Inflation is getting out of hand: Erdogan once curbed inflation – now a price crisis could cost him his office
Turkey plunges into the worst inflationary crisis since the turn of the millennium. Only one can help: President Erdogan. But he continues to push for lower interest rates – even though he himself once led his country into an era of unprecedented price stability. In the end, the plight of consumers could remove him from office.
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What characterizes the prosperity of a society? Refrigerator! At least when it comes to Recep Tayyip Erdogan. In 2018, Turkey’s president cited high device sales to show how far the country has come under his leadership. “If every house has a refrigerator, we are at a certain level of prosperity,” said Erdogan.
Erdogan was criticized and ridiculed for his silly reasoning. A then politician from the opposition party CHP said: “Our citizens have had refrigerators in their homes for 40 years, only recently they emptied them themselves”, thus targeting the problem Erdogan was facing. Wanted to drown with: Heavy inflation in the country.
Inflation reached 25.2 percent in 2018 during the lira crisis. Hardly any Turk would have dreamed at the time that the situation would get worse. Four years later, the state of the Bosphorus is grim. The latest readings in May showed an incredible inflation rate of 73.5 percent compared to the same month last year.
For comparison: With the current inflation rate in Germany of 7.9 percent, it will take about seven years for Turkish consumers to recover to the level they are currently at if inflation remains the same. And those are just the official numbers.
Informal estimates, such as those by the ENAG Institute, assume inflation of 160 percent. The Erdogan government’s answer to these indicators: prison sentences for anyone who calculates inflation rates without the permission of the statistical office, as well as for those who report on indicators such as the ENAG Institute.
The particular tragedy of this development is that Erdogan himself was once the one who controlled inflation. In general, the early years of the presidential government were characterized by an economic boom. Between 2001 and 2011, gross domestic product (GDP) grew by an average of 18.37 percent. The starting point of the boom was a financial crisis, followed by radical reforms and capital aid from the International Monetary Fund (IMF) and the World Bank.
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Economic miracle on the Bosphorus
When Erdogan came to power in 2003, he initially helped drive this change. According to a 2015 analysis by think tank CEPR, his AKP party has ended military patriarchy in Turkish politics and implemented the reforms that have been initiated. The focus of the same: away from arbitrary decisions and policies prone to corruption, towards independent state institutions that act according to rules and not whims.
The success of this structural change quickly became apparent. The inflation rate – still in the triple digits in the 1990s – fell into the single digits, unemployment and poverty fell. Erdogan’s economic miracle was not just a boom for the rich: The Gini index, which measures the unequal distribution of wealth, fell from 41.4 points in 2002 to just 38.4 points in 2007.
At the same time, GDP per capita tripled during this period, indicating an overall higher level of prosperity. More importantly, consumers in Turkey have finally been able to enjoy stable prices after decades of appalling inflation – a privilege some German citizens are painfully aware of being deprived of.
Misery forces the Turks to give up
Old Turks are now going through the worst: goods have become increasingly expensive in the decades before the turn of the millennium. The daily surge has been affecting the most basic commodities out there for a while. The owner of an Istanbul cafe told Britain’s Spectator he bought plastic menus years ago so he could quickly manage and adjust prices – now he’s comfortable with his decision at the time.
In this misery, many Turks have only one option: renunciation. According to a survey by the “FAZ”, 63 percent of citizens prefer to leave their car at home, and almost as many do without meat. 58 percent of respondents wash their clothes less to save energy. And in about every third state, they sometimes suffer from hunger.
Erdogan himself sealed the fate of the “Tiger on the Bosphorus”
How did the country once known as the “Bosphorus tiger state” and working its way up into the ranks of the G20 get into this crisis? The most important factors, say the CEPR researchers, are Erdogan and the AKP itself: “The AKP government, which had previously supported economic opening, turned 180 degrees after becoming powerful enough and deciding against sanctions and the threatened by the military. ” Made a turn. The interference was gone.”
Gradually, Erdogan and his party bid farewell to the structural reforms of the early 2000s and returned to the practices that had plagued Turkey for decades – corruption and arbitrary decisions by political leaders.
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The failure of the EU accession negotiations dealt another blow to the former economic miracle. The collapse weakened the AKP’s commitment to the reform process on the one hand and the broad support of the Turkish population for changes on the other. In 2018, the EU Commission announced that the accession negotiations that had started in 2005 had “actually come to a standstill”.
At this point, Turkey was already in decline. The so-called Gezi Park protests in 2013, which Erdogan violently broke up, showed what kind of ruler Erdogan wants to be. The attempted coup in 2016 reinforced authoritarian tendencies. Economically, things were already going downhill – when GDP per capita peaked and has been falling since 2013, the Gini index rose again.
According to CEPR researchers, nothing illustrates this economic regression better than a procurement law introduced in 2002 under the auspices of the IMF. The law regulates purchases made by civil servants and other institutions with state funds. But Erdogan’s AKP is undermining the law by abandoning more and more industries and goods – paving the way for a resurgence of corruption.
The President is already pushing for even lower interest rates
This change went unnoticed internationally, leading to a cessation of capital flows to Turkey. In 2018, the country finally slipped into an inflation and currency crisis – now it turns out that this was just the beginning.
Four years later, Erdogan faces an economic crisis. Of course, Erdogan could have acted, or better: let act. The Central Bank of Turkey (TCMB) would have to raise interest rates drastically to stabilize the lira exchange rate. But it’s not that easy on paper for an independent central bank. Erdogan has sacked three central bank governors since the lira crisis began in 2018.
Only under the leadership of Nassi Agbal, the predecessor of the current TCMB governor Sahup Kavioglu, did Erdogan initially show a willingness to compromise. The country has to swallow “bitter pills” in the form of higher interest rates to curb inflation. That was at the end of 2020. The president’s patience proved to be too short: Barely a year later, TCMB began cutting interest rates again.
And even that is not enough for Erdogan. “This government will not raise interest rates,” he announced last Monday. “On the contrary, we will continue to lower interest rates.” Even triple-digit inflation cannot change the president’s mind. While such a tone is not new, the situation is slowly taking on “real virtues,” a forex strategist commented on Erdogan’s recent promises.
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2023 will show whether the Turks have enough Erdogan
Almost all scholars see two main explanations for the Presidential Course. On the one hand, Erdogan believes that low interest rates are the best way to stimulate the economy. That’s not necessarily wrong, but high inflation is thwarting any boost Turkish companies can make with cheap money.
Erdogan, on the other hand, advocates low interest rates in the context of Muslim rules: high interest rates are usury and therefore religiously prohibited. On such a line, Erdogan should score points with the more conservative sections of the population.
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But will that be enough to stay in power? Parliamentary and presidential elections are scheduled for next year in Turkey. If Erdogan sticks to his unconventional monetary policy, the inflationary crisis in Turkey could last not only in the election year, but beyond.
In the 2018 election, many voters would have forgiven Erdogan that the times of the “tiger state on the Bosporus” are over. But the end of a boom and a massive price collapse are two different things. 2023 will show whether the Turks are ready to re-elect Erdogan to the presidential palace when there is no more food on the table.
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