Turkey Trying for several months to strengthen its economy by pouring billions of dollars into strengthening its currency. These measures are losing steam and increasing economic pressure on the country’s leader, President Recep Tayyip Erdogan.
The Russian invasion of its neighbor Ukraine, inflationary pressures around the world and the strengthening of the dollar all added to Turkey’s troubles. Conditions exacerbated a crisis in the country that began last year after Erdogan pressured the central bank to cut interest rates despite soaring inflation.
On Wednesday, the pound fell for the sixth time in a row and reached a ratio of 17 pounds to the dollar for the first time since last year’s crisis, thus further eroding the purchasing power of consumers and companies in Turkey. The rising price of food, medical care, energy and other vital things has brought millions of Turkish citizens closer to poverty and eroded support for Erdogan’s government.
The weakness of the pound and the unstable financial situation of Turkey are a reassuring backdrop for Erdogan. He became a major player in the war in Ukraine, and hosted talks on grain shipments and ceasefires. Turkey also sold UAVs to Ukraine and blocked Sweden and Finland from joining NATO.
But within Turkey, it is facing the biggest economic challenges since coming to power two decades ago over another economic crisis.
Estimates: Real inflation is probably higher
Inflation in Turkey reached nearly 75% in May, the country’s statistics agency said on Friday. Today inflation is the highest among all countries in the G-20 and the sixth highest in the world, after countries like Syria, which is still in the midst of a civil war, Venezuela, a devastated country.
Independent economists say real inflation is probably higher. ENAGroup, a project organized by economists and accountants, says that real inflation in Turkey is closer to 160%. The Turkish government has tried to oppose the possibility for independent economists to publish their own inflation data and express themselves in a way that officials see as detrimental to the Turkish currency. Last year, the government statistics agency sued ENAGroup following its inflation calculations.
“The million dollar question is how long will such policies continue to run”
The Turkish president called for lowering interest rates in the belief that it would help expand the economy and ultimately calm inflation, contrary to classical economic wisdom. It forced the central bank to cut interest rates four times by the end of 2021.
This led to the pound collapsing. Turka stabilized the currency for a while through a combination of improvised steps. The first among them was a plan at the end of last year that promised to pay the gap in the fall of the exchange rate against the dollar if citizens undertook to leave their savings in banks in pounds.
“These are steps to buy time. These are not steps to solve economic problems,” said Eric Myerson, a senior economist at the Swedish bank Handelsbanken.
But alongside the surge in inflation, the decline in the pound has begun to pick up speed again in recent weeks. The currency has fallen in value by more than 20% since the beginning of the year.
The central bank tried to stem this decline by spending the remaining dollars in order to intervene in the currency markets and strengthen the pound. Central bank data observed by the Wall Street Journal show that the bank probably sold about $ 24 billion in foreign currency between January and March this year.
It emptied Turkey’s empty safes anyway. Economists estimate that the central bank has $ 60 billion more in debt compared to assets, which means its net reserves are negative. The bank has borrowed dollars significantly from the commercial banks in Turkey, thus raising the question of whether there will soon be a shortage of dollars in the banking system.
The central bank opposed calls from economists and the business community to raise interest rates as a way to pull money back into the pound. Erdogan recently called on the bank to cut interest rates again. Bank officials are expected to meet again later this month.
The recent crisis has hurt the quality of life among the upper middle class in Turkey, which grew in the early years of Erdogan’s two decades in power. Erdogan and his party are facing elections next year that if the government wants they can get ahead of them, analysts say.
We see the money in our pockets going down from about today to tomorrow. “We see the money we earn melting down every day,” said Ozen Thaner Asma, a 24-year-old personal trainer from Istanbul. “My only dream now, like almost all my friends, is to move to another country, but that too requires money.”
Erdogan rejected the cry of ordinary Turks for the violation of their purchasing power.
In a speech on May 27, he said, “Some people say ‘we are hungry.’ Come on, do not be so picky. No one is really hungry!”
Despite soaring inflation, the Turkish economy has strengths, such as low sovereign debt, high public confidence in banks and industries that include manufacturing, agriculture and tourism, which produce foreign money.
The government is relying more and more on these areas in order to produce foreign currency for the central bank. In April, the bank increased the percentage of foreign currency earnings that exporters must sell to the central bank to 40%. Economists warn that changing the rule could force exporters to relocate operations outside Turkey in order to save more than their income. Turkish officials hope a strong tourism season will bring more foreign money to the country.
“Given the negative level of reserves, the million-dollar question is how long will such policies continue to run,” said Slava Demirelp, a professor of economics at Koch University in Istanbul and a former economist on the Federal Reserve board.
Alban Kiwilchim participated in the preparation of the article.