Zaid M. Belbagi
The Turks love tea, with each one consuming an average of 1,300 cups per year. The associated transactions, though small, are sufficiently numerous that they play their part in keeping the economy ticking over. Unfortunately, inflation has become almost as identifiable with Turkey as tea.
From 1975 to 2004, Turkey’s painful experience of high and chronic inflation was alleviated only by increased economic growth marked by investments, increased employment levels and rising incomes. Last year, however, the Turkish economy, which is heavily dependent on imports for producing goods domestically, suffered further, with inflation for producers up as much as 50 percent in some cases. Amid the lira slumping 48 percent against the dollar in 2021, the worst-performing emerging market currency has almost become a barometer for Turkish economic instability.
Inflation is rising around the world, meaning central banks are eyeing up hikes in interest rates — but not in Turkey. The lira’s collapse comes not only amid a dogged determination to keep rates low, but also a growing myriad of economic problems. Over the last two decades, Turkey has transformed into an upper middle-income nation, with the poverty rate decreasing from 44 percent to 18 percent. Strong fiscal policies were a central feature of the economic progress Turkey enjoyed.
However, the wheels are coming off the world’s 20th-largest economy. Importing more than it exports, the country has run a trade deficit year on year. Rather than dealing with this, Turkey has only grown more reliant on foreign investments and loans, mostly in foreign currencies. Fueled by lower interest rates, this debt drove a construction boom. However, the real estate market now has 2 million unsold homes. The trade deficit has put consistent pressure on the lira, making imports too expensive for the average citizen, therefore reducing consumption. With the people’s purchasing power having been consistently reduced, inflation has caused major problems for those with savings in lira, as well as those who borrowed massively in dollars owing to the low interest rates and are now unable to meet their payments. This crisis has lingered owing to the confused and at times erratic political responses by the government.
The economic experiment of lowering interest rates in the face of inflation has caused incredible hardship. As a country that has persistent deficits, Turkey can expect further pressure on wages and the costs of living and imports unless the government makes sweeping changes. Therein lies the problem, however. It is not that the government is unable to introduce the necessary policies, it is that it is not empowered to do so.
President Recep Tayyip Erdogan in October dismissed Semih Tumen, a respected economics professor, from his position as a central bank deputy governor, making him the fourth incumbent to lose such a role in as many years. The Finance Ministry has not fared any better. Since its separation from the Treasury six years ago, five ministers have come and gone, being either too aligned with the presidency to have any clout or too independently minded that they are removed.
Given the interference of the presidency, the central bank has not been allowed to implement policy. Like other Turkish institutions, it has seen itself hollowed out at the expense of creating a more powerful executive. Many argue that not since the end of Mehmet Simsek’s tenure as finance minister in 2015 has a Turkish official been able to court international partners sufficiently to restore confidence in the Turkish economy.
“It is a problem of trust. The hiring and firing makes us look inconsistent and, just when we need to build confidence, our government is perceived as being unable to implement urgent reforms for fear of opposing the president,” a senior Ankara-based economist said. Having lost this independence, Turkey is unable to encourage the top-down good governance that is required to alleviate its economic woes. The presidency accepts the need for a strong lira and stable currency, but it has failed to appreciate the added importance of a strong central bank and has instead lurched from crisis to crisis with tactical solutions and no long-term strategy.
An elastic supply of cheap finance fueled Turkey’s boom in the late 2000s. However, inflation and short-term policies have discouraged the understanding that slower, more sustainable growth is preferable to the boom and bust cycles of the past. Justice and Development Party governments have always seen the path to Turkish prosperity as being a weak Turkish lira to boost exports. However, given the country’s recurring trade deficit, this model is unsustainable.
Turkey requires an overhaul of economic thought and policy if its economy is to remain viable. Turkish industry and manufacturing are central pillars of the country’s economy, while the services sector is an under-explored area for potential growth. Turkey must invest in education to keep its economy competitive, as the challenges of human capital and language have hindered the potential for the economy to move away from one that is based on attracting investment, providing unsustainably cheap finance and competitive exports to one that is less exposed to shocks, is competitive and, importantly, allows institutions to have the ability to inspire confidence and embark upon bold policymaking.