The Turkish economy is starting to fall apart. The pound is collapsing, people are queuing up to buy subsidized bread, families are cutting back on meat consumption and masses are looking for ways to escape to Europe, where they hope there is a chance to find a better life.
The Turkish currency has lost 45% of its value this year – leading millions of middle-class Turks below the poverty line. Although sharp price increases were felt (and still are) all over the world during the epidemic, and many economies were hit, in Turkey an effect was observed several times over – inflation has already passed 21% and workers are running to replace their shrinking salaries for dollars or gold. People eat less outside and have difficulty finding imported products, including medicines.
● Is this the end of Erdogan’s rule? | Yoav Karni, Commentary
● “Emirates’ investment in Turkey will have a positive impact on Israel”
The crisis stems in large part from the economic policies of President Recep Tayyip Erdogan’s leaders, say economists, both inside and outside Turkey. After almost 20 years in power, President Peter fired almost everyone who held a senior position in the Turkish economic system and disagreed with his unconventional positions. During the years of his rule he managed to significantly weaken the state institutions and concentrated more and more powers and power, and now, say Turkish officials, he has reached a point where he controls almost completely the economy – and no one in the coalition opposes him.
As part of Erdogan policy, the president put pressure on the central bank to cut interest rates despite rapid inflation. Usually the action is reversed – in cases of rapid inflation central banks raise interest rates to encourage people to save, suppress credit taking and thus cool inflation. But Erdogan pushed for low interest rates, blaming the dramatic price increases on foreign interests interfering in Turkey’s internal affairs.
“He does not understand economics”
Turkey is a member of the G20 (the forum of the 20 largest economies in the world) and a leading country among emerging markets. It is also a member of the NATO Alliance and a key US security partner – so its economic and social instability is likely to resonate throughout the Middle East (see box). Such a situation could also threaten the government’s ambitions in Ankara to become the decisive power in the region – after acting as a counterweight to Russia and at the same time intervening in conflicts in Libya, Syria and Iraq.
The large drop in the pound is now raising fears that the crisis will deepen and turn into significant financial instability, and economists are also warning of the possibility of a mass onslaught on banks or a credit crunch. Bankers and former senior officials in the economic system argue that this is the biggest challenge facing Turkish financial institutions for decades.
The theory of Erdogan and his supporters is that the changes in the pound exchange rate are temporary, and that it is all part of a long-term strategy to encourage exports and make the Turkish economy one based on production and industry. At the same time, the president blamed the crisis on foreign forces, but did not elaborate on their identity or the nature of their intervention in the local economy, and senior members of the ruling party called on citizens to eat less as a personal sacrifice in favor of the state.
“What you call currency exchange rates rising today and falling tomorrow,” Erdogan said on December 1. “What you call inflation goes up today and goes down tomorrow. Production and employment are constant.” Erdogan’s office did not respond to a request for comment from the Wall Street Journal.
Turkey has suffered a string of debt and currency crises in recent years, but the current crisis is different – simply because there is no one left in the coalition to oppose Erdogan’s policies, including cutting interest rates despite high inflation.
Former Finance Minister Lutfi Alban, whom many senior officials and analysts saw as the latest voice in a moderate and sane economy in the cabinet, resigned last week and was replaced by an associate of Erdogan. “He does not understand economics, and the people around him do not understand economics,” said former Prime Minister Ahmet Davutoglu, who was close to Erdogan himself in the past, referring to the president. “He is in another world, in another universe.”
Working-class and middle-class Turks are the backbone of Erdogan’s supporters and the Justice and Development Party (APK) he leads, but they too are already impatient in light of the currency slump. After years of leading Turkey in times of war and instability in the Middle East and even surviving an attempt at a military coup, the president is now facing danger of rebellion within his political support base for the first time.
At the end of November, thousands of citizens in the big cities took to the streets, demonstrating and calling for Erdogan’s resignation. Policemen Perso spread demonstrations in the streets of Istanbul, and at least two prominent opposition figures, including Dvotento, accused it in betrayal. More than 60 people have been arrested, according to local lawyers.
The parachute continues. Exchange rates in Istanbul earlier this week / Photo: Shutterstock
Reduces interest rates at all costs
“We used to eat meat every day, now it’s once a week,” said Miriam Atlai, a 58-year-old worker at a restaurant in Kasimpasa, the Istanbul neighborhood where Erdogan grew up. “We always voted for the AKP. Now is the time to try someone else.”
In the earlier stages of his political career, Erdogan contributed greatly to making Turkey’s economy one of the fastest growing in the world and significantly expanded the country’s middle class. As mayor of Istanbul in the 1990s, he brought running water and garbage collection to the city’s slums and helped restore its status as a world center of tourism and commerce.
After being elected prime minister in 2003, Erdogan and a number of AKP-led coalitions have strengthened the Turkish economy by investing in roads, airports and other infrastructure. Ankara received billions of dollars from the International Monetary Fund and modernized the economy, prompting a boom that brought Turkey to 16th place in the world economies in 2014.
Within one decade, Turkey became a middle-class country. More Turks bought cars and houses and went on vacations in Paris and Rome. Tourism has quadrupled. By 2013, Turkey’s economy was four times larger than it was in 2002.
Erdogan has expressed a desire to lower the interest rate since taking office almost 20 years ago, both because of his desire to encourage the economy and because of his religious beliefs. As a devout and devout Muslim of increasing the role of religion in society, he noted the Islamic ban on interest-bearing loans when he argued that its rate should be cut.
For most of Erdogan’s time in power, his cabinet, advisers and Turkish bureaucracy have curbed his ambitions. For more than a decade, Erdogan has been surrounded by technocrats and other party members, who have realized that central banks are raising interest rates to fight inflation and lowering it when inflation is under control.
“It was pretty easy,” recalled Syrian Sardanjakti, who served as central bank governor from 2001 to 2006. “He would have issued a demand for a lower interest rate. I would not have said anything, and we would have left the interest rate as it is.”
Over the years, his circle of advisers has shrunk. Party leaders left after experiencing clashes with him over economic issues or the relentless expansion of government powers.
Erdogan’s growing dominance of the economy reflected his growing power in the country. Authorities imprisoned his political opponents, and in 2013 police beat and sprayed protesters with tear gas. The process accelerated after Erdogan survived a military coup attempt in 2016 and won a referendum in 2017, following which the Turkish parliamentary system was replaced by a method in which the presidential office has more power.
For years, state institutions opposed Erdogan’s unconventional economic ideas. In 2018, when the Turkish currency collapsed in the midst of a crisis in relations with the Trump administration in the US, the central bank ignored Erdogan’s calls to lower the interest rate, as governors have done in the past.
Even this year there was a central bank governor in Turkey, Nassi Agbel, who resisted government pressure and raised the interest rate in an attempt to take control of inflation. In March, Erdogan fired him and appointed a senior AKP official who wrote positively about the president’s monetary policy. This was the third time in two years that Erdogan had fired the central bank governor.
Even after Agbel was fired, the bank opposed cutting interest rates for months, but surrendered in September and began cutting. In October, Peter Erdogan fired two members of the bank’s strong monetary policy committee, collapsing the last remnants of the bureaucracy that blocked its policies. Then came a sharper cut.
“This time people are seeing,” said Ibrahim Kanakchi, a former deputy secretary of the Turkish Ministry of Finance who also served at the International Monetary Fund and the World Bank. “All the institutions, all the bureaucrats, all the ministries are under his control. He can not blame anyone else.”
In November, the central bank cut interest rates for the third time, even though inflation rose to 21% that month. In a speech a few days later, Erdogan defended his policy, saying that Turkey was “fighting its war of economic independence.” The day after the speech, on November 23, a mass sale of the Turkish lira was recorded by investors, resulting in the second-largest fall ever in the currency in one day. For middle-class Turks, the collapse further weakened their already weak purchasing power. Some supermarkets restricted sugar and flour sales. Drivers lined up at gas stations to refill the tanks before the price went up.
Suleiman Girai, a 45-year-old waiter at a tea house in the Kasimpasa neighborhood of Istanbul, said he supported Erdogan when he was mayor and brought garbage and other services to the area. Now, he said, he has stopped giving his three children out-of-pocket money and buying them more books to help them with their schooling. The family stopped eating meat. The price he pays for tea has risen from £ 120 a pound to £ 190 a pound. His salary has not changed. “We can no longer do anything. We no longer have a social life,” he said. “Once this neighborhood was Erdogan’s base. Now everyone here is furious.”
The market in Ankara. The price to the consumer in Turkey has risen by about 20% / Photo: Associated Press, Burhan Ozblici
Whim or strategy
And Erdogan himself, in his presidential palace? The crisis does not shock him or his advisers, say associates in the palace discourse. When the pound fell on November 23 and crowds took to the streets, Erdogan met with his economic team. “There was no tension, there was no panic,” said a Turkish official who was present at the meeting. “We told the president the same thing we are telling you. There is no need to worry, Turkey is not in a currency crisis.”
Tamal Carmolulu, the leader of the Islamist opposition party, said he raised the issue of the Turks’ economic struggle during a meeting with the president before the latest interest rate cut. “He insists that economically the situation in Turkey is not as bad as we think,” he said. “I said we have an unemployment problem, but he does not think so. I said that civil servants and blue-collar workers can not close the month. He does not think so.”
Economists say that the big leap Turkey has made in the last two decades has prepared it for this test, and that there are signs that its financial institutions will be able to withstand the pressure for some time to come. The fact that in the last seven years there have been increases in tourism and exports have also given support to the whole economy, which may for the time being prevent a full economic crisis.
Erdogan and other Turkish officials said they welcomed the decline in the pound sterling to encourage an export-based economy, similar to the economies of Japan and Taiwan. The Turkish president has framed this strategy as part of a broader struggle against Western countries, which has accused them of wanting to restrict Turkey. “No matter what they do, they will not be able to distract us from our economic program, which is based on production and employment,” Erdogan said in a Nov. 26 speech.
There were those who said the strategy was likely to fail because inflation put pressure on exporters, who now have to pay more for energy and raw materials. Turkish exporters have also complained that the large fluctuations in the pound make the craft of pricing impossible.
If Erdogan wants a weaker pound to encourage exports, then this is a change in strategy compared to the one recently adopted by the government – in which the central bank spent more than $ 165 billion in foreign exchange reserves in less than two years to stabilize the pound. In three days in order to curb the decline in the value of the pound, and sell foreign currency despite the low reserve levels, which may lead to a negative balance sheet.
Meanwhile, Turkish banks have managed to withstand the currency crisis. But economists fear that a further collapse of the pound could lead to an attack on them, or that Turkey could reach insolvency in its foreign currency debt.
Turkish citizens are already paying for Erdogan’s bet on higher electricity bills and more expensive food and consumer prices. In a survey conducted in October by MetroPoll, a leading Turkish polling company, more than 80% gave the government a poor score in managing the economy.