Despite currency collapse, Recep Tayyip Erdogan stays on unorthodox course | Business | Economy and finance news from a German perspective | DW | 02.12.2021

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Despite currency collapse, Recep Tayyip Erdogan stays on unorthodox course

The Turkish lira is weaker than ever before. Still, the president sticks to his questionable interest rate policy. But now, the central bank has intervened on the foreign exchange market.

A shop closed in Istanbul, Turkey

Inflation is impacting all parts of the Turkish economy

The current economic situation in Turkey is slowing down the whole country. Since the price of raw materials and energy skyrocketed, many Turks have been heating their homes with coal or wood. Natural gas has become an expensive luxury.

The reason for the high prices on the energy market is the currency crisis that has been raging in Turkey for three years now. An inflation rate of almost 20% is putting the Turkish lira under pressure. The currency has been falling for years. Most recently it had reached new lows practically every day.

On Wednesday, the Turkish central bank pulled the emergency brake and intervened in the foreign exchange market for the first time in seven years. It stopped the further decline of the lira, at least for the time being. Yet how long this measure helps remains to be seen.

A man holding Turkish lira 100 bills

The Turkish lira has been depreciating at an alarming rate

Blame the central bank for the lira's problems

Stability is important for Erdogan right now because there is growing displeasure among the population that the country's policies cannot get rampant inflation and the associated price fluctuations under control.

But so far, the solutions proposed by the Turkish government, both in terms of economic and monetary policy, have come to nothing. Still, at Erdogan's request, the central bank decided in mid-November to cut its benchmark interest rate from 16% to 15%. This was after the authorities already lowered the key rate by two percentage points in October.

Modern economic theory doesn't prescribe any lowering of the key interest rate amid high inflation. On the contrary, central banks usually raise interest rates to curb inflation.

As many experts predicted, the lira collapsed after this latest decision. At times, a single US dollar was worth more than 14 lira on the markets. That is a 45% devaluation of the Turkish currency since the beginning of the year.

Erdogan remains stubbornly on course

For years, the exchange rate has been significantly influenced by Erdogan, who has openly declared his dislike of high interest rates. On December 1, he fired his finance minister, Lutfi Elvan, who had only been in office for a year. He will be replaced by his deputy, Nureddin Nebati.

Former Turkish Finance Minister Lutfi Elvan and Nureddin Nebati, the current one

Former Finance Minister Lutfi Elvan (left) and his successor,Nureddin Nebati

The Turkish president has repeatedly changed the top staff at the central bank when they didn't implement his monetary policy agenda. Although Erdogan's interest rate cuts have fostered the devaluation of the lira, he has not been dissuaded from his mantra: "Interest rates are the reason, inflation is the result."

He reiterated this on November 30 on state broadcaster TRT. Turkey was lowering the key interest rate in order to drive investment, employment, production and growth, he said, once again highlighting his unorthodox belief that high interest rates drive up prices and showing that he did not want to abandon his economic policies.

Turkish President Recep Erdogan

Turkish President Recep Erdogan whose policies are wreaking havoc on the economy

Sleeping with dollars under their pillows

Economist Soner Kuru points out that the market and people have already adjusted to the fact that interest rate cuts will continue for a while. "People are now trying everything to save their money from inflation. But even if savers buy gold, this leads indirectly to an increase in the exchange rate," since the precious metal is also dependent on the US dollar, he explained.

The people in Turkey have been confronted with constantly rising dollar prices since 2013, according to Kuru. And now more and more people are trying to secure their assets with the help of foreign currencies.

"In the future, people will increasingly sleep with dollar bills under their pillows," said Kuru. "We are at a time when even people who never did business in dollars now see that currency as a safe haven."

Shoppers at a market in Turkey

Prices for staples like food and energy have skyrocketed

Economic growth at any cost

Erdogan also emphasized on that TRT broadcast that he believed Turkey would achieve strong economic growth this year. Gross domestic product (GDP) should increase by at least 10%, he added. Core economic indicators are very strong and the country is just waiting for long-term investments from abroad.

While currency devaluation is problematic at home, foreign exporters and investors are benefiting from the weak lira. Partly because of this, the growth rate of the Turkish economy is impressive.

According to the Turkish Statistical Institute the country's economy grew by 21.7% in the second quarter of 2021. It is the highest growth rate since 1999.

But it's an upswing that hasn't led to the Turks gaining more purchasing power. On the contrary, consumers are unhappy about current sky-high prices for staple food items.

This article has been translated from German.

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