To solve serious problems in the economy and extend his 20-year rule into a third decade, Turkish President Recep Erdogan has promised to continue his policy of cutting interest rates as long as he remains in power and inflation will be kept under control. This is an operating policy that is said to go against conventional economic theory.
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In the Turkish election, incumbent President Erdogan, although he did not win 50% of the votes to win, but he still kept the lead. (Source: Reuters) |
Whoever the next president of Turkey is, they all have to shoulder an extremely difficult "mission", which is to bring this economy out of the crisis and rebuild the country after the earthquake disaster.
President Erdogan's personal thesis
However, what makes observers and those who are watching every step of the incumbent Turkish President Recep Tayyip Erdogan on the political scene, to maintain power for 20 years, is still wondering about his promise to "continue cutting interest rates to combat soaring inflation" if he is re-elected on May 28.
“Follow me after the election and you will see that inflation will go down with interest rates,” he asserted in the interview. CNN recently.
When asked, does that mean there will be no change in economic policy? "Yes, certainly," Erdogan replied.
In fact, the Turkish lira has steadily depreciated in recent years, falling more than 40% last year as the incumbent government's economic policies spurred inflation to soar and fall to near historic lows when markets opened on election day.
While central banks across most major economies raised interest rates at a breakneck pace to control soaring prices, Turkey did the opposite.
“I would argue that interest rates and inflation – they have a direct correlation. The lower the interest rate, the lower the inflation will be,” Erdogan said.
“In this country, the inflation rate will go down with interest rates, and then people will breathe a sigh of relief… I say this as an economist, not a fantasy.”
Back in late 2021, when prices began to rise rapidly around the world, President Erdogan ordered the Central Bank of Turkey to cut interest rates.
By October 10, the consumer price inflation rate reached 2022%, before falling to 85% in April this year, according to data from the Turkish Statistical Institute.
Commenting on Erdogan's intentions, James Reilly, an economist at Capital Economics, said, "The incumbent's unexpectedly strong performance in the first round of elections means that a return to normal economic policy is unlikely. As a result, the Turkish lira looks set to remain under severe pressure this year.”
This expert further analyzed, here, a victory is likely to come to Mr. Erdogan, which means that he will continue to maintain the policy of low interest rates and high inflation in the economy.
Economists say that Turkey is experiencing a financial crisis not seen in decades, with the local currency Lira continuously depreciating, currently at about 55% against the dollar. The conflict between Russia and Ukraine has also worsened the situation, pushing energy prices to new highs.
The skyrocketing prices are hurting Turkish consumers and the economy as a whole, as the country struggles to recover from a devastating earthquake in February. According to the World Bank, the disaster killed at least 45.000 people, left millions homeless and caused an estimated $34 billion in immediate damage - or about 4% of Turkey's annual economic output.
Official Turkish data also showed that the country's net foreign exchange reserves fell to negative levels for the first time since 2002.
Specifically, the net foreign exchange reserves of the Central Bank of Turkey (CBT) recorded at -151,3 million USD on May 19. Experts say this has to do with the government's controversial recent efforts to try to keep the lira stable by enforcing unorthodox policies and trying to keep interest rates low amid escalating inflation. This has brought many risks to the economy of this group of 5 largest economies in the world.
According to Selva Demiralp, an economics professor at Koc University in Istanbul, CBT has tried to offset the adverse effects of a low interest rate environment on the exchange rate by selling off foreign currency. Up to this point, Turkey's foreign exchange reserves have been mostly exhausted and after adjusting for swap arrangements, net foreign reserves have dropped to negative levels.
Demiralp also said that for an economy with a current account deficit of about $8 billion a month, a negative drop in net foreign exchange reserves is alarming, as it could disrupt trade, cut supply chains and halt production not only of Turkey but also of partners in the current global production network.
Türkiye's GDP per capita will be $15.000
"Turkey will need to contain inflation, protect financial stability and put the economy on a path of sustainable growth regardless of the election outcome," analysts at JPMorgan said.
Experts also note that the country's prospects will depend on the extent to which it returns to normalcy. “If policies are moved to more orthodoxy, deflation will be faster.”
Meanwhile, Mr. Erdogan showed complete confidence with his optimistic message. “We have overcome challenges in the past,” he said. We are now as strong as Türkiye.”
Even fairly certain of the economic outcome, Mr. Erdogan cites the success of his 20 years in power that has brought Turkey's GDP per capita, a measure of the nation's prosperity, from about $3.600 to $10.650 today. "And the number that will definitely be reached in the next few months is $15.000," said President Recep Tayyip Erdogan.
Turkey's GDP per capita stood at $3.641 in 2002, a year before Mr. Erdogan became Prime Minister and reached $9.661 in 2021, according to World Bank data.
Meanwhile, analysts expressed concern as Türkiye's economic crisis showed signs of worsening after Mr. Erdogan topped the poll. Analysts fear Erdogan's victory could lead to further instability with high inflation and the lira slipping to record lows against the euro and dollar having lost nearly 80% of its value in the past five years.
Turkish President Erdogan, Turkey's longest-serving leader, will extend his rule into a third decade - until 2028 - if he wins more votes in a second round vote on May 28.
Nearing the decisive days, Mr. Erdogan received more good news when he won more support from Mr. Sinan Ogan - who ranked 3rd in the first round of elections. If he gets 1% of the vote from Mr. Sinan, incumbent President Erdogan will win the second round of the election and stay in power.
The International Monetary Fund (IMF) in April lowered its forecast for Turkey's economic growth in 4 to 2023% but raised its forecast for next year to 2,7%.
