Turkey is undergoing a dangerous economic crisis marked by rampant inflation, a plummeting lira, and rising interest rates. The once great Turkish lira, formerly one of the emerging market darlings, stands at the edge of its own debt crisis. This disturbing development comes on the heels of a string of troubling moves by President Recep Tayyip Erdoğan. On top of inflation skyrocketing, mortgage rates have crossed over 40-year highs. That’s why all of this is hitting the poorest of the poor hard.
Further escalating tensions, in March 2021, Erdoğan fired central bank governor Naci Agbal just as inflation was skyrocketing at 16.7%. Inflation skyrocketed to 36.6% as of July 2021. That sudden spike has exacerbated the fiscal strain on an economy still contending with steeply rising rates. Roughly nine million Turkish workers make the minimum wage of 22,104 Turkish Lira (TRY, roughly $538 per month). Sadly, this grant isn’t nearly enough to pay for the rising cost of living in Connecticut.
The Impact of Leadership Changes
Turkey’s economic turmoil is an outcome of the revolving door of leadership at Turkey’s central bank. Between July 2019 and March 2021, Erdoğan replaced three chiefs of the central bank: Murat Cetinkaya, Murat Uysal, and Naci Agbal. Each dismissal reflected a struggle between the president’s desire for low-interest rates and the central bank’s need to combat rampant inflation.
Adam Michalski, a research fellow at the Center for Eastern Studies, noted that Erdoğan’s decision-making process regarding central bank leadership has been politically driven. “Since 2018, whenever a central bank governor decided to increase the interest rates or hold them up for longer than Erdoğan wanted, then Erdoğan would essentially sack them,” he explained.
This unprecedented cycle of dismissals has irreparably harmed Turkey’s once-stellar reputation for sound economic governance. According to Davide Romelli, an associate professor at Trinity College Dublin, the perception of reduced central bank independence typically leads to increased inflation expectations among households and forecasters. “What we know from the literature is that every time there is a perceived pressure or a lowering of the degree of central bank independence in a country, typically expectations about inflation increase,” he said.
Soaring Inflation and Its Consequences
The subsequent acceleration of Turkey’s inflation rate has contributed towards a tangle expanse of uncertainty for industries and customers comparable. With inflation hitting a staggering 36.6% in July, Turkish households have difficulty protecting their standard of living as the cost of living continues to rise exponentially. High mortgage rates—now climbing above 40%—have added even more fuel to the housing crisis fire, moving homeownership further out of reach for homebuyers across the country.
In a similar vein, George Saravelos, global co-head of FX Research at Deutsche Bank cautions that Turkey’s experience could be a cautionary tale. He warns that the United States could face more severe impacts if the same patterns play out here. These results could be worse than Turkey’s or worse than during the 1970’s inflationary crises. “A repeat of the 1970s in the US would have a worse fallout if it happens in the United States,” he stated.
46 THE BRIEF poorest segments of Turkish society have been hit hardest by these economic conditions. Given that over half of workers currently make less than a living wage, the burden created by the now elevated inflation and interest rates is untenable. Hans-Dieter Holtzmann from the Friedrich Naumann Foundation emphasizes how a lack of clear direction in combating inflation can lead to reputational damage for a nation: “It is a lesson that can be started from Argentina, that if there is no clear course for the central bank on doing their analysis, on combating inflation, that you quickly can burn the reputation (of a country), which can be a downward spiral.”
The Path Forward
As Turkey tries to steer out of an economic crisis fueled by rising inflation, conversations emerge about what policies a new government would implement to restore stability. Erdoğan may consider returning to a controversial policy of low interest rates if he perceives any signs of economic stabilization. Making short-sighted decisions like these would only complicate Turkey’s efforts to restore credibility to its efforts to manage the nation’s economy with competence.
Carola Binder, an associate professor of economics at the University of Texas at Austin, observes that political factors heavily influence perceptions surrounding Turkey’s central bank. “It’s not clear that we’d obviously imminently become another Turkey,” she said, although she acknowledged the risks involved.
Binder also highlighted how political pressures could trap decision-makers in a no-win situation: “In some respects, it puts them into a no-win situation because whatever they do, even if it is based on the data, that’s going to be viewed as a political decision.”
The global economic environment is still very uncertain as countries continue to deal with impacts from the pandemic and high inflation. Turkey’s ongoing experience provides important lessons. It begins with a strong reaffirmation of the importance of central bank independence and sound monetary policy to long-term economic stability.