Erdoğan needs to drop economic experiment to avoid full-blown crisis

Turkish President Recep Tayyip Erdoğan has little choice but to end a costly economic experiment and hike interest rates sharply to avoid a full-blown crisis and widespread poverty.

Inflation in Turkey surged to 36.1 percent in December, the highest level since he assumed power in 2002. That puts Turkey in the top ten of high inflation countries that include basket cases such as Argentina and Venezuela. In terms of nations with a population of more than 50 million, Turkey is the leader for inflation globally.

The price of basic foods is surging to levels unprecedented since a massive financial crisis in 2001, which required Turkey to seek emergency help from the International Monetary Fund (IMF).

"Turkey is facing an Argentina/Venezuela-style inflation/devaluation spiral," Tim Ash, senior emerging markets strategist at BlueBay Asset Management, said in e-mailed comments.

The cost of flour, margarine, bread and meat jumped by an annual 86 percent, 114 percent, 54 percent and 56 percent respectively last year, according to official data published Monday. Many ordinary Turks say the figures grossly underestimate real inflation. Producer prices soared by 79.9 percent last year.

At the weekend, Turkish regulators were forced to increase the price of natural gas and electricity by between 25 percent and 100 percent, piling more misery on consumers and businesses.

Metropoll, an Ankara-based pollster, published a survey on Monday showing that 62 percent of Turks believed inflation accelerated by more than 100 percent last year, including 46 percent who are backers of Erdoğan's Justice and Development Party (AKP).

In a televised speech earlier in the day, Erdoğan did not comment on inflation, which has already impoverished millions of Turks even after a 50 percent increase in the minimum wage announced last month.

Instead, to resounding applause from his business allies, the president lauded Turkey’s export performance and, quite incongruously, boasted how the lira had become an important means of exchange between Turkish companies and their buyers abroad.

But the lira slumped by 44 percent in 2021, making it very difficult for exporters to set prices. A pre-Christmas announcement by Erdoğan that his government was introducing a scheme allowing Turks to open lira deposit accounts linked to the dollar helped the currency rally sharply from a record low of 18.36 per dollar. It traded as strong as 10.15 per dollar on Dec. 23. But the currency has since weakened by almost 25 percent.

Last week, trading in the Turkish lira became as volatile as Bitcoin, a highly disturbing situation for an emerging market seeking the stability and growth to become one of the world’s top 10 economies. It was trading up 3.3 percent at 13.08 per dollar on Monday after dropping in all five trading days last week.  

A latest central bank survey of finance industry professionals predicts that the lira will slide further in 2022, hitting 15.38 per dollar by December. The monthly survey historically fails to predict the scale of losses for the currency.

Rate cuts ordered by Erdoğan - he now controls the once independent central bank after sacking three governors since 2019  - total 5 percentage points since September. Erdoğan has justified the reductions by citing Islamic teachings and by claiming higher interest rates are inflationary - a view that jars with traditional economic theory.

Erdoğan’s rate cuts have had the opposite effect than intended and led to higher borrowing costs for the Treasury, businesses and consumers. In fact, they are fast losing their meaning as a gauge of the cost of credit in Turkey.

Interest rates on the Treasury’s 10-year lira bonds have hit 25 percent, 11 percentage points higher than the central bank’s so-called ‘benchmark rate’ of 14 percent. The bonds traded at 16.3 percent just before the rate-cutting cycle. Meanwhile, the average cost of existing consumer loans has risen by 5 percentage points to more than 20 percent. Some banks say businesses must now pay well in excess of 30 percent annually on their borrowing. Commercial loans carry variable rates of interest while consumer loan rates are fixed for the term of the borrowing. 

In his speech on Monday, Erdoğan recalled the economic crisis of 2001, which helped his newly established political party defeat a three-party coalition government and assume power with a parliamentary majority. He claimed his government has now insured Turkey against a repeat of such turmoil through economic growth and booming exports. Exports would increase to $250 billion this year from a record $225 billion in 2021, he predicted.

History shows that exports tend to thrive when a currency is in freefall. And exports are not the only thing booming in Turkey – so is inflation, borrowing costs, poverty and support for opposition political parties.

It is time Erdoğan stopped chasing an economic dream based on his religious beliefs and instead accept reality – his government’s policies are driving the economy and Turks’ hopes of future wealth into the ground. The sooner he reverses course, the sooner the damage raining down on the economy will cease.

Wolfango Piccoli, co-president for global risk at research and consultancy firm Teneo, said on Monday that Erdoğan's "crazy economic experiment" could be over by the end of the month.

But Erdoğan’s stubbornness to push on with his policies is notorious. Since assuming power in 2002, he has led relentless crusades against his enemies – first the secular military, which he has now co-opted and Islamicised, then ordinary Turks who protested his increasing authoritarianism at nationwide protests in 2013. He has since locked up or sacked tens of thousands of his former political allies in the Gülen religious movement to assume absolute power over the police and bureaucracy, and crushed civil society and the independent media.

While Erdoğan, who assumed vast new presidential powers in 2018, may silence or lockup those in Turkey that he does not wish to listen to or deal with, he cannot do away with the laws of economics. The sooner he realises that the sooner he can allow his country to start breathing again and to achieve its undoubted potential.

"Just idiotic economic policies - Turkey at danger of heading into cult-like scenario where economic logic, theory, rationale are ignored in favour of whatever claptrap the ultimate leader spouts," Ash said.

(This story was updated with lira price in the 11th paragraph.)

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