The Turkish economy is in bad shape. President Recep Tayyip Erdogan took the markets by surprise when he decided on December 20 to link the value of certain bank deposits in Turkish lira to the dollar. Turkey’s currency rallied sharply, from 18.45 pounds per euro on December 18, to 12.06 pounds per euro on December 24. A year ago, 1 euro was worth 9.21 pounds …
Prior to his intervention, inflation had reached 21% year-on-year and the currency has lost up to 60% of its value against the dollar since January. The fall in the Turkish lira has lowered household purchasing power and raised the cost of production for businesses. The Turkish president intends to continue his heterodox policy which creates a spiral of rising prices, falling currency, rising production factors and impoverishment of populations. This scenario, if it were to continue, would put the economy “out of control” and resemble the fall of Venezuela in the 2000s under President Hugo Chavez.
The Turkish economy is taking a “Venezuelan” trajectory: the Turkish lira hit a new all-time low after the central bank decided to lower its main policy rate, from 15% to 14%, for the fourth consecutive month; inflation is getting out of control; food and drug shortages are emerging.
For several years now, the Turkish president has decided to engage in a policy that goes against all classic theories. Believing that high interest rates promote inflation, he has systematically called on the Turkish Central Bank to cut rates for two years, setting off a dangerous spiral of inflation and the fall of the Turkish lira. Three central bank governors have been sacked. Turkey is acting against the current waves of monetary tightening in several emerging countries and also initiated by developed countries to contain the rise in prices.
Impoverishment of the Turkish economy
Believing that households should not be suffocated with a rise in interest rates and that the fall in the currency can boost exports, Erdogan does not intend to change his policy. He is betting everything on growth driven by exports. Yet the impoverishment of the Turks is spectacular. The collapse of the currency results in a surge in prices that is difficult to sustain, the country being very dependent on imports. The Turkish president, who ruled out possible capital controls to curb the fall of the pound, may not have a choice. If this were to continue, part of the economy could “dollarize” as in Venezuela.
Erdogan is in a race against time for the 2023 presidential election. Several polls indicate that the mayor of Istanbul, Ekrem Imamoglu, and that of Ankara, Mansur Yavas, his main challengers, would obtain a majority in the second round against the Turkish President, as well as Kemal Kilicdaroglu, the leader of the main opposition movement, the Republican People’s Party. Now the oppositions (nationalist, Kurdish, centrist) have the future of Turkey in their hands to avoid a Venezuelan spiral, as long as they are united in 2023.
