Turkey’s Economic Rollercoaster: A Journey From Growth To Crisis

The signs of Turkey’s economy gradually emerging from the crisis are garnering attention from foreign investors who had previously withdrawn due to President Recep Tayyip Erdogan’s unpredictable past policies.

Turkey once hailed as one of the fastest-growing economies globally, now stands at the brink of an economic crisis, drawing parallels with countries like Argentina and Pakistan. The astonishing contrast between India’s 5% inflation rate and Turkey’s staggering 61% inflation rate in the last month underscores the severity of the situation. Examining the root causes reveals a complex interplay of historical significance, unorthodox economic beliefs, and the consequences of a leader’s policies.

With a rich history as the heart of the Ottoman Empire for over 600 years, Turkey remains a crucial bridge between the East and the West. Its tourism sector, boasting numerous historical sites, plays a vital role, ranking as the 15th largest in the world and contributing significantly to the nation’s GDP.

Turkey’s annual inflation rate in November showed a slight uptick, reaching 61.98%, compared to October’s 61.36%, according to the state statistics agency TUIK’s report. This marginal increase suggests a stabilisation trend, following a series of significant interest rate hikes. Consumer price growth, on a steady incline over six consecutive months of rate hikes, began to moderate after the borrowing cost surged from 8.5% to 40%.

Analysts predict a final rate hike of 2.5 percentage points at the central bank’s upcoming policy meeting on December 21, with expectations of a stable policy rate in the early part of next year. Recent data indicates that higher borrowing costs are starting to decelerate consumption, aligning with the central bank’s objectives.

Turkey’s gross domestic product (GDP) saw a modest rise of 0.3% between July and September, a significant slowdown compared to the 3.3% increase between April and June. The signs of Turkey’s economy gradually emerging from the crisis are garnering attention from foreign investors who had previously withdrawn due to President Recep Tayyip Erdogan’s unpredictable past policies. The cautious optimism in response to the data reflects the ongoing efforts to navigate the economic challenges and restore investor confidence.

Economic Crisis Unveiled

In October of 2022, Turkey witnessed a significant surge in inflation, reaching 85%. Now, in the aftermath of the earthquake, projections indicate that inflation is anticipated to persist above 40% for the coming months. While conventional monetary policy suggests that central banks typically raise interest rates to combat inflation, Turkey has taken an unconventional approach.

President Erdogan has opted to continually cut interest rates despite the soaring inflation, driven by his belief that interest is the ‘mother and father of all evil.’ This perspective is rooted in Islamic principles that consider interest on loans as usury, deeming it forbidden. Erdogan’s steadfast commitment to reducing interest rates has led to the dismissal of numerous officials within Turkey’s central bank who were deemed unsuccessful in achieving the desired rate cuts.

The economic landscape in Turkey, shaped by these unorthodox policies, raises questions about the effectiveness of such an approach in managing inflation and addressing broader economic challenges. The clash between economic principles and religious considerations adds complexity to the decision-making process within Turkey’s monetary policy, with implications for the nation’s economic stability in the months ahead.

Pandemic Fallout

The COVID-19 pandemic exacerbated Turkey’s economic woes, leading to a decrease in consumer spending, a downturn in tourism, and disruptions in global trade. In response, Erdogan attempted to stabilize the Lira by injecting billions of dollars from foreign exchange reserves. However, these efforts proved insufficient as two principal factors precipitated Turkey’s economic collapse.

Dollarization and Trade Deficit

Dollarization emerged as a significant challenge, with a growing dollar-based economy within Turkey. As citizens increasingly turned to foreign currencies, the government introduced a Lirarization strategy, attempting to stabilize the Lira by compensating those holding foreign currencies with more Liras. However, economic deterioration forced the government to print more money, further devaluing the currency.

Simultaneously, Turkey’s status as a net importer left it vulnerable to global economic shifts. The rise in U.S. interest rates post-COVID-19 led to reduced spending in the U.S., impacting Turkey’s exports. The country faced rising costs for imported raw materials priced in dollars, depleting foreign reserves. Despite the evident need to raise interest rates, Erdogan hesitated, fearing the potential impact on economic growth and his chances of re-election in 2023.

Recent Developments

Erdogan’s re-election in May 2023 marked a turning point. Appointing a new economic team, he eventually conceded to raising interest rates to combat inflation. The Central Bank implemented a series of rate hikes, leading to a drop in inflation to 38.30% in June 2023. However, by September 2023, inflation had surged again to 61.5%. Currently, the Central Bank maintains a policy rate of 30%, emphasizing its commitment to monetary tightening to curb inflation and control price instability.

Turkey’s economic journey reflects the delicate balance between growth and stability, with President Erdogan’s unorthodox policies playing a pivotal role. As the nation grapples with the aftermath of an economic crisis, the path to recovery hinges on sustainable policies that address both inflationary concerns and long-term growth prospects.

Effects on the Region

Turkey, situated at the crossroads of Europe and Asia, serves as a crucial bridge between the two continents, overseeing the Straits of Bosphorus and the Straits of Dardanelles. These waterways connect the Mediterranean Sea to the Black Sea, making them strategically vital.

The significance of these straits amplifies for Turkey due to the Black Sea being the only water body where Russia can maintain a warm water port throughout winter, unlike those in the Baltic Sea and the Pacific Ocean, which freeze. The straits play a pivotal role in facilitating the transportation of grains such as wheat, barley, and maize from Russia and Ukraine.

According to a report by the BBC, approximately 20 million tonnes of grain were delayed in the port city of Odesa, Ukraine. Before the conflict, the majority of Ukraine’s wheat, maize, and sunflower oil were exported through its Black Sea ports.

In response to the crisis, a Black Sea initiative (grain deal) was brokered with the involvement of Russia, Turkey, the UN, and Ukraine. Turkey’s control over the straits proved instrumental in mediating and facilitating the agreement, allowing the grains to reach the global market. The deal became essential as some ports suffered damage, were blocked by mines, or fell under Russian control, making the demining process a challenging and cautious undertaking for Ukraine.

The war and subsequent sanctions on Russia, coupled with the naval blockade in the Black Sea, disrupted the shipment of crucial grains. The UN estimates that over 47 million people are at risk of facing food shortages due to these challenges.

Furthermore, Turkey faces geopolitical challenges on multiple fronts. The Russia-Ukraine War to the north, the Nagorno-Karabakh Conflict to the east, and the Syrian Civil War and Gaza Conflict to the south and west respectively surround the country. As the sole Asian country in NATO, Turkey serves as a vital base for NATO operations in the region. Southern Turkish airbases, for example, have facilitated US Air Force airstrikes in Syria and Iraq during the civil war and the conflict with ISIS.

The potential destabilization of Ankara’s economy could escalate conflicts in the already volatile region and lead to the possible Balkanization of the country.