Erdoganomics

Inflation in Turkey, an enduring challenge, has reached a concerning milestone, persisting relentlessly for the 17th consecutive month. As of October 2022, official figures revealed a staggering year-on-year increase of 85.5%, an alarming trend primarily driven by the relentless surge in food and energy prices. For nearly two years, the 85 million residents of Turkey have grappled with the harsh reality of escalating living expenses.

 The Turkish Statistical Institute's reports paint a grim picture of the economic landscape. Food prices surged by a staggering 99%, housing costs soared by 85%, and transportation expenses skyrocketed by an astonishing 117% when compared to the same period the previous year. These statistics underscore the daunting economic challenges that ordinary Turkish citizens face daily.

 At the heart of this crisis lies the sharp devaluation of Turkey's currency, the lira. What distinguishes this crisis is the controversial stance of President Recep Tayyip Erdogan, who adamantly refused to raise interest rates, contending that such a move would be detrimental to the economy. However, economists and critics argue that it is precisely Erdogan's policies that have contributed to the precipitous decline of the lira and the resultant inflationary pressure.

 Even when Turkish inflation exceeded 83%, Erdogan's administration chose to lower the key interest rate by a remarkable 150 basis points on October 20 2022, reducing it from 12% to 10.5%. This decision, taken against the backdrop of soaring inflation, raised concerns among economists and experts who feared it would further exacerbate the currency crisis.

 President Erdogan remained unwavering in his pursuit of lower interest rates, with the aim of achieving single-digit rates by the end of 2022. He consistently frames this approach as pro-growth. However, critics contend that this strategy fails to address the underlying causes of the economic turmoil, leaving the nation's financial stability in a precarious state.

 Erdogan's unconventional interpretation of monetary policy, which favors low-interest rates, has played a pivotal role in exacerbating the situation. While intended to stimulate economic growth, this approach has eroded confidence in the economy and prompted both local and foreign investors to withdraw their funds, deepening the crisis.

 Furthermore, Erdogan's insistence on maintaining control over crucial economic institutions, including the central bank, has hindered their ability to take effective measures to mitigate the crisis. This concentration of power has eroded the checks and balances that are essential for a stable economic landscape, leaving Turkey in a state of economic uncertainty.

 The heart of the matter is that President Tayyip Erdogan's understanding of monetary policy appears to lack clarity, as he seems to underestimate the dangers of pursuing economic growth at the cost of rapidly increasing inflation. Lowering interest rates is typically intended to encourage borrowing and boost consumer expenditure and business investment, while discouraging saving. This, in turn, leads to an increase in aggregate demand. However, when aggregate supply cannot keep pace with this rising demand, demand-pull inflation occurs.

However, as inflation escalates to extreme levels, the purchasing power of consumers diminishes, leading to a reduction in consumer expenditure. This, in turn, causes aggregate demand to fall, prompting businesses to cut production to save costs. Consequently, this downturn in economic activity results in a recession, which stands in stark contrast to the desired economic growth.

 In conclusion, Turkey's relentless battle with inflation serves as a cautionary tale. The economic policies pursued by President Erdogan have contributed significantly to the enduring crisis. The challenges ahead call for prudent policies and a clear understanding of the intricate dynamics that shape a nation's economy.

References

Askew, Joshua. “'Everything is overheating': Why is Turkey's economy in such a mess?” Euronews.com, 21 December 2022, https://www.euronews.com/2022/11/09/everything-is-overheating-why-is-turkeys-economy-in-such-a-mess. Accessed 1 October 2023.

“Erdogan: Turkey's inflation will fall to 40% in months, 20% in 2023.” Reuters, 12 December 2022, https://www.reuters.com/world/middle-east/erdogan-turkeys-inflation-will-fall-40-months-20-2023-2022-12-12/. Accessed 1 October 2023.

Glinski, Stefanie. “Erdogan's Economic Policies Haven't Solved Turkey's Inflation Problems.” Foreign Policy, 7 September 2023, https://foreignpolicy.com/2023/09/07/turkey-economy-inflation-erdogan-lira-interest-rate-tourism/. Accessed 1 October 2023.

“Turkey's inflation tops 85% as Erdogan continues to rule out interest rate hikes.” CNBC, 3 November 2022, https://www.cnbc.com/2022/11/03/turkeys-inflation-tops-85percent-as-erdogan-continues-to-rule-out-interest-rate-hikes.html. Accessed 1 October 2023.

Written by- Yajush Jayakrishnan, Adi Ovalekar

Edited by- Dhruv Mathur, Ivannah Jacob, Tanuj Waghray