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: Türkiye. 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 Türkiye plunging into the red.Also read: Reserve Bank's Monetary Policy Committee likely to hold rates in August
Proponents of the Erdonomics policy argue that in spite of high inflation, Türkiye has been showing positive and robust economic growth (11.4 percent in 2021 & 5.6 percent in 2022). This is despite the pandemic-induced uncertainty and recessionary economic outlook.
Despite these seemingly robust economic growth numbers, it is hard to present a rosy economic picture of Türkiye. The high inflation is rapidly taking a toll on the purchasing power of the locals, and much of the brunt is borne by the poor and the middle class, who are struggling to make ends meet in such a highly volatile economic scenario. Price volatility has also forced businesses to reduce their planning horizon, which may have implications for the country’s long-term growth.
Vendors too are refusing to make supplies on credit and in some cases, seeking payments in US dollar, thus putting additional pressure on an already depreciated lira. All of this will have a grave impact on the long-term productivity and growth prospects of the country.
With the surprise re-election of Recep Tayyip Erdogan as president in May 2023, the chances of Türkiye returning to a more traditional economic approach have diminished. However, experts argue that Türkiye has no other option but to return to economic orthodoxy.
These claims find some backing in recent developments surrounding Türkiye. The president linked Türkiye’s changed stance on Sweden’s entry into NATO with his nation’s bid to join the EU. If Erdogan hopes to make it happen sometime in the future, he has to signal to the EU today that he is ready to align his country’s economic policies with those of the European bloc. Moreover, with the long-pending sale of the F16 fighter jets by the US to Türkiye, Erdogan may be gradually making a political shift to the West. If that happens, Western economic thinking will eventually follow.Also read: India's trade and the Ricardian comparative advantage
Domestically too, the appointments of Hafize Gaye Erkan, a former Goldman Sachs managing director, as governor of the Turkish central bank, and Mehmet Simsek, a supporter of traditional economic policies as finance minister, have stoked optimism. More weight has been added to these voices after the central bank’s decision to raise the policy rate from 8.5% to 15% after a two-year freeze.
But having said all of this, President Recep Tayyip Erdogan has historically established huge control over the government as well as the central bank. With a history of sacking multiple high-level office bearers who held divergent viewpoints, only time will tell how much independence will be granted to the new appointees. Apart from that, the increased fiscal expenditure in order to fulfill the election promises, guarantees against currency depreciation provided to depositors will lead to additional inflationary pressures.
It remains to be seen whether Erdonomics proves to be sustainable or we have an economic crisis brewing? In any case, it will be a curious case of macroeconomic analysis.
Ishit Doshi is an MBA student at IIM Kozhikode
Shubhasis Dey is a Professor of Economics at IIM Kozhikode