Vturkish tourists People are often surprised to find restaurants (at least in the big cities) packed with customers in what should be an economically depressed country. But appearances are deceiving. A big reason for the clamor is that Turkey’s middle class would rather spend their income today than watch inflation wipe out their savings tomorrow. Inflation is officially measured at 55% year-on-year, but is widely believed to be much higher.
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The lira plummeted after Turkish President Recep Tayyip Erdogan forced the central bank to cut interest rates sharply amid soaring prices. He hopes this will boost the economy by lowering export prices and encouraging domestic production. His finance minister has promised that the policy mix, repackaged as Turkey’s “new economic plan”, will bring inflation down to single digits ahead of this year’s presidential and parliamentary elections. Things didn’t go as planned.
Imports are still necessary, but are much more expensive now. As a result, they dwarf exports, leaving Turkey with its largest absolute current-account deficit in four decades.Annual inflation has fallen from 85% last year, but remains by far the highest OECD, A group of mainly wealthy countries. Growth continues, thanks less to exports than to an unsustainable surge in consumption. Mr Erdogan’s economic model appears to be running out of steam.
The sluggish economy, combined with an earthquake in February that killed more than 50,000 people in the south of the country, has dimmed Mr Erdogan’s prospects. Opinion polls show him trailing opposition presidential coalition candidate Kemal Kilidaroglu by 4 percentage points or more. For a populist strongman with a slavish news media and control over state institutions, this is all but insurmountable. But this is the biggest hole Mr Erdogan faces ahead of any major election.
How he plans to get out of the situation is unclear. Elections are scheduled for May 14, with a run-off on May 28 if no candidate secures an absolute majority in the presidential race. Turkey can often do more in two months than most countries in two, but Mr Erdogan seems to be running out of ideas, especially on the economic front. Sensing a historic opportunity, the opposition is closing in. On March 22, the country’s main Kurdish party said it would not field its own presidential candidate, as feared, suggesting it would support Mr Kilicdaroglu and avoid splitting the opposition vote.
Many worry that Mr Erdogan could reignite the rabble. Selim Koru of the Turkish Economic Policy Research Foundation said one option could be a renewed confrontation with Greece over the maritime border. Greek general elections, now also expected in May, raise the risk of conflict, either verbally or, in the worst case, violently. Domestic politics may favor hot heads over cool heads. “I’m not sure these people are going to leave quietly,” said Mr Kluj, of Mr Erdogan and his circle.
On the economic front, Türkiye’s leaders have limited options. In the past three months, the government has raised the minimum wage by 55 percent, more than doubled the basic pension and passed a law making millions of Turks eligible for early retirement. Mr Erdogan is likely to announce further handouts during Ramadan, which begins on March 23. His greatest hope, however, is that the economy will remain prosperous ahead of the election. It grew 5.6% last year, thanks in large part to ridiculously low lending and soaring consumer demand.
Erdogan has all the economic and monetary policy levers in his hands, but has been pulling them in opposite directions. The benchmark interest rate has been cut by more than ten percentage points since 2021, pushing the lira to new lows last year. That helped exports hit a record $254 billion. However, imports surged to $364 billion (40% of total imports gross domestic product), also hit a new high. Turkey’s current account deficit with the rest of the world ballooned to $10 billion in January.
Emergency measures have prevented a run on the lira in 2021. But since the lira started slipping again last year, Turkish officials have been restricting bank lending and selling billions of dollars worth of foreign exchange reserves, drying up central bank coffers. The lira, which has lost 80 percent of its dollar value in five years, has stabilized, but only at the expense of exporters, which Mr Erdogan’s model is expected to benefit from. Turkish exporters now say the currency is overvalued and is squeezing profits. “They have become currency junkies,” said economist Cevdet Akcay. “They were ecstatic and now they’re complaining again.”
Meanwhile, ordinary Turks are paying for Mr Erdogan’s experiments in the form of a cost-of-living crisis. Apart from managing the exchange rate, the government has done little to rein in price increases. On March 23, the central bank kept the benchmark interest rate unchanged at 8.5%. Credit is cheaper in Turkey than anywhere else in the world when adjusted for inflation.
Selva Demiralp of Istanbul Cork University says the economy is on borrowed time. “They’re trying to maintain the current system until the election, before it crumbles,” she said. Without a factory reset, Turkey could soon face another currency crisis and a fresh spike in consumer prices. Mr Akcay said controlling inflation was hard enough for the new government. “This time, it’s impossible.” ■
