Turkey's Economic Crisis
Q: Why is Turkey suffering economically?
A: As of January 22, 2022, Turkey’s Finance Minister Nureddin Nebati announced that he expects inflation to peak around 40% in the next couple of weeks. Continued inflation of the Turkish lira has caused intense and pervasive economic challenges, including rising prices for consumer goods and gas. While the decreasing value of the lira has been stabilized due to emergency measures enacted in December, concerns still remain about the future of Turkey’s economy, especially under the leadership of President Recep Tayyip Erdogan.
Q: What factors led to the escalation of Turkey’s economic state?
A: While inflation had been rising for some time due to high levels of debt and lending, President Erdogan decided to cut interest rates, compounding various economic problems. Officials at Turkey’s central bank were not in favor of lowering interest rates, especially given that central banks typically increase interest rates when faced with rising inflation. However, President Erdogan demanded to have them lowered, going as far as firing multiple central bank officials in October because of their opposition to decreasing interest rates.
By December of 2021, the lira had lost almost 50% of its value against the dollar over the course of the past year. As interest rates were cut, it became easier for individuals to borrow money and led to an overall decrease in the value of the lira. President Erdogan’s tendency to fire bank officials who contend with his economic strategy, regardless of the validity of their stances, has led to decreased confidence in the future of Turkey’s economy under his leadership. This decaying trust comes not only from within Turkey but also from international investors and economists.
Q: What is President Erdogan’s economic philosophy?
A: Since the start of President Erdogan’s time in power, he has been vehemently opposed to increasing interest rates. Erdogan believes that low-interest rates are conducive to a strong and healthy economy. When first entering office, Erdogan did not inherit a strong economy. Under his direction, Turkey became an upper-middle-class country with a positive economic future. He was able to accomplish this by encouraging lending and development, cultivating foreign investment, and investing in domestic projects such as infrastructure.
Erdogan’s administration managed to respond relatively well to the 2008 recession, as well as the Syrian refugee crisis that has afflicted the economies of other refugee accepting nations. While Erdogan’s economic philosophy did benefit Turkey in the decade following his election, he has not adapted his economic policies to changing conditions and circumstances.
Q: Why does President Erdogan insist upon keeping interest rates low?
A: When first elected, President Erdogan’s policy of low-interest rates served as a catalyst for economic growth. His economic philosophy became very popular as low-interest rates enabled Turkish citizens to advance their own financial status. However, like imposing taxes, raising interest rates is usually not popular. In an interview in 2021, President Erdogan stated, “Interest rates make the rich richer, the poor poorer.”
President Erdogan has incorporated his affinity for low-interest rates into one of his fundamental political stances. Moreover, he justifies his stance on interest rates through his Muslim faith and personal interpretation of the Quran, which outlines if, how, and when interest rates should exist.
Q: How is inflation typically remedied in other countries?
A: In almost every other well-functioning economic country, inflation is typically combated with raising interest rates. This makes borrowing more expensive, which decreases the likelihood of putting more money into circulation.
President Erdogan does not seem to hold this conventional economic belief, as he believes that low-interest rates reduce inflation.
Q: What are the political implications for President Erdogan’s handling of the current economic situation?
A: As a result of the economic crisis, multiple protests broke out in Istanbul in late 2021. The protests focused on the increase in poverty in Turkey and worked to lobby for an increase in the national minimum wage.
Additionally, Erdogan’s approval rating hit lows in December 2021 before rising slightly in January 2022 as a result of perceived economic mismanagement. The next election is scheduled for June 2023, but President Erdogan could call for an election before that. It is not unlikely that the continuation of the decaying value of the lira and poor economic conditions would put President Erdogan’s job in serious jeopardy. Moreover, if the proper measures are not enacted to make long-term progress on the economy, Erdogan’s political party will most likely suffer the consequences as well.
Q: What does this mean for the U.S.-Turkey relationship?
A: The U.S.-Turkey relationship has been contentious at times over the last five years. For example, there was widespread criticism of President Erdogan by U.S. lawmakers and officials when he purchased Russian missile defense systems. Also, the U.S. allied with Turkey’s foe, the People’s Protection Units (YPG) in counterterrorism operations in Northern Syria. Lastly, further alienating Turkey from the West, President Erdogan was not invited to President Biden’s summit on democracy.
The economic crisis, if it worsens, will likely lead to widespread criticism of Erdogan’s leadership and may continue to alienate Turkey from the West. Economic challenges within Turkey could force Turkey to be less supportive of NATO, at least financially, which would seriously strain relations Turkey has with the West, particularly the U.S. Simultaneously, these developments may push Turkey to develop better relationships with like-minded autocrats, such as Vladimir Putin or Xi-Jinping.