Erdogan, Recep Tayyip

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For Turkey, Erdogan Victory Brings More Risky Economic Policy

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The Turkish lira has hit a new low, and analysts see few improvements ahead as re-elected President Erdogan pursues unconventional economic policies.Since winning re-election, President Recep Tayyip Erdogan of Turkey has publicly doubled down on his idiosyncratic economic policies.“If anyone can do this, I can do it,” he declared in a victory speech last Sunday, referring to his ability to solve the country’s calamitous economic problems.His brash confidence is not widely shared by most analysts and economists.The Turkish lira dropped to a record low against the dollar this week, and foreign investors have been disheartened by the president’s refusal to stray from what is widely considered to be an eccentric economic course.Instead of combating dizzying inflation by raising interest rates and making borrowing more expensive — as most economists recommend — Mr. Erdogan has repeatedly lowered rates. He argues that cheap credit will boost manufacturing and exports.But his strategy is also fueling inflation, now running at an annual rate of 44 percent, and eroding the value of the Turkish lira. Attempts by the government to prop up the faltering currency have drained the dwindling pool of foreign reserves.As the lira’s value drops, the price of imported goods — like medicine, energy, fertilizer and automobile parts — rises, making it more expensive for consumers to afford daily costs. And it raises the size of debt payments for businesses and households that have borrowed money from foreign lenders.The national budget is also coming under increasing strains. The destructive earthquakes in February that ripped up swaths of southern Turkey are estimated to have caused more than a billion dollars in damage, roughly 9 percent of the country’s annual economic output.At the same time, Mr. Erdogan went on a pre-election spending spree to attract voters, increasing salaries for public sector workers and payouts for retirees and offering households a month of free natural gas. The expenditures pushed up growth, but economists fear that such outlays will feed inflation.President Erdogan in Istanbul last month. Foreign investors have been disheartened by his refusal to stray from what is widely considered to be an eccentric economic course.Sergey Ponomarev for The New York TimesAn effort to encourage Turks to keep their savings in lira by guaranteeing their balances against currency depreciations further adds to the government’s potential liabilities.Critics of the president’s economic approach were somewhat heartened by reports that Mr. Erdogan is expected this weekend to appoint Mehmet Simsek, a former finance minister and deputy prime minister, to the cabinet. Mr. Simsek is well thought of in financial circles and has previously supported a tighter monetary policy.“What Turkey really needs now is more exports and more foreign direct investment, and for that you have to send a signal,” said Henri Barkey, an international relations professor at Lehigh University. One signal could be Mr. Simsek’s appointment, he said.Mr. Barkey argues that Mr. Erdogan will have no choice but to make a U-turn on policy by winter, when energy import costs rise and some debt payments are due.Others are more skeptical that Mr. Erdogan will back down from his insistence that high interest rates fuel inflation. Kadri Tastan, a senior fellow at the German Marshall Fund, a public policy think tank based in Brussels, said that regardless of the cabinet’s makeup, he didn’t believe a policy turnaround was imminent.“I’m quite pessimistic about an enormous change, of course,” he said.To deal with the large external deficit and depleted central bank reserves, Mr. Erdogan has been relying on allies like Russia, Qatar and Saudi Arabia to help bolster its reserves by depositing dollars with the central bank or extending payment deadlines and discounts for imported goods like natural gas.In a note to investors this week, Capital Economics wrote that any optimism about a policy shift is likely to be short-lived: “While policymakers like Simsek would probably pursue more restrained fiscal policy than we had envisaged, we doubt Erdogan would give the central bank license to hike policy rates to restore balance to the economy.”Turkey’s more than $900 billion economy makes it the eighth largest in Europe. And Mr. Erdogan’s efforts to position himself as a power broker between Russia and the European allies since the war in Ukraine began has further underscored Turkey’s geopolitical influence.Mr. Erdogan, who has been in power for two decades, built his electoral success on growth-oriented policies that lifted millions of Turks into the middle class. But the pumped-up expansion wasn’t sustainable.As the lira’s value drops, the price of imported goods rises.Sergey Ponomarev for The New York TimesThe borrowing frenzy drove up prices, spurring a cost-of-living crisis. Still, Mr. Erdogan persisted in lowering interest rates and fired central bank chiefs who disagreed with him. The pandemic exacerbated problems by reducing demand for Turkish exports and limiting tourism, a large source of income.Mr. Erdogan is likely to keep up his expansionary policies until the next local elections take place next year. Until then, Hakan Kara, the former chief economist of the Central Bank of Turkey, said the country would probably just “muddle through.”“Turkish authorities will have to make tough decisions after the local elections, as something has to give in eventually,” Mr. Kara said. “Turkey has to either switch back to conventional policies, or further deviate from the free market economy where the central authority manages the economy through micro-control measures.”“In either case,” he added, “the adjustment is likely to be painful.” More

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    How Inflation Affects Turkey's Struggling Economy

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    Even before the pandemic, Turkey was trying to ward off financial meltdown. The crisis has accelerated as President Recep Tayyip Erdogan has doubled down on his unorthodox policies.The signs of Turkey’s disastrous economy are all around. Long lines snake outside discounted bread kiosks. The price of medicine, milk and toilet paper are soaring. Some gas stations have closed after exhausting their stock. Angry outbursts have erupted on the streets.“Unemployment, high living costs, price increases, and bills are breaking our backs,” the Confederation of Progressive Trade Unions said last month.Even before the coronavirus pandemic and supply chain bottlenecks began walloping the world’s economies nearly two years ago, Turkey was trying to ward off a recession as it struggled with mountainous debt, steep losses in the value of the Turkish lira, and rising inflation. But in recent weeks that slow-moving train wreck has sped up with a ferocious intensity. And the foot that’s pushing hardest on the accelerator belongs to the country’s authoritarian president, Recep Tayyip Erdogan.Why is this happening now?Turkey’s economic problems have deep roots but the most recent crisis was caused by Mr. Erdogan’s insistence on lowering interest rates in the face of galloping inflation — precisely the opposite tactic of what economists almost universally prescribe.Mr. Erdogan, who has ruled Turkey for 18 years, has long resisted that particularly painful prescription, but his determination to keep cutting interest rates even as the country’s inflation rate tops a staggering 21 percent appears to be pushing Turkey past a tipping point.Normally, investors and others look to a nation’s central bank to keep inflation in check and set interest rates. But Mr. Erdogan has repeatedly shown that if Turkey’s central bankers and finance ministers won’t do what he wants, he will get rid of them, having already fired three in two years.The value of the lira has nose-dived in recent weeks, and on Monday hit a record low — reaching 14.3 to a dollar, from about 7 to the dollar earlier this year — pushing some businesses and households that have borrowed money from abroad into bankruptcy. The currency’s steep decline means prices for imported goods keep rising. Shortages are common and people are struggling to afford food and fuel. The youth unemployment rate is 25 percent. The president’s popularity is sinking and his opponents have become emboldened.With an election coming up in 18 months, Mr. Erdogan seems convinced that his strategy will enable the Turkish economy to grow out of its problems. Most economists, however, say a crash is more likely.When did Turkey’s economic problems begin?“Interest rates make the rich richer, the poor poorer,” the Turkish President Recep Tayyip Erdogan said in a recent interview.Antonio Masiello/Getty ImagesMr. Erdogan’s aggressive pro-growth strategies have worked for him before. Since he began governing Turkey in 2003, he has undertaken expensive infrastructure projects, courted foreign investors and encouraged businesses and consumers to load up on debt. Growth took off.“Turkey was considered to be an economic miracle” during the first decade of Mr. Erdogan’s rule, said Kadri Tastan, a senior fellow at the German Marshall Fund based in Brussels. Poverty was sliced in half, millions of people swelled the ranks of the middle class, and foreign investors were eager to lend.But Mr. Erdogan’s relentless push to expand became unsustainable. Rather than pull back, however, the giddy borrowing continued.The increasingly unstable economy was caught in a bind. High interest rates attracted foreign investors to accept the risk and keep lending, but they would stunt growth. Mr. Erdogan was unwilling to accept that trade-off, and continued to support cheap borrowing as inflation took off and the currency’s value declined.And he insists that high interest rates cause inflation — even though it is low interest rates that put more money into circulation, encourage people to borrow and spend more, and tend to drive up the prices.“Erdogan has his own economic philosophy,” said Henri Barkey, a fellow at the Council on Foreign Relations.The economy seesawed between these conflicting goals until 2018 when growing political tensions between Turkey and the United States caused the value of the lira to topple.The political standoff eased, but the underlying economic problems remained. Mr. Erdogan kept pushing state banks to offer cheap loans to households and businesses and the borrowing frenzy continued. “Things never really normalized,” said Selva Demiralp, an economist at Koc University in Istanbul.When the chief of the central bank resisted pressure from the president to lower the 24 percent interest rate in 2019, Mr. Erdogan fired him, the beginning of a pattern.To prop up the lira, Turkish banks began selling off their reserves of dollars. Those stocks of dollars are now running low.The global economic slowdown caused by the coronavirus pandemic has added to the strains by limiting the sales of Turkish goods around the world. Tourism, which was one of Turkey’s most dynamic sectors, has also been badly hit.What is President Erdogan’s approach to interest rates and what do economists say?A protest against the economic policies of the government in Istanbul on Sunday.Murad Sezer/ReutersBy keeping interest rates low, Mr. Erdogan argues that consumers will be more eager to keep shopping and businesses will be more inclined to borrow, invest money in the economy and hire workers.And if the lira loses value against the dollar, he says, Turkey’s exports will simply become cheaper and foreign consumers will want to buy even more.That is true to some degree — but it comes at a heavy price. Turkey is quite dependent on imports like automobile parts and medicine, as well as fuel and fertilizer and other raw materials. When the lira depreciates, those products cost more to buy.At the same time, Mr. Erdogan’s disdain for conventional economic theory has scared off some foreign investors, who had been eager to loan Turkish businesses hundreds of millions of dollars but now are losing faith in the currency.And the lower rates go, the faster inflation rises. Over the past year, the lira has lost more than 45 percent of its value, and the official inflation rate has surged past 20 percent, although many analysts believe the rate on the streets is much higher.By comparison, an inflation rate of 6.8 percent so far this year in the United States (the highest in nearly four decades) and a 4.9 percent rate in the eurozone are enough to set off alarms.In Turkey, skyrocketing prices are causing misery among the poor and impoverishing the middle class.“We can’t make a living,” said Mihriban Aslan, as she waited on a long line to buy bread in Istanbul’s Sultangazi district. “My husband is 60 years old, he can’t work much now.” He has a small pension of 1,800 lira — which at the moment is worth about $125. “I sometimes do needle work at home to bring in extra money,” she said.Businesses would rather hoard goods than sell them because they don’t think they will be able to afford to replace them.Ismail Arslanturk, a 22-year-old cashier at a neighborhood grocery shop, complained that the price of green lentils has nearly doubled. “I don’t believe the economy will be fixed after this point,” said Mr. Arslanturk, who added he was forced to leave high school to help support his family. “I am hopeless.’’A currency exchange office in Turkey. Over the past year, the lira has lost more than 45 percent of its value.Emrah Gurel/Associated PressWhat has Erdogan’s response been to the intensifying crisis?The president has doubled down on his approach, asserting he will “never compromise” on his opposition to higher interest rates. “Interest rates make the rich richer, the poor poorer,” he said in an interview on national television last month. “We have prevented our country from being crushed in such a way.”The president has invoked Islamic precepts against usury and referred to interest charges on loans as the “mother and father of all evil,” and blamed foreign interference for rising prices. Analysts like Mr. Barkey of the Council on Foreign Relations said that such comments are primarily aimed at appealing to more conservative religious segments of the country that represent the core of Mr. Erdogan’s support.Turkey’s fundamental problem, Mr. Barkey maintains, is that it has an overly confident ruler who has been in power for a long time. “He believes in his omnipotence and he’s making mistakes,” Mr. Barkey said, “but he’s so surrounded by yes men that nobody can challenge him.” More

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    ‘Our Money Has No Value’: Frustration Rises in Turkey at Lira Crisis

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    President Recep Tayyip Erdogan’s insistence on directing monetary policy and sticking with low interest rates is draining confidence, economists say.ISTANBUL — Lines outside bread stores and gas stations; farmers defaulting on loans; impromptu street demonstrations. The signs of economic distress in Turkey are all too clear as the lira continues a dizzying slide.Sporadic protests have broken out around Turkey and the opposition parties have called for a series of rallies to demand a change of government after the lira crashed sharply last week. The latest week of turmoil follows months of worsening economic conditions for Turkish citizens. The currency has lost more than 45 percent of its value this year, and nearly 20 percent in the last week, continuing its downward trend on Tuesday. Economists have tied the currency crisis to President Recep Tayyip Erdogan’s direct interference in monetary policy and his determination to lower interest rates.The latest crash in the currency came after Mr. Erdogan gave a speech last week outlining his determination to keep rates low as a way of promoting economic growth. He reaffirmed his opposition to raising rates again in comments to reporters aboard his plane as he returned from a visit to Turkmenistan on Monday.President Tayyip Erdogan of Turkey addressing members of his party last week. He has said he will “never compromise” on interest rates.Murat Cetinmuhurdar/Ppo/Via Reuters“I have never defended raising interest rates, I don’t now and will not defend it,” he told the reporters. “I will never compromise on this issue.”There are rumblings of public dissent, unusual for a country where only officially sanctioned demonstrations are permitted and the main television channels and newspapers follow the government line.Scores of people have been detained for joining street protests. The police detained 70 people in several districts of Istanbul last Wednesday who were protesting the government’s management of the economy, after a record drop in the lira the day before.The Confederation of Progressive Trade Unions issued a blunt statement on Wednesday. “That’s enough. We want to make ends meet,” it read. “Unemployment, high living costs, price increases, and bills are breaking our backs.”An Istanbul shopping district last week. Some traders in the city said business was sharply down.Ozan Kose/Agence France-Presse — Getty ImagesNecla Sazak, an 80-year-old retired bank employee heading home with a bag of groceries, said she was surviving on credit cards.“Our purchasing power dropped — our money has no value anymore,” she said.Business has stalled around the country as inflation scares away domestic shoppers and causes producers to hoard goods.“I didn’t sell anything since the morning,” Asuman Akkus, the 29-year-old owner of a clothing store in Istanbul, said one recent afternoon. “It is deserted here this week and it is 100 percent because of the dollar.”Opposition parties have renewed their call for the government to resign and for Mr. Erdogan or Parliament to call early elections. Yet they are in a bind, without the seats in Parliament to force a vote for early elections and wary of triggering unrest that could prompt Mr. Erdogan to impose a state of emergency, which would suspend normal democratic procedures.Police officers detaining a protester during a demonstration in Istanbul last week.Bulent Kilic/Agence France-Presse — Getty ImagesMr. Erdogan, who is sliding in the polls, will not call elections before they are scheduled in June 2023, a political ally, Devlet Bahceli, leader of the Nationalist Movement Party, said last week. In the meantime, Mr. Erdogan ratcheted up the pressure on his opponents by detaining Metin Gurcan, a military and political analyst and a leading member of an emerging opposition party, DEVA, on charges of espionage.Mr. Erdogan has promised that low interest rates will help kick start the economy within three to six months, but economists said they detected little confidence in his policies at this stage.“I don’t think he has the confidence of the nation anymore,” said Atilla Yesilada, an investment analyst with Global Source Partners. “There’s an urgent problem of deepening poverty and the wheels of the economy are coming to a standstill,” he said.Some loyal supporters of Mr. Erdogan, when asked, insist that everything is fine, but even the pro-government columnist Abdulkadir Selvi, of the Turkish daily Hurriyet, said he disagreed with Mr. Erdogan’s economic policy. He recalled an episode during an earlier economic crisis in 2001 when a shopkeeper threw his cash register at the prime minister, sparking a countrywide revolt.Outside a currency exchange office in Istanbul last week. The Turkish lira has lost more than 45 percent of its value this year.Sedat Suna/EPA, via Shutterstock“We can’t ignore what is happening today,” Mr. Selvi warned. He added: “We should stay strong but we shouldn’t miss the fact that broad economic turmoil has broad political consequences.”Shortages are emerging, including in imported medicines and medical equipment, and even at bakeries, Mr. Yesilada, the analyst, said. A loaf of bread still sells at 2.5 liras, or about 20 cents, but bakeries are complaining that their costs are closer to 4 liras a loaf, he said. “Soon they are going to shut down bakeries and then we are going to have bread riots,” he said.The Turkish public talks of little but the economy.“We used to be able to go and have tea with our friends in a cafe somewhere, but now a glass of tea costs 7 liras and so we don’t go,” said Cansu Aydin, a high-school graduate. “Our social lives have come to a stop, and now it’s as if we are living just to survive.”Some Turks have expressed concerns over their ability to afford basic goods. Erdem Sahin/EPA, via ShutterstockOguzhan Yelda, 21, a student in Istanbul, said he worried especially about “utility bills and basic goods like oil, sugar, flour.” Many young people were leaving the country to take menial jobs as cleaners and waiters abroad, he said. “When I graduate, a bleak future awaits me.”Dogan Gul, 60, was sitting outside a bank in Istanbul on Monday, waiting for it to open so he could make a payment on a loan. “We cannot get by,” he said. “The rent has gone up from 1,500 liras to almost 2,500 liras since last year. I don’t know where this is all going.”He said he could not afford the cost of transportation to visit relatives.“For the future of my children, what can I say?” he lamented. “They are each trying to make sure they have a meal once a day. They can’t even think about the next day. They can’t plan their futures. This is not just the case for me but for all of Turkey.”For Yaman Ayhan, who sells clothing online, the answer is plain. “The leaders have to change,” he said. “Just a decision for snap elections would make the lira gain some value.” More