President Erdogan’s Re-Election leads to More Risky Economic Policy for Turkey

After winning re-election, Turkish President Recep Tayyip Erdogan has expressed his continued support for his unconventional economic policies that have resulted in economic instability. He recently declared in his victory speech that he has the ability to solve Turkey’s economic problems.

However, most analysts and economists have a different opinion. The value of the Turkish lira has dropped to its lowest point in history against the dollar, and foreign investors have been put off by the president’s refusal to divert from what has been dubbed an eccentric economic course.

Rather than taking the conventional approach of raising interest rates to combat inflation, which most economists recommend, President Erdogan has repeatedly lowered rates and argued that cheap credit would stimulate manufacturing and exports. However, his strategy has also worsened inflation, which is currently running at a staggering 44%, thereby eroding the value of the Turkish lira and draining the little foreign reserves available to the government.

As a result, the prices of imported goods, which include energy, medicine, automobile parts, and fertilizer, have increased. This has made it difficult for consumers to afford daily necessities, and it has raised the cost of debt payments for households and businesses that borrowed money from foreign lenders. The national budget is experiencing considerable strains, with the February earthquakes in southern Turkey estimated to have caused more than a billion dollars in damage, or roughly 9% of the country’s annual economic output.

President Erdogan, however, embarked on a pre-election spending spree to attract voters, increasing salaries for public sector workers and providing payouts for retirees. This increased growth, but many economists are concerned that such expenditures will only fuel inflation.

To encourage Turks to keep their savings in lira, the government guaranteed their balances against currency depreciation, which adds to the government’s potential liabilities.

While there are reports that Mehmet Simsek, a former finance minister and deputy prime minister who is well-respected in financial circles, may be appointed to the cabinet by President Erdogan this weekend, critics are skeptical if this would make a significant impact. Turkey’s more-than-$900 billion economy is currently the eighth largest in Europe, and the president has used his country’s geopolitical influence as a power broker between Russia and European allies to further strengthen his position.

President Erdogan’s growth-oriented policies that lifted millions of Turks into the middle class built his electoral success two decades ago. However, the expanded economy was unsustainable and resulted in a cost-of-living crisis. Despite this, President Erdogan stubbornly persisted in lowering interest rates and firing central bank chiefs who opposed his approach. The pandemic has only made matters worse by reducing the demand for Turkish exports and limiting tourism, a primary source of income.

President Erdogan is likely to maintain his expansionary policies until the next local elections next year, leading some economists to believe that Turkey will “muddle through.” However, Mr. Hakan Kara, the former chief economist of the Central Bank of Turkey, predicts that the country will have to make difficult decisions in the near future. Inevitably, Turkey will have to choose between returning to conventional policies or deviating even further away from the free market economy and implementing micro-control measures, both of which will likely result in painful adjustments.