Turkey has recently changed its westernised name back to its ancient name – Turkiye. This change in name, which is driven by a surge of nationalism, extends to economic policy as well.
It seems that Turkey no longer wishes to follow the prescription of Western ‘imperialism’ to tackle its surging hyperinflation. It will instead choose to follow a unique policy of ‘Turkiye’ origin.
Turkey’s inflation has reached a 23-year peak of over 70%. Inflation is a complex phenomenon with a multitude of socio-economic and financial causes. However, in the case of Turkey, a significant component of this hyperinflation is the politically contrived policy of the dictatorial President, Erdoğan.
The government’s ‘novel’ policy of lower interest rates is novel for obvious reasons. Not to mention that it flouts the fundamental tenets of economics enough to make the likes of Adam Smith and Keynes turn in their graves. In times of inflation, the central bank increases interest rates to absorb excess liquidity from the market. The recent rate hikes by major central banks such as the Fed. The
The Bank of England is apposite for tackling inflationary pressures on the global economy. The European Central Bank(ECB), which is known to maintain a dovish outlook on inflation, has also indicated a potential rate hike in July 2022.
Erdoğan’s bonhomie with lower interest rates in times of hyperinflation clearly indicates that Turkey’s inflation is a political phenomenon as the central bank of Turkey does not have autonomy over monetary policy. Turkey’s top business association, which rarely criticises the President, has also vouched for the central bank’s independence after the lira plunged over 17% in October 2021. The President has stated on multiple accounts that he does not wish to burden his people with high interest rates.
This has rattled economists.
Not only does he claim that low-interest rates battle inflation, but qualifies it as an acceptable economic approach.
This lack of independence of the central back and the government’s experimentation with economic policy is alarming as the economy is facing stagnation along with inflation i.e stagflation. As the global economy is headed towards stagflation, the fine-tuning of monetary tightening is crucial. Excessive tightening can contract economic activity worsening stagflation.
According to Erdoğan, higher interest rates make the rich richer and the poor poorer, exacerbating inequality. Furthermore, he claims that the conventional economic prescription of rate hikes to battle inflation is an imperialist Western agenda. His populist rhetoric is that only the rich (read Western and imperialist) nations and rich people have heftier pockets after rate hikes. Mounting evidence of inflation worsening inequality in Turkey contradicts this populist rhetoric.
The economic facts, however, couldn’t be further from the truth. The low-interest rates that Erdoğan considers to be an antidote to imperialist practices, are in fact leading to dollarization. Dollarization is the use of the US Dollar as a substitute for domestic currency. This is evidence of the loss of faith in the domestic currency, the lira in this context.
The lira has dropped over 20% against the US Dollar(USD) in 2022 followed by a 44% drop last year. It plummeted from 8TL/USD to 18TL/USD. The aim is to have lower interest rates that would boost exports by increasing domestic production. At present, Turkey’s balance of payments situation seems bleak. The imports far outweigh the exports.
Erdoğan’s export promotion is economically rational as it is aligned with the goal of strengthening the foreign reserves but is unlikely to work in curbing inflation. Export promotion would be successful if it is backed by a stable currency otherwise currency fluctuations and capital flight can eat into the gains from exports.
Turkey’s contemporary economic woes began in 2017. The cumulative impact of tariffs imposed by the US on Turkey’s steel exports as retaliation to Erdoğan’s authoritarianism, excessive foreign debt and a housing bubble, have paved the way for the currency crisis and
hyperinflation. The central bank recently had to make a hushed intervention to restore the value of the lira by selling dollars in the international market. This intervention has proved to be effective in restoring the gross forex reserves but the net reserves (after adjusting for liabilities) remain low.
Hyperinflation is a grave issue for Turkey. Against the backdrop of global stagflation, Erdoğan’s populism is likely to have dire consequences. The surging consumer prices have dampened Erdoğan’s popularity domestically. The lira’s collapse, hyperinflation and sanctions from the West have already affected Turkey’s gains from international trade and investment.
Unless the President considers changing his economic policy as important as changing the country’s name, Turkey’s future looks bleak.