June 26, 2022

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The collapse of the Turkish currency in the name of "economic freedom"

The collapse of the Turkish currency in the name of “economic freedom”

As a result of the policies of President Recep Tayyip Erdogan in the name of his country’s “economic freedom”, Turkey began its worst year with inflation in December, surpassing its maximum annual rate of 36% since 2002.
However, some observers believe that Turkey is sinking into a cycle of inflation, as the Turkish lira has lost nearly 45% of its value against the dollar in one year.

Erdogan believes that, contrary to traditional economic principles, higher interest rates will stimulate inflation. He reiterated the teachings of Islam that forbid interest to justify his policy.

At the behest of the head of state, the central bank – officially independent – cut interest rates by five points in four months, causing a new depreciation of the Turkish lira each time.

In parallel, Erdogan has fired three central bank governors since July 2019 and replaced the finance minister three times since July 2018 – most recently on December 2, amid chaos.

According to Turkish economists from the Inflation Research Group, the real inflation rate has reached 82.8% year-on-year, higher than official figures.

For people, rising costs of basic goods and services – especially food and energy – are becoming increasingly difficult to bear. On January 1, gas and electricity prices rose by 50% and 25%, respectively. In a year, the price of sunflower oil has increased by 86% and the price of bread by 54%.

Eighteen months before the next presidential election, official inflation has reached seven times the target set by the government earlier this year.

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This economic downturn could further erode Erdogan’s influence, which has already diminished considerably since he built his electoral victories on the basis of his promises of prosperity over the past two decades.

The president continues to pursue the same policies against all odds: on Monday he again praised the good performance of the Turkish economy with an annual growth rate of 7.4% in the third quarter of 2021 – especially thanks to increased exports due to lower prices.

“Thanks to the reforms we have achieved, we have succeeded in freeing the Turkish economy from its shackles and freeing Turkish democracy from training,” he said.

President Erdogan is betting on growth at any cost, ignoring fears of a monetary crisis and counting on investment, production and exports.

Some observers have suggested that the idea was to turn Turkey into an export power at a lower price than China. Exports rose 32.9 percent to $ 225.37 billion in 2021.

But last month, the major employers’ association, which represents 85% of exporters, issued a stern warning and called on him to rectify the situation.

He further added that “political choices have created new difficulties not only for the business world but also for our citizens” and called on the President to “return to economic policies applicable to the market economy.”

Faced with the rapid decline of the currency, Erdogan has taken a series of steps to curb this trend and improve his popularity: he has urged the government to offset any fall in the value of local currency bank deposits against the dollar, thus using public money.

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By December 30, the country’s net reserves had fallen from $ 12.2 billion a week to $ 8.6 billion. Many members of the opposition say the country’s money will soon be gone.

Under these economic conditions, Erdogan raised the minimum monthly wage by 50% on January 1, from 2,825 lira to 4,250 lira (approximately $ 310), which economists fear could exacerbate inflation.

“I am afraid all pay rises will disappear in two months,” wrote Chem Ostok Aldinsak, chief economist at the Turkish Employers’ Association, on Twitter.