Understanding Turkey’s Inflation and Economic Crisis
INTRODUCTION
For the past 2 decades Turkey has been one of Europe's strongest economic powers, experiencing growth and development. However, it has been battling inflation and economic crisis since 2018. In early January 2024, Turkey’s inflation soared to 64.8%, marking its highest point since November 2022, when it reached 88.5%, nearly doubling the prices across sectors. Core inflation rates have also reached a 24 year high at 70.6%. In this article we will examine reasons and consequences of Turkey’s current economic crisis.
WHY IS THERE INFLATION?
Since the 1990s, Turkey's economic trajectory has been marked by expansive growth and financial modernization, caused by innovative reforms. However, a notable shift occurred with the rise of Recep Tayyip Erdogan to the presidency, leading to a period of slowed growth. The country faced a substantial current account deficit, escalating from $33.1 billion in 2016 to $47.3 billion in 2017. To counterbalance this deficit, Turkish banks and major corporations increasingly turned to foreign currency borrowing, resulting in a more than doubling of foreign currency debt from $214 billion in 2009 to 2017. This heightened vulnerability left Turkey exposed to currency depreciation and diminished investment as concerns over the stability of the lira grew.
A significant factor in Turkey's economic challenges lies in President Erdogan's unorthodox stance on interest rates. Erdogan, openly opposed to interest rate hikes, deemed them as "the mother and the father of all evil," aligning with his Islamist views that discourage interest-based financial policies. The president's interference prevented the Central Bank from implementing necessary interest rate adjustments, contributing to a surge in inflation rates to a 24-year high in 2022. Erdogan believed that maintaining low-interest rates would decrease inflation, persistently cutting rates during his presidency, even amid escalating inflation and throughout his election campaign. In 2021, amidst the lingering economic vulnerabilities from the COVID-19 pandemic. Central Bank chief Naci Agbal, was replaced by Şahap Kavcıoğlu, a supporter of Erdogan's interest rate views. This change led to an interest rate reduction from 19% to 14%, causing the Turkish lira to lose nearly half (44%) of its value in 2021 alone.
HOW IS THE NATION AFFECTED?
The ongoing economic crisis in Turkey has left a significant impact on numerous households and businesses across the nation. The cost of basic necessities has surged dramatically, with food prices witnessing an increase of 69.71% in January 2024 compared to the same month in the previous year. The root of this price surge lies in Turkey's heavy dependence on imported raw materials, driving up costs for fuel, everyday goods, and imports. Notably, Turkey imports 93% of its oil and 99% of its gas, both priced in dollars, resulting in increased expenses across the board due to the weakened lira.
These economic challenges are reshaping the educational environment for young Turks who are struggling to make ends meet. Many are switching to remote or evening education as their financial situation forces them to work during the day. Moreover, the economic pressure has forced some students, who bear the responsibility of supporting their families, to drop out of school and work full-time to prevent their families from falling into poverty. The economic instability is also contributing to a "brain-drain" effect. Skilled workers are actively seeking better opportunities in more economically stable European countries like Germany. This migration of talent has the potential to harm Turkey's future economic state significantly.
WHAT IS GOING TO HAPPEN?
September 2023 marked a crucial moment for Turkey as President Erdogan reversed his long standing opposition to higher interest rates. Acknowledging the need to slow down rapid price growth, Erdogan declared Turkey's commitment to implementing "tight monetary policies," expecting them to be the foundation for confidence and stability in the nation's economy. Since then interest rates have been increased 8 times, reaching the current level of 45%. While some argue that this adjustment may not fully make up for the prolonged loose monetary policies of the Central Bank, there are promising signs. December 2023's inflation rate, at 64.8%, was slightly lower than the anticipated 65.1%, signaling a potential turning point.
As Turkey deals with its harsh financial situation, there's hope for better economic stability and a brighter future. This U-turn in Turkey's monetary policies could mark the start of a new and better era, bringing the possibility of a stronger and more prosperous future for the country.
Written by Rustem Zhumagaliyev | Proofread by Amina Meirkhan
