VISITORS IN Türkiye are often surprised to discover that in a country supposedly plagued by economic malaise, restaurants, at least in the big cities, are full of customers. But appearances are deceptive. A big reason for the turmoil is that middle-class Turks would rather spend their income today than watch inflation, officially measured at 55% yoy but widely seen as much higher, burn through their savings tomorrow. .
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Turkish President Recep Tayyip Erdogan bullied the central bank into cutting interest rates in the face of soaring prices, allowing the pound to fall. He hoped it would boost the economy by making exports cheaper and encouraging domestic production. The policy mix, repackaged as Turkey’s “new economic programme”, would bring inflation down to single digits before presidential and parliamentary elections this year, its finance minister has promised. Things didn’t go as planned.
Imports are still necessary but are now much more expensive. Consequently, they eclipsed exports, leading Turkey to its largest absolute current account deficit in four decades. Annual inflation fell by 85% last year, but remains by far the highest in the OECD, a group of predominantly wealthy countries. Growth continues, less thanks to exports than to an unsustainable surge in consumption. Mr. Erdogan’s economic model seems to have run its course.
The poor economy, compounded by earthquakes that killed more than 50,000 people in the south of the country in February, has clouded Erdogan’s outlook. Opinion polls show him trailing joint opposition presidential candidate Kemal Kilicdaroglu by four points or more. For a populist strongman who enjoys a slavish press and control over the country’s institutions, this is hardly insurmountable. But it is the biggest hole Mr Erdogan has faced before any major election.
How he plans to get out of it remains unclear. The elections are set for May 14, with a second round on May 28 if no candidate obtains an absolute majority in the presidential election. More happens in Turkey in two months than in most countries in two years, but Mr Erdogan seems to be running out of ideas, especially when it comes to the economy. Sensing a historic opportunity, the opposition is closing ranks. On March 22, the country’s main Kurdish party said it would not field its own presidential candidate, as feared, suggesting it would support Mr Kilicdaroglu and avoid splitting the opposition vote.
Many fear that Mr. Erdogan may return to unrest. One option could be a new confrontation with Greece over maritime borders, says Selim Koru of Turkey’s Economic Policy Research Foundation. An election in Greece, now also expected in May, runs the risk of a confrontation (of words or, at worst, of weapons). Domestic politics can favor warm heads over cold heads. “I’m not sure these guys will go quietly,” Mr. Koru says of Mr. Erdogan and his entourage.
When it comes to the economy, the Turkish leader’s options are limited. Over the past three months, the government has increased the minimum wage by 55%, more than doubled the basic pension and passed a law allowing millions of Turks to benefit from early retirement. Mr Erdogan could announce further donations during Ramadan, which began on March 23. His best hope, however, is that the economy keeps going until the election. It rose 5.6% last year, largely thanks to ridiculously cheap loans and booming consumer demand.
Mr. Erdogan holds all the levers of economic and monetary policy in his hands, but pulls them in opposite directions. Cuts in the benchmark interest rate, of more than ten percentage points since 2021, pushed the pound to new levels last year. This helped exports reach a record $254 billion. Imports, however, jumped to $364 billion (40% of GDP), also a new high. The current account deficit, Turkey’s balance of payments with the rest of the world, soared to $10 billion in January.
Emergency measures ended a run on the pound in 2021. But since it started falling again last year, Turkish authorities have rationed bank loans and sold billions of dollars in foreign exchange reserves, leaving central bank coffers depleted. After losing 80% of its dollar value in five years, the lira has now stabilised, but only at the expense of the exporters Mr Erdogan’s model was meant to benefit from. Turkish exporters are now saying the currency is overvalued and reducing profits. “They have become addicted to the exchange rate,” explains Cevdet Akcay, an economist. “They were thrilled, and now they’re complaining again.”
Ordinary Turks, meanwhile, have to foot the bill for Mr. Erdogan’s experiment, in the form of a cost-of-living crisis. Apart from managing the exchange rate, the government has done virtually nothing to control price growth. On March 23, the central bank kept the benchmark interest rate unchanged at 8.5%. Adjusted for inflation, credit in Turkey is cheaper than anywhere else in the world.
The economy runs on borrowed time, says Selva Demiralp of Istanbul’s Koc University. “They are trying to keep the current system going until the election, before it explodes,” she said. Without a return to factory settings, Turkey could soon face another currency crisis and another spike in consumer prices. Controlling inflation will be difficult enough for a new government, says Akcay. “For this one, it became impossible.” ■
