For four years, Erdogan has been trying to fight inflation at home with interest rate cuts. Last week, for the third time since September, interest rates were cut by a full percentage point to 15 percent, while annual inflation has risen above 20 percent again.
Economics is not an exact science, but some principles seem undisputed. One is that inflation can best be combated by raising interest rates. A higher interest rate makes money more expensive, so that the amount of money decreases or rolls less quickly. In many Western countries where inflation is now rising, interest rates are already being raised – New Zealand even announced a second rate hike on Wednesday – or there is increasing pressure to do so in the short term, such as in the United States or Great Britain.
Erdogan thinks otherwise. He calls interest rates ‘the real enemy’ and argues that higher interest rates lead to higher inflation and undermine economic growth. If there is something to be said for this view in theory, practice has so far proved unruly. The problems of the Turkish economy – still one of the success stories among the emerging countries ten years ago – are only increasing.
Erdogan’s policies have led to a massive fall in the lira. On Tuesday, the currency lost another 15 percent against the dollar and the euro. That means that Turks now have to pay 14 lira for 1 euro. For comparison: four years ago 1 euro cost only 3.5 lira and at the beginning of this year 7.5 lira. “It’s a crazy price drop, but also a reflection of the crazy monetary policy that is currently being conducted,” analyst Tim Ash wrote in a report on Turkey’s economy this week.
The cheap lira is good for exports and advantageous for foreign tourists, but the disadvantages are much greater. The Turkish population itself is in trouble because of this. It leads to impoverishment because all imported items become more expensive. But the state is also shooting itself in the foot. No less than 60 percent of the foreign debt totaling 446 billion dollars is denominated in dollars and euros. Not only the state, but also companies have borrowed in this currency because the interest on it was much lower than on loans in lira.
That debt hangs like a millstone around Turkey’s neck. Because GDP is earned in liras, it is becoming increasingly difficult to meet interest and repayment obligations. In November and December, Turkey must repay 13 billion dollars in debt. The country doesn’t have the money for that. Another major disadvantage is that the Turks themselves want to get rid of their liras, because they are decreasing in value. They exchange it en masse for dollars and euros, which further exacerbates the depreciation of the lira.
The governors of the Turkish central bank who point this out to Erdogan are invariably fired. In two years’ time, three bank presidents have already been fired. One of them, Semih Tumen, wrote on Twitter this week: ‘We must stop this irrational experiment that has no chance of success. Instead, there must be policies that protect the value of the Turkish lira and serve the well-being of the people.’
The well-known Turkish economist Daron Acemoğlu – a professor at the Massachusetts Institute of Technology (MIT) – said he saw one bright spot at a Turkish business conference last month: Erdogan’s economic mismanagement increases the chance of a return to democracy. Acemoğlu, co-author of the book Why Nations Fail, said Turkey – “after Mali” – has experienced the worst institutional deterioration in the world in the past five years. In 2016, a coup attempt took place in Turkey that has undermined both the rule of law and the economy. With his interest rate policy, Erdogan now seems to be doing that with his own position.
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