Turkiye provides a curious case of macroeconomic analysis, with the country following an unconventional economic policy—backed by President Recep Tayyip Erdogan—of keeping interest rates low, and not high, to combat sky-high inflation. It's not working yet, and a change seems to be brewing
Turkish President Recep Tayyip Erdogan
Image: Ludovic Marin / AFP
The theme for the past two years when it comes to macroeconomics has undoubtedly been nothing but inflation. We have seen increases in policy rates at a historical pace across countries and continents.
However, there has been one notable exception i.e., the 8th largest economy in the Eurozone area: TĂ¼rkiye. Turkish President Recep Tayyip Erdogan, who largely drives the economic policy of the nation believes that high interest rates are a cause of inflation rather than its remedy.
He also believes high inflation can be fought by keeping interest rates low, which will keep borrowing costs low for producers, who in turn will pass on the lower costs to consumers. This approach which is at a crossroads with the classic economic idea of fighting inflation through higher rates and tight monetary policy, has been coined ‘Erdonomics’.
The policy actions have, however, failed to control inflation as prices in the country and have risen by a gigantic 72 percent in 2022. Policymakers argue that inflation has fallen to 38 percent in June 2023 but it has been largely influenced by a fall in global crude oil prices. Even at 38 percent, the number remains strikingly high and is causing severe hardships to Turkish locals and businesses.
The value of the Turkish Lira has depreciated, reaching a value of 23.3 against the US dollar, which is more than five times the exchange rate five years earlier. Efforts have been made by the government to control this depreciation through exchange controls, and by the central bank through extensive forex market intervention. However, these measures have been largely in vain, resulting in the net forex reserves of TĂ¼rkiye plunging into the red.