The Economist magazine predicts a bleak future for the Turkish economy

In times of extreme crisis it is important to have something to lean on. For a currency, this could be a central bank in able to keep inflation at bay, or a stable and predictable government to reassure nervous investors.

Since today’s Turkey has neither, its own currency in deterioration, the lira, had to seek help elsewhere.

On December 20, President Recep Tayyip Erdogan announced an unconventional plan to save the Turkish economy from the crisis caused by his policies, which involved the government insuring certain deposits. in lira against fluctuations in exchange rates.

In the short term, the scheme appears to have worked. However, the main driver of the increase was not the deposit insurance program, but rather the central bank, which has spent billions of dollars from its reserves. in decrease to buy the lira according to The Economist.

According to the report, the revival of the currency provided some time for Erdogan, who was suffering from deep political problems. But it masked, or even increased, the risks to the Turkish economy.

The report pointed out that the direct source of these risks is Erdogan’s obsession with low interest rates. For years, he has insisted, defying the laws of basic economics, that low rates reduce inflation rather than fuel it. Beginning in September, with Turkish inflation approaching 20%, Erdogan urged the central bank to reduce the benchmark rate four times, from 19% to 14%. This led to the collapse of the currency. Even after its recent rally, the lira lost nearly 40% against the dollar in 2021, more than any other major currency in the world.

Erdogan points out that the weak lira will be beneficial to the Turkish economy as it stimulates exports and attracts investors. But few Turks agree with him on this. In a recent survey, 94% of respondents said that consumption was negatively impacted. About two in three said they could not meet basic needs without taking out loans. Many believe that inflation is well above the officially announced rate of 21%.

high inflation

The rapid rise in food and energy prices has particularly affected the poor, who spend a greater share of their profits on necessities and there are long queues at shops selling subsidized bread.

Real wages have fallen and the class media Turkey, which swelled during the first decade of Erdogan’s government, is shrinking.

Since the beginning of December, Turkey’s central bank has used up at least $ 20 billion in foreign reserves to support the currency, sometimes acting alone and other times through state-owned commercial banks. In the two days following Erdogan’s announcement, Turkish banks bought 7 billion lire.

risks to public finances

Regardless of its effectiveness, the new system presents significant budgetary risks. And if a significant portion of Turkey’s nearly $ 300 billion in private savings is transferred in secured deposits, the sharp depreciation of the currency could get the country in trouble: “The system could collapse when faced with an exchange rate shock,” said Hakan Kara, a former chief economist at the central bank.

THE media faithful have declared Erdogan’s move a blow and the government has its tools to dissuade skeptics from speaking.

On December 27, Turkey filed a complaint against Dormus Yilmaz, the former central bank governor, and at least 25 others for criticizing monetary policy and other statements they did not like. Yilmaz accused the president of transforming the country in a “laboratory” of disconnected ideas.

But the strongest response to Erdogan’s policy has arrived in a press conference on December 23, where Vladimir Putin defended the Russian Central Bank’s recent interest rate hikes, saying: “Without them, we could end up like Turkey.”

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