As Turkish inflation soars, Erdogan’s response is fueled by paranoia
All around the world, politicians, finance ministers and central bankers are waging war against accelerating inflation. Not in Turkey: President Recep Tayyip Erdogan has stood idly by as consumer prices have soared to among the highest in the world.
The main way governments bring down rising inflation is by raising interest rates, which deters borrowing and spending and slows the economy by raising the cost of money. But Turkey’s central bank has been doing the exact opposite.
As inflation has accelerated – rising from an already high year-on-year rate of between 19 and 21 percent in autumn 2021 to more than 80 percent last month – Turkey’s central bank actually lowered its interest rate.
Today, after the latest rate cut – a 1 percentage-point drop to 13 percent ordered in August – central bank interest rates are today a negative 67 percent after taking inflation into account. In other words, borrowers get paid to take out loans. And the rate-cutting isn’t over: Economists expect the central bank to reduce the rate further, to 12 percent.
Analysts and economists say the policies Turkey has adopted are an outgrowth of Erdogan’s worldview – a combustible mix of Islam and paranoia, combined with a poor understanding of economics.
“The big problem basically is that Erdogan refuses to raise interest rates,” says Gallia Lindenstrauss, a senior research fellow at the Institute for National Security Studies in Tel Aviv. “One reason is religious objections. Another is that he believes there’s a world interest rate lobby that’s seeking to weaken Turkey, and that rate rises are only good for the lobby. Another is that [he believes] his policies will increase exports and spur economic growth that will compensate the public for inflation.”
Erdogan has always expressed skepticism about interest rates as a tool for fighting inflation. But it was only last December that he explicitly connected his views with Islam – which bars Muslims from receiving or charging interest on loaned or borrowed money.
“They complain we keep decreasing the interest rate. Don’t expect anything else from me,” Erdogan said. “As a Muslim, I will continue doing what our religion tells us. This is a religious command.”
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His comments caused the lira to plunge, since economists say Turkey needs higher interest rates to attract foreign capital and prevent the currency from depreciating. Which is what happened as interest rates dropped. From a rate of 8.3 to the dollar a year ago, the lira this week was trading at over 18 – a decline that has fanned inflation by raising the price of imports.
The “interest rate lobby” has been a bugbear of Erdogan’s for some time and explains why he is so determined to wean the Turkish economy off foreign capital. It carries antisemitic overtones, which have never been articulated by the president himself. However, they do surface in the pro-Erdogan media, which speaks, among other things, of a coalition of Jewish financiers allied with the Catholic Opus Dei and the Illuminati (the mythical secret society often cited by conspiracy theorists).
Harassing economists
Liam Peach, a senior emerging markets economist at Capital Economics in London, says reducing Turkey’s reliance on foreign capital will be a Herculean task. The country suffers low rates of savings, and runs persistent and sizable current account deficits that need to be covered with outside investment.
Analysts say Erdogan regards inflation as the price Turkey has to pay in order to create his financial fortress. A plunging currency and low borrowing costs will enable Turkish companies to invest in machinery and equipment, boost production and exports, turning the country’s trade deficit into a surplus and boosting employment, the logic goes. Eventually, Turkey will emerge economically stronger.
In the meantime, the government has sought to take the sting out of soaring prices by raising the minimum wage by tens of percent, hiking pay for civil servants and pensioners, imposing rent controls and compensating people holding their savings in lira for increases in the value of the dollar.
If that weren’t enough, the government has also harassed economists whose analyses show that inflation is far worse than the official figures.
A bill was proposed last spring that would make publication of economic data not approved in advance by TurkStat (the government statistics bureau) liable for prison terms of up to three years. Meanwhile, a consortium of economists called ENAG, whose research shows consumer prices climbing as much as double the pace the government says, is being investigated for failing to report income equivalent to 30 cents.
Whatever the real rate is, Turkey’s inflation will soon be peaking, mostly for technical reasons. The Turkish government predicts inflation will ease by the end of the year, but remain at a steep 65 percent.
Most economists agree that inflation will trend lower. But Turks are going to have to live with sharply rising prices for the foreseeable future – and that is due to Erdogan’s policies, they say.
“Turkey is turning into a high inflation economy as a result of low interest rates and policy measures that try to protect household income,” says Peach. “Turkey is going to have 80 percent inflation for a few months and then it will come down sharply – but it will be 20 to 30 percent a year in the medium term. The biggest problem is that inflation has become entrenched at very high levels.”
For now at least, Erdogan’s policies have yielded some of the results he hoped for.
The plunging lira helped boost Turkish exports 16.4 percent year on year in the second quarter, while the number of tourist arrivals doubled – the latter thanks also to an influx of Russian visitors with few other vacation options. Growing exports and soaring consumer spending caused Turkish gross domestic product to expand at an annual 7.6 percent in the second quarter, the highest among the G-20 economies.
Election challenge
Economists warn that growth like this isn’t sustainable. Household spending in the second quarter was reportedly boosted by consumers rushing to buy things before prices rise even more. And there are already signs of a slowdown not only in retail sales but in industrial production. A recession in Europe, Turkey’s main export market, will inevitably hurt exports. Unemployment remains in the double digits.
That poses a serious problem for the Turkish president, who faces the voters in next June’s election. As the economy struggles, the poll numbers for Erdogan and his Justice and Develoment Party (AKP) have been getting worse, though Lindenstrauss says they have shown a small uptick since July.
Despite measures to protect consumers from inflation and keep them loyal to the AKP, a survey by the Yöneylem Social Research Center taken between July 28 and August 1 found that more than 69 percent of respondents said they were struggling to pay for food. Just over half blamed Erdogan for the state of the economy.
Even if the election is conducted freely and fairly, which many analysts worry won’t be the case, Erdogan may still pull off a victory due to a weak opposition.
Kemal Kilicdaroglu, head of the main opposition Republican People’s Party (CHP), has united the six anti-Erdogan factions in parliament. But the opposition, popularly known as “the table for six,” is divided over who will lead them into the election, says Lindenstrauss: Kilicdaroglu himself, who is regarded as lacking charisma; or more popular figures such as Ekrem Imamoglu or Mansur Yavas – the mayors of Istanbul and Ankara, respectively.
An Erdogan win would mean more of the same for Turkey in terms of economic policy. From the central bank to the statistics bureau, the president has firm control over the policy-making establishment and is driven by ideology. Once secure in power after the elections, Erdogan will have no political incentive to change course.
“The only real hope investors have in Turkey,” says Peach, “is a change when the election happens next year – a new party comes into power with a more credible economic policy.”