Record rise in inflation in Turkey calls into question Erdogan’s management

December’s year-on-year inflation, 36% the highest since 2003, the year in which the current Turkish president, Recep Tayyip Erdogan came to power, calls into question his personalist economic policy.

That sharp rise from 21% in November partly reflects the lira’s collapse between mid-November and December 20, when the Turkish currency lost 40% of its value in just five weeks, but then recovered.

The opposition considers that the inflation figures offered by the Statistical Institute (TÜIK) are not true and denounces the unusual disparity with respect to the producer price index, which reached 54% in November and 79.9% in December.

the worst is yet to come

Turkish economist Emre Deliveli dismisses these suspicions and believes that real inflation is only “slightly higher” than the official one.

He considers that farmers and manufacturers, more affected by the fall in the lira by having to import their raw materials, have not yet passed their real costs to the consumer, but they will do so gradually in the coming months.

“The worst may be yet to come,” fears Deliveli, recalling the sharp increases of 25% in natural gas prices for homes and 50% for industry, with similar increases for electricity and traffic rates, in force since 1 from January.

The 50% increase in the minimum wage, announced in December, is good news for workers who have seen their purchasing power diminish due to inflation, but employers will pass this expense on to consumers, he warns.

Deliveli owns a hotel on the Turkish Aegean coast, where “half the staff are paid this minimum wage,” which is common in Turkey, so he will have to increase his total operating expenses by 40%, he calculates.

By receiving 80% to 90% of its income in foreign exchange, the fall of the lira seems favorable for its business, but inflation, together with the shortage of clients due to the pandemic, erodes profits.

Export soars

The export, favored by the weak lira, has soared to reach a record figure of US $ 225,000 million in 2021, as Erdogan announced on Monday, a rise of 39% compared to the previous year’s figures, but also to those of exercises prior to the pandemic.

However, exporters are not happy either, Deliveli adds, because although new markets are opening up for them, Turkish manufacturing depends on the import of raw materials, which become enormously expensive with the devaluation of the currency.

In addition, the worst thing is not the decline in the lira but its fluctuation: it prevents planning for the future and poses a high risk in the event of a sudden change in value.

The recovery of the lira at the end of December, probably due to a massive intervention by public banks, seems to have momentarily stabilized the currency at values ​​close to 15 units per euro and 13 per dollar, but the future remains uncertain if the rates of interest keep dropping.

Guaranteed savings

The Central Bank lowered rates at Erdogan’s suggestion to 14% in December, which means that, against an official inflation of 36%, a bank customer has a negative rate of 22%: saving is impossible like that.

Erdogan defends this policy to stimulate investment and growth and refuses to allow a drastic rise in interest rates, which, according to economists, is the only sensible solution.

But this would translate into less consumption and less employment, a halt in the economy that the president does not want to risk before the elections scheduled for June 2023, analyzes Deliveli.

Instead, the Government offers fixed-term savings accounts with the value guaranteed by the dollar: if the lira falls more than the saver earns with interest, the State will pay the difference.

The measure aims to stop the flight of savers towards foreign currency accounts, but a new collapse of the lira would mean a huge burden on the public treasury, which either bankrupts the Central Bank or forces it to print money, still boosting plus inflation.

The question is whether the country can endure this inflationary cycle for another year and a half, until the appointment with the polls.

Deliveli believes not: “If he wants this strategy to work, Erdogan should call early elections very soon.”