Turkey's economic crisis: How Erdogan crippled the Lira

[The Larch]

I don't think we've discussed this topic at all in the forum, and in the last few months I've seen increasingly alarmed articles on this.

Long story short, the slump in which the Turkish economy has been since 2018 has taken a plunge since last year and continuing into 2022, with the value of the Turkish Lira crashing and lots of associated economic downturns followed. This is caused in no small part by Erdogan's interference in the Turkish central bank, as he has some pretty cooky ideas regarding monetary policy (he basically thinks that high interest rates cause inflation) and has basically fired every head of the Turkish central bank that has dared to raise interest rates to cool down the ballooning inflation (they're on their 4th head of the central bank in the last 5 years at the moment), coupled with censoring/manipulation of official economic statistics that have caused a downturn of foreign investment in the country. This seems to be coming crashing down lately due to failing measures to prop up the Lira and massive inflation (36% annual inflation rate at the moment), and Erdogan's popularity is taking a big toll, with Presidential elections due next year and his popularity currently in the doldrums.

Is there a real risk of Erdogan doing something foolish/desperate, should he come close to losing power due to this crisis? He already has a track record of "performative actions" to boost his failing popularity, so who knows what might happen if his prospects for next year elections are bad...

As Turkey's economy struggles, Erdogan goes it alone
Economic growth empowered Turkey's leader. But experts who helped foster that growth are long gone.

A parade of Central Bank governors have been fired, along with other bank policymakers who counseled fiscal prudence. Government ministers who once challenged dubious economic strategies are gone, replaced by others who seem to ask few questions and simply say yes.

As President Recep Tayyip Erdogan faces Turkey's worst economic crisis in almost two decades, he has few independent-minded experts at his side — a consequence of his efforts to centralize power, which have sidelined or hollowed out financial institutions to which he once deferred, economists say.

The severity of the crisis came into sharp relief this month when the government announced that the annual inflation rate had reached 36.1 percent, the highest since 2002. That rise was driven by the rapid depreciation of the Turkish lira, which lost more than 40 percent of its value last year, and, more broadly, by Erdogan's push to cut interest rates based on his unorthodox belief that this would lower consumer prices.

As financial hardship has spread across Turkey, the crisis has prompted fresh scrutiny of the president's years-long accumulation of authority, from appointing university rectors to naming high court judges. But his vast powers are little help when it comes to the delicate task of managing Turkey's economy, which in its current state requires a talent for reassuring global markets and investors — rather than the political skills and authoritarian inclinations that have long enabled Erdogan to outflank domestic opponents.

The president's domination of economic policy may become a liability as he approaches elections next year. In a survey by the Turkish polling company Metropoll released in December, about 75 percent of respondents said their trust in the government's economic policies had decreased over the past year.

For those who have watched Turkey's development over years, including from inside the halls of power, the government's current approach is a startling contrast with that of Erdogan's early tenure, when he and members of his party largely deferred to technocrats carrying out reforms aimed at repairing an economy in ruin.

"The institutions are there to tell the truth to politicians," said Hakan Kara, a former chief economist at Turkey's Central Bank who left two years ago and now teaches at Ankara's Bilkent University. Until recently, he said, there were "healthy checks and balances" that prevented the government from making crucial mistakes.

Now, "that kind of interaction is very weak," he said. Seasoned economists said they were in the dark about whom the president asks for advice and where the economy is headed.

Three Central Bank governors were fired in a span of two years, along with other bank officials who were said to have opposed Erdogan's interest-rate cuts. The dismissals were part of a pattern of political pressure on the Central Bank that has intensified over the past decade, marked by an increasing number of calls by Erdogan to cut interest rates, according to Selva Demiralp, a professor of economics at Istanbul's Koc University and a former economist at the U.S. Federal Reserve Board.

"We have seen independence eroding," she said. "And as political pressures go up, inflation deviates from targets."

Turkey also has had four finance and treasury ministers since 2018, including Erdogan's son-in-law. The latest, Nureddin Nebati, appointed in December, is considered a loyalist of the president and has become known for a string of eyebrow-raising statements, including a claim during a TV interview that the U.S. Federal Reserve is run by five families.

Erdogan has acknowledged the hardships caused by Turkey's high inflation rate, calling it a "problem," while asserting that the country is better off than others around the world and insisting that its economic fundamentals are sound. Analysts say the economy has been buffeted by shocks both beyond its control and self-imposed, including the pandemic and a political dispute that led to a trade war with the United States.

"It is clear that there is a bulge in inflation, as in the exchange rate, that does not match the realities of our country and economy," Erdogan told members of his ruling Justice and Development Party, or AKP, last week.

Emergency measures recently taken by the government have helped the lira recover some of its value against the dollar. And statements by Erdogan and the new finance minister over the past few days have suggested they intend to put off further aggressive cutting of interest rates. But it remains to be seen whether those measures will restore badly damaged confidence.

For some, the government's recent signals only raise more questions about the president's economic beliefs. "You have a theory that says you should cut interest rates to lower inflation rates. Then you say you are going to pause cutting interest rates when the inflation rate is 36 percent. Why would pausing establish trust?" Demiralp asked.

When Erdogan's AKP assumed power in 2002 after a severe banking crisis, "they took over an economy that was basically bust," said Cevdet Akcay, a former chief economist at Turkey's Yapi Kredi bank. The new government — including Erdogan, who served as prime minister, and Ali Babacan, the economy minister — successfully implemented an International Monetary Fund assistance program that addressed structural problems in the economy, he said.

"The best ministers, the best Central Bank governor, by far the best secretary of the treasury that I have seen in my lifetime are during the AKP's time," Akcay said. "If they replaced their counterparts in the U.S., trust me, the performance in the U.S. would improve; they were that good. And Erdogan had no problem with any of this."

Kara, who joined the Central Bank in 2002, said that under the IMF program, which was mostly prepared by Turkish technocrats, the banking system was rehabilitated, and foreign direct investment increased as trust in Turkey's institutions started to improve.

"It was the best of all worlds," he said, adding that Turkey's economy was growing as inflation plummeted, from near 80 percent to 8 percent annually.

Others have said that Erdogan and his party — which clashed at times with the IMF over requirements of the program — had no choice but to implement it, given the state of the economy and the government's strong desire at the time to join the European Union. And as the economy started to grow, benefiting the AKP's vast patronage network, the government had no need to push back.

As late as 2010, Erdogan was heeding the counsel of advisers who cautioned that Turkey should seek to make growth more sustainable, because the economy was "borderline overheating," rather than listening to ministers who wanted to maximize growth, Akcay said.

The situation started deteriorating gradually, economists said. Several key events occurred in 2013, notably the Gezi Park demonstrations — which began as a sit-in to protest the destruction of an Istanbul park and grew into nationwide protests against Erdogan's government. The unrest jangled the nerves of foreign investors and fed Erdogan's fears of plots targeting him.

The protests, just two weeks after Turkey had been elevated to an investment-grade rating by Moody's Investors Service, "threw Erdogan off," Akcay said. "Anybody around him who had close ties to the West became a semi-traitor or a traitor."

But the "real breaking point" came after a coup attempt against Erdogan's government in the summer of 2016, Kara said — an event that was followed by a massive campaign of arrests and a purge of state institutions.

"Power become more and more centralized. The people appointed to top positions were selected from a very small pool," Kara said. At the Central Bank, concerns about political pressure became more acute, and the bank, like other institutions, was expected to "follow instructions from the government very closely."

Amid the latest economic crisis, Erdogan has framed developments, including the plunging value of the lira, as calculated steps designed to foster export-led growth, increase access to credit and reduce the country's trade deficit. This explanation is part of a populist pitch ahead of the 2023 elections.

"No one would object to the idea that the Turkish economy should be more self-sufficient," said Demiralp, adding that the net value Turkish exports add to the economy is "very low" because of the high cost of intermediate goods. But to improve the trade deficit, "you need ... innovation," she said. "Doing it through monetary policy is not the way to go."

Turkey's inflation hits 36% amid financial turmoil

Turkey's annual inflation rate has soared to a 19-year high, underlining the country's financial turmoil and alarm over its president's policies.

Prices hit more than 36% December as the cost of transport, food and other staples ate into household budgets.

Most central banks raise interest rates to help cool inflation but Turkey has gone the other way.

It has meant a collapse in the value of the lira, as Tayyip Erdogan prioritises exports over currency stability.

The lira shed 44% of its value against the dollar last year, and fell another 5% on Monday before recovering to trade flat.

The drop in the lira has made the price of inflation-fuelling imports more expensive, ranging from energy to many of the raw materials Turkey's manufacturers turn into exports.

Mr Erdogan has described interest rates as "the mother and father of all evil," and has used more unorthodox policy to try to dampen prices including intervening in foreign exchange markets.

In a speech on Monday he said Turkey was "going through a transformation in economy and rising to the next league".

He said the nation is "reaping the fruits especially in exports of our country's efforts and hard work in the past 20 years to bolster our foreign trade".

One economist forecast that inflation could reach as high as 50% by the spring unless the direction of monetary policy was reversed.

"Rates should be immediately and aggressively hiked because this is urgent," said Ozlem Derici Sengul, founding partner at Spinn Consulting, in Istanbul. But she accepted the central bank was unlikely to act.

Mr Erdogan overhauled the central bank's leadership last year. The bank has slashed rates to 14% from 19% since September.

The subsequent accelerating surge in prices and drop in the lira have upended household and company budgets.

There were pictures last month of people queuing for subsidised bread in Istanbul, where local officials have said the cost of living was up 50% in a year.

The cost of living is expected to rise further, especially after recent hikes in the price of electricity and gas bills of around 50% and 25% respectively.

The central bank has argued that temporary factors have been driving prices, and had forecast in October it would end the year at 18.4%. The bank's official inflation target is 5%, but the rate has remained in the double digits for the past two years.

To curb the lira's weakness, Mr Erdogan unveiled a scheme three weeks ago in which the state protects converted local deposits from losses versus hard currencies. That sparked a sharp 50% rally in the lira with support from the central bank.

But the lira then sank again last week, prompting a call on Friday from the president for people to keep all their savings in lira and shift gold into banks.

The economic turmoil has hit President Erdogan's opinion poll ratings ahead of planned elections scheduled for no later than mid-2023.

Why Turkey's currency crash does not worry Erdogan

Turkey's national currency has plummeted 45% against the dollar this year and yet President Recep Tayyip Erdogan doesn't seem all that bothered.

The lira has flirted with record lows this week, but Turkey's long-time leader is pressing ahead with his "economic war of independence", backed up by low interest rates.

So why is Mr Erdogan pushing a model that critics warn risks soaring inflation, higher unemployment and poverty, and what does it mean for Turks?

Unorthodox policy
The simple reason for the Turkish lira's collapse is his unorthodox economic policy of keeping interest rates low to boost Turkey's economic growth and export potential with a competitive currency.

For many economists, if inflation goes up you control it by raising interest rates. But Mr Erdogan sees interest rates as "an evil that make the rich richer and the poor poorer".

"Everything is so expensive," Sevim Yildirim told the BBC at a local fruit market. "It's impossible even to cook a main course for a family with these prices."

Annual inflation has surged above 21% in Turkey, but the Central Bank of the Republic of Turkey, overhauled by Mr Erdogan, has just lowered interest rates from 16% to 15%, the third cut this year.

Inflation is rising around the world, and central banks are talking about hiking interest rates. But not here, because Mr Erdogan believes ultimately inflation will fall.

In the past two years he has sacked three central bank presidents and only this week replaced his finance minister. And so the lira continues to drop.

Soaring prices
Turkey's economy is heavily dependent upon imports for producing goods from foods to textiles, so the rise of the dollar against the lira has a direct impact on the price of consumer products.

Take the tomato, a vital ingredient in Turkish cuisine. To grow tomatoes, producers need to buy imported fertilisers and gas.

Tomato prices were up 75% in August, compared with the year before, according to the chamber of commerce in the south coast agricultural hub of Antalya.

"How can we make money out of this?" asks Sadiye Kaleci, who farms grapes in Pamukova, a small town three hours' drive from Istanbul. "We sell cheap, but buying costs are expensive," she complains, citing high costs of diesel, fertiliser and sulphur, which is thrown on the vines.

Another farmer, Feride Tufan, complains the only way she can get by is by selling her assets: "We can pay off our debt by selling our land and vineyards. But when we sell everything, we'll have nothing left."

The currency has become so volatile that prices are changing daily. Inflation for producers alone is up 50%.

"I've cut down on all my expenses," says Hakan Ayran, out shopping at a market. "To pay the bills everybody eats less and nobody buys stuff."

Supermarket employees post price hikes on social media, showing before and after labels for products.
(...)
Foreign currency debt is a problem for the private sector and most companies have found it is more profitable to hold products in storage rather than sell them, because of the lira's volatility and inflation.

It all adds up to more poverty and a widening gap in income and wealth equality.

Angry young Turks
Queues form outside petrol stations and outside local government offices offering cheap bread.

And opposition parties have called for snap elections and rallies. When the lira slumped 18% in one day on 23 November, there were small protests and dozens of arrests.

But the most visible display of public dissent is among younger Turks on Twitter, Twitch live streams, TikTok videos and YouTube.

"I am not happy with this government at all. I cannot see a future for myself in this country," one young person told a reporter from a YouTube channel.

One in five young people in Turkey is out of work; it is even worse among women.

Turkey has the world's fourth highest rate of youth not in employment, education or training, according to the OECD.

Turkey's youth compare their living standards with those in other countries and do not like what they see.

"For a young person in the US or Europe, it's easy to buy an iPhone with their salary," says one 18-year-old. "Even if I work for months and months, I cannot afford it. I don't deserve that."

This generation is poised to play an important role in politics in Turkey, ruled by Mr Erdogan's Justice and Development Party (AKP) since 2002.

Almost nine million Turks born since the late 1990s will be eligible to vote in the next election in 2023 and that could spell trouble for the AKP.

One video that went viral showed a mother praising President Erdogan to a reporter, while her eight-year-old son contradicted her, pointing out his poor handling of recent disasters.

'Impossible to guess'
The ruling party's success was partly down to a flood of foreign funding after the 2008 financial crisis.

But much of Turkey's economic growth came from government spending and lending that favoured the construction industry.

As a result production continues to depend on imports and the economy is at the mercy of currency fluctuations.

Few hold out hope of Mr Erdogan's new economic model coming to the rescue of the Turkish lira.

Amid such uncertainty, economist Arda Tunca says all bets are off for what happens next.

"This is the first time we're using a model completely beyond economic theory. Even when there were crises we could guess what would happen. Now it's impossible," he said.

[Tamas]

the Kurds and/or Armenians will be in deep trouble over this, I recon.

[Sheilbh]

The President of El Salvador (who've made bitcoin legal tender and been buying on the dip a lot with their treasury) either was or is in Ankara on a state visit. I cannot imagine a major world leader more likely to be susceptible to crypto-talk than Erdogan - and I slightly wonder if he'll do something along those lines.

I think part of the problem is Erdogan's growth model which is basically based on capital flowing into Turkey causing asset prices to rise and then going into construction and real estate plus expanded consumption. It's always been a real estate and construction boom and that works while there's lots of cash flowing around and not great returns anywhere else in the world - I think that's probably a challenge now though. From what I understand there's never been an industrial strategy or any attempt to move to a more export-based model so Turkey is a very import heavy economy - and I don't think there's a quick fix to that. Also it means that Turks are really exposed to devaluation and to the fall in the Lira which is happening.

I think there's been some innovative schemes announced to basically encourage people to convert their foreign currency holdings into Lira with a government guarantee but it looks like that's not enough. Which is why I slightly wonder/worry that he'll do something crazy with Bitcoin (and this is when, as with El Salvador) the crypto bubble goes from individuals losing money into a bit of a risk globally - and there was a story in the FT today about Turks flocking to crypto amid fears that the Lira is a "shitcoin". Apparently there's been a crackdown on banks lending for people to invest in crypto or foreign currencies. I suppose it's a savings hedge of sorts? It feels like there's no bigger sign of a country's economy being in trouble than everyday people starting to get into foreign exchange speculation

The polling looks awful for 2023. I think Erdogan is losing against all of the second round candidates they've polled him against. AKP in the parliamentary elections is down to about 30-35%, but crucially it looks like their coalition partner is below the 10% threshold. I'm not sure about the "performative actions" that Erdogan's previously done - the AKP have done well because they've presided over a twenty year construction boom a bit like Fianna Fail's dominance in Ireland during the (construction and real estate fuelled) Celtic Tiger period. I worry it'll end in the same way.

[Valmy]

The CHP is prepared to save the country again.

[Jacob]

I don't expect Erdogan to leave power gracefully, should he lose.

[Duque de Bragança]

So gone is the islamo-calvinism fiction (nightmare?) as growth/development model? 

Well, colour me unsurprised.

[DGuller]

I don't expect Erdogan to leave power gracefully, should he lose.

I don't expect Erdogan to lose, should he lose.

[Crazy_Ivan80]

I think there's been some innovative schemes announced to basically encourage people to convert their foreign currency holdings into Lira with a government guarantee but it looks like that's not enough.

That was around Christmas, but the Turks didn't fall for it. A few days later, after some sleuthing, it was discovered that the Turkish central bank sold a big chunck of its reserves to prop up the Lira and make it appear as if the scheme was a success.

[Crazy_Ivan80]

So gone is the islamo-calvinism fiction (nightmare?) as growth/development model? 

Well, colour me unsurprised.

Better help the Greeks build a massive wall for when the shit hits the fan. Europe doesn't need more islamos

[Sheilbh]

I don't expect Erdogan to leave power gracefully, should he lose.

Maybe. I think there's probably an equal or possibly better chance that he'd leave office more gracefully than Trump (and plot his comeback).

Stronger chance that he tries to change the rules to win - but I can see that working at a parliamentary level, it's tougher once you've changed the system to a Presidential model and there's a run-off.

[Josquius]

So spending billions turning Istanbul into an island turned out to not be the path to vast riches? Shocking.

[The Larch]

So spending billions turning Istanbul into an island turned out to not be the path to vast riches? Shocking.

IIRC they only started with the project last summer, so I don't think Istanbul is an island just yet.

Don't know what will happen to it, though. Apparently one of the austerity measures that the Turkish government announced recently was the stopping of all public real estate and infrastructure projects, except those depending directly from the Presidency (no toys for anyone but Erdogan himself). I wouldn't be surprised if the Istanbul canal project depended directly from the Presidency and was thus exempted from those austerity measures.

[Iormlund]

I' sooo glad that my brother's in-laws live in Germany. Well, not all of them, but at least the family will be somewhat safe from all this shit.

[Sheilbh]

Apparently Erdogan has ordered AKP's economy team to look into crypto - so maybe Bukele's visit did work