Turkey’s Economic Crisis: How Unorthodox Policies Led to Un-Sustained Inflation In a G20 Country.

In April 2017, you could exchange 1 US Dollar for 3.50 Turkish Liras. But now, 1 US Dollar costs 14.75 Liras which is more than 4 times its original exchange rate.


Turkey has a big economy. It’s the 20th largest economy in the world but when you divide that by its massive population of over 84 million, it ranks at 91. Turkey’s economic crisis is about so much more than just rapid inflation and a plummeting currency. It’s about how people are struggling to make ends meet as their buying power falls and its young generation dreams of a life abroad.


Amidst the currency crisis, inflation is hitting a record high of 21% making things for the broken economy worse.


Why is This Happening?

Let us first dive a bit into macroeconomics to understand this issue. The Central bank sets a base interest rate to control economic activity in the country. When interest rates are lower, consumers are incentivized to spend their money. This means, there is high economic activity in the country causing excess demand which cannot be met by supply (at least in the short run). So, prices increase leading to inflation. Low-interest rates also mean less foreign investment coming into the economy as investors would not make much profit when interest rates are low, and this leads to depreciation of the country’s currency. So, the base interest rate set by the Central Bank should be moderated at regular intervals, to ensure inflation is stable.


However, Turkey’s President Mr. Erdogan says high-interest rates are “both the mother and father of all evils”. Since 2018, not only has he demanded interest rate cuts as part of an unorthodox strategy to grow but he has fired almost every senior official who opposes his vision. The low-interest rates have pushed inflation in the economy to a record-breaking 21%.


Usually, to slow down inflation, economists say, central banks should use monetary policy and raise interest rates to reduce activity in the economy thus leading to a fall in the inflation rate. But, Turkey’s central bank cut interest rates in Nov 2021 to encourage consumption. Turkey has done the exact opposite of what economists believe, which has led to its worst recession.


How Has This Affected People?

The cost of living in Turkey is going up exponentially. As days pass, more and more Turks are being pushed into poverty. More people are looking to buy homegrown products instead of importing from other countries. That’s just one way to keep prices down. Transportation prices are getting higher and owning a car has become nearly impossible for most people.


Many parents cannot afford to pay their children’s tuition fees anymore and younger people cannot find jobs that match their skillset so are forced to live on low-paying jobs.

1 in 5 young people in Turkey are out of work and most of them say that they cannot see a future for themselves in Turkey.


Long Term Effects:

Most economists believe that if The Central Bank of The Republic of Turkey continues to lower interest rates, the Recession would only get worse. It would become harder for Turks to afford basic necessities pushing the majority of its population into poverty.


The next Turkish Parliamentary Election is due to take place in June 2023 and leaders of six opposition parties in Turkey have signed a joint declaration outlining their plan to restore the parliamentary system if they win the 2023 elections. This is the only light at the end of the tunnel for Turkey for now. But will the opposition be able to overhaul the president and his policies? We will have to see.

 

References:

https://www.cnbc.com/2022/02/17/turkish-lira-nudges-downward-as-central-bank-holds-interest-rates.html#:~:text=Turkey's%20lira%20dipped%20slightly%20in,in%20line%20with%20analysts'%20expectations

https://www.theguardian.com/world/2021/dec/19/theres-jobs-but-no-money-turkeys-economic-crisis-begins-to-bite

https://www.bbc.co.uk/news/world-europe-59487912

https://en.wikipedia.org/wiki/2018%E2%80%932022_Turkish_currency_and_debt_crisis

https://ichef.bbci.co.uk/news/1632/idt2/idt2/c61e3475-3daf-4335-8bf4-4b1567525ec5/image/816


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