickly. But at the same time it would have more resources for its manoeuvres in Syria and other competitive regions. In any scenario, Russia benefits from maintaining its partnership with Turkey because it is, firstly, money, secondly, an opportunity to jointly resolve conflicts in the Mediterranean and Transcaucasus, and, thirdly, to weaken NATO from within.
Kamran Hasanov, VZGLYAD