Turkey’s economy paying the price for years of policy mishaps – Asia Times

Turkey's economy paying the price for years of policy mishaps - Asia Times

For many years, it was n’t the economy that determined voting behavior in Turkey. The government’s president, Recep Tayyip Erdogan, won almost every vote he contested despite a deteriorating economic outlook.

The importance of identity politics in a nation that has seen polarization from Erdogan’s ruling Justice and Development ( AK) Party’s policies over the course of its 22 years in power is frequently explained.

But, Erdogan’s run came to a screeching halt on Sunday, March 31 following Turkey’s regional votes. His AK Party lost the common ballot for the first time since 2002, and the main opposition party won in important locations like Istanbul and Ankara.

The reason why this time was different is largely due to the enormous accumulated fees from years of careless coverage that are now beginning to pay off in a major way.

What was the country’s economic viewpoint as they cast ballots, then?

On March 21, Turkey’s central bank raised interest rates quickly to 50 %. The rate increase was the most recent in a line of price increases to occur since Erdogan’s re-election as president in May 2023. The central bank’s determination to combat runaway inflation, which is currently hovering close to 70 %, was shown in the media.

The rising interest rates have received a lot of positive feedback as a much-needed change from the overly conventional economic plan. Erdogan’s innovative policy stance stemmed from his steadfast belief that raising interest rates may lead to more inflation rather than a decrease.

The pandemic and Russia’s invasion of Ukraine caused prices to ascend worldwide. Turkey went on an interest rate lowering binge while nearly every key bank raised interest rates in response. The increase in home prices was attributed to the artificially low interest rates that were kept low, making Turkey an prices champion on par with Argentina and Venezuela.

Decoupling from another emerging markets

Emerging industry have shown surprisingly strong resilience in the face of the world’s economic strain. Some emerging economies, unlike in the past, have avoided significant fluctuations in their exchange rates, have never experienced debt distress, and had managed to maintain prices.

One cause for this is the achievement of emerging economies in enhancing their plan systems, especially by promoting the freedom of their central banks. More particularly, central bankers in these countries have tremendously improved their conversation and accountability, and have become much better at prediction inflation.

In consequence, developed nations like Chile, the Czech Republic, and South Africa have outperformed their rivals.

Unfortunately, Turkey was an exception in this circle. The nation has entirely abandoned its economic policy’s independence to the point where its central bank has had six distinct governors in the last five decades.

Politics also played a disproportional part in the development of monetary policy. Changes to the Greek law, which were put in place in 2018, gave Erdoğan considerable executive powers to press for very nice spending ahead of the 2023 national elections.

The minimum wage increased significantly, and expensive pension plans and subventional cover tasks were implemented. Normally, this increase in public spending was a result of the inflationary pressures that were already brewing.

Turkey’s central banks is then forced to raise rates while others are just beginning the easing period because of its outcast position in loose monetary policy, which cut rates between 2021 and 2023 while everyone else was tightening.

Why does this problem?

Most nations believe that getting economic plan right is important. But it matters more for nations like Turkey, which are incredibly open to trade and financial moves and whose home economy’s exchange price movements are a major factor of fluctuation.

The Turkish lira is one of the biggest losers of Erdogan’s unconventional economic policy. The value of the zloty has significantly decreased over the past six years in relation to the US dollar. In January 2018, you may have needed to part with 3.76 liras to order one US dollars. Now, this number stands at 31.9 liras.

The Greek economy suffers from significant swings in the value of the lira for a variety of reasons.

First, a major component of Turkey’s imports are inputs used in the manufacturing process, especially of vehicles, machinery and electrical devices that make up nearly half of the government’s exports. Any increase in the value of the lira may increase the cost of production and, consequently, the price of exports, which will lower the government’s profitability.

Next, Turkey imports a large portion of its power from abroad. In much the same method, any loss of the lira may increase the cost of importing strength.

Third, Turkey has significant foreign money obligations. This increases the cost of the lira’s loss perhaps more. Any decline in its price increases the amount of resources needed to pay back a certain amount of foreign currency responsibilities.

Turkish lira banknotes and coins.
Over the past six times, the lira’s worth has drastically decreased. Photo: hikrcn / Shutterstock via The Talk

Turkey’s transfer to more conservative economic plan is good news. However, the plan shifts that have been made are insufficient to turn the tables on its business, especially in the fight against inflation because it is so long overdue. Constant inflationary pressures have made it more expensive for people to buy overseas coin, adding even more pressure on the lira.

The government have had to lose significant amounts of foreign currency reserves to stop the lira from depreciating more as a result of a decline in foreign cash inflows. Similar to the sharp increase in interest rates on March 21, and as the cost the nation is willing to pay for its previous coverage blunders, should be seen in this context.

More importantly, Turkey has n’t implemented any substantive institutional reform plans in the last almost a year, which is unacceptable.

You have look no further than the current resilience of other emerging economies for evidence if you need to know whether strong and independent policy institutions improve economic efficiency.

Brazil, for example, has n’t just rebounded strongly from the pandemic. It is able to control inflation and has one of the world’s best-performing economies.

Gulcin Ozkan is Professor of Finance, King’s College London

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