On December 31, Turkish President Recep Tayyip Erdogan issued his annual New Year’s Day message, promising to grow Turkey’s economy into the world's top 10 by 2023.
Erdogan claimed his government had stabilized the Turkish currency’s roller-coaster exchange rate and fought “exorbitant price schemes” he attributed to global commodity prices.
“We have started a historic transformation in the economy by launching a process of growth in our country on the basis of investment, employment, production, exporting and current account surplus,” Erdogan said.
But that is misleading. In fact, news reports say that dramatic cuts in interest rates by Erdogan’s administration ended up driving prices ever higher, crashed the Turkish lira and roiled markets.
Far from transforming the economy, Erdogan’s policies likely added to the problems.
As the Financial Times reported on December 21, Erdogan’s decision to slash interest rates was intended to fight inflation, attract investments, create jobs and make Turkey more self-sufficient.
Trouble is, that flies against standard economic theory, which calls for raising interest rates, not lowering them, to reduce rising prices. Predictable damage followed.
Data from Turkey’s statistical agency released January 3 showed that the average price of goods and services like utilities, fuel and food in the month of December 2021 rose by 36% compared with the same month in 2020.
According to the Financial Times, that was the biggest jump in prices since 2002, when Turkey’s financial woes paved the way for Erdogan’s rise to the post of Turkish prime minister in 2003.
Some Turkish opposition members say inflation is much higher than the official numbers. Ali Babacan, head of the opposition Deva party, told the newspaper that earlier this year, electricity prices increased by as much as 125% for commercial users and 50% for households.
CNBC said the lira had dropped 44% against the U.S. dollar by year’s end. The plummeting currency hits hard, as Turkey depends on imports to grow food and make textiles.The producer price index rose 80 percent in 2021, CNBC reported.
Reuters reported in July that Turkey’s economy had a setback after having been one of the few countries to dodge an economic blow during the COVID-19 pandemic.
After becoming Turkey’s prime minister in 2003, Erdogan was able to lead the country to solid growth during the following decade. Even during the 2008 global financial crisis, Turkey benefited from investors seeking returns in emerging markets.
Erdogan’s grip on all institutions in Turkey, including the economy, grew after he survived a military coup in 2016 and purged perceived enemies in government, the armed forces and media. Following his re-election as president in 2018, the government named his son-in-law Berat Albayrak as finance minister and put the central bank under the ministry’s responsibility.
In November 2020, amid a foundering economy and lira, Albayrak resigned, citing health reasons. But The New York Times also cited the context of Erdogan’s economic policies and his “increasing interference in decisions by the Central Bank and in the judiciary, which has undermined the confidence of businesses and investors.”
“As foreign investment has dried up, rising inflation and unemployment have politically damaged Mr. Erdogan, who has long won popularity by delivering a middle-class lifestyle to Turks,” The New York Times wrote.
In December, Moody’s Investors Service reaffirmed its concern about Turkey’s credit. “The decision to maintain the negative outlook predominantly reflects the elevated policy unpredictability, in particular the central bank's monetary policy stance that is the cause of pressure on the exchange rate and volatile international capital flows,” Moody’s said.
The rating agency added: “The current economic policy stance will lead to significantly higher inflation over the coming months, eroding households' purchasing power and increasing the likelihood of a sharp slowdown in growth despite lower interest rates.”
The Economist referred to Erdogan’s interest rate cuts as a “zany monetary experiment” and said the outcome was a “crisis of his own making.” The latter comment came in December when Erdogan announced subsidies to protect the accounts of Turks with plummeting lira values.