Since 2002, Turkey’s GDP growth relative to other developing and emerging economies has been slow. This is a sharp contrast to the previous economic growth and prosperity that Turkey enjoyed in previous decades. In more recent years, Turkey’s economic situation has only gotten worse, exemplified by the sharp decline in the value of the Turkish Lira. Erdogan’s increasing authoritarianism has only exacerbated the crisis, depriving the country of much-needed investment. At the same time, Turkey’s external debt has increased rapidly over the past decade, having risen from $300 billion USD in 2005 to $1,100 billion ($1.1 trillion) by 2014. As the Turkish lira continues to depreciate relative to other currencies, successive bank governors have been unable to deal with the economic malaise that has faced the nation. Erdogan has refused to permit interest rate hikes to deal with their rising inflation. The economic situation in Turkey continues to deteriorate and it appears unlikely that their fortunes will change any time soon.
The role of Erdogan
President Erdogan has been directly responsible for creating and exacerbating Turkey’s economic difficulties. Following his rise to power, there was a sharp decrease in foreign investment. Between 2006 and 2008, FDI averaged $21 billion. However, since Erdogan’s accession to office, FDI has decreased, averaging only $10 billion between 2016 and 2018. At the same time, foreign ownership of Turkish equities and bonds has drastically fallen, from $92 billion in 2017 to $53 billion in 2018. This is the result of Erdogan’s increasingly authoritarian actions, as he has quelled the free and factual reporting of economic data by financial analysts. In 2016, Erdogan ordered the seizure of various private assets following the failed military coup. It is therefore unsurprising that Erdogan has prompted a decrease in foreign investment, as his authoritarian nature has created a sense of political instability, thereby deterring individuals from investing in Turkey.
In more recent years, Erdogan has held a tight grip on Turkey’s monetary policy. Over the past two years, Erdogan has removed three central bank governors. This is because of the reluctance of Erdogan to allow increases to the Turkish bank rate, as he believes that high-interest rates cause high inflation. Turkey had grappled with high inflation in the years leading up to the pandemic, as it had risen from 10% in 2017 to 18% by the end of 2018; interest rate hikes quickly suppressed this, with inflation falling below 10% in 2019. In March 2021, Naci Agbal, Turkey’s former bank governor, raised the bank rate from 17% to 19%. This move was designed to curb growing inflation in Turkey, which steadily climbed in 2020. At the same time, raising interest rates has the effect of encouraging foreigners to hold more Turkish Lira, due to the high bond yields that come with high-interest rates. Even though the markets responded well to Agbal’s interest rate rise, Erdogan quickly fired Agbal just a few months after his appointment. This quickly prompted an outflow of foreign capital, leading to the Lira further depreciating.
Rising inflation & Coronavirus
Turkey’s rising inflation can be attributed to its reliance on imports. As the Turkish Lira has depreciated due to the lower investor confidence in Turkey, inflation has risen. This is because of the rising costs of imports that come with a weakened currency. Following the Great Recession of 2008, Turkey’s current account deficit has grown. In 2016, the current account deficit was $33 billion; by 2017, it had risen to $47 billion. As a result, a depreciating Lira has made it more expensive for firms to import their manufacturing products from abroad, passing these higher costs onto consumers. This has led to cost-push inflation, with higher inflation further waning investor confidence, leading to a vicious cycle of a depreciating currency and higher inflation. Had the Turkish economy been more reliant on exports, a weakened currency would further boost economic growth.
The coronavirus pandemic has worsened the economic situation of Turkey more than most other nations. As economic situations become more tenuous, investors seek safer investments. As a result, the pandemic led to a sharp depreciation in the Turkish Lira, as investors sought safer currencies such as the US Dollar. Whilst developing and emerging markets provide a potentially larger return for investors, in uncertain times, investors prefer safer sources of income, as these markets tend to become more volatile. The result was the Turkish Lira depreciating from 1 USD:6 TRY to 7 TRY over the space of two months, between March and May 2020.
Ultimately, the economic peril that is currently being witnessed in Turkey is the result of Erdogan’s authoritarianism and subsequent poor monetary policies, alongside a reliance on foreign capital and foreign goods. Erdogan’s increasing power struggle has weakened investor confidence, resulting in the Turkish Lira depreciating. This has led to cosh-push inflation as the Turkish economy is heavily reliant on imports. However, as the Lira continues to weaken in value, the Turkish domestic market will only improve, prompting a stronger trade balance that should benefit the Turkish economy in the long run.