Erdogan's war cost for Turkey's “economic independence”

Analysts attributed inflation growth to 36.1 per cent last month (according to official figures), increasing the cost of imports, ranging from energy to many of the first materials Turkey's producers turn into exports.

These costs increased because of a historic collapse of the lira, which lost 44 percent of its value to the dollar last year.

But ultimately, analysts blame both inflation and the freedom crisis, Erdogan's fervent belief that high interest rates cause inflation.

The conventional theory says the opposite is true because high interest rates slow economic activity by making borrowing more expensive and providing incentives for people to keep their money in the bank.

Below is a summary of Turkey's economic puzzle:

How did the problems begin?

Calling high interest rates “na and the father of any evil”, Erdogan orchestrated a series of lower interest rates starting in September, which further undermined economists' confidence in the Central Bank's independence.

Erdogan, who has dismissed three central bank governors since July 2019, has refused to accept any responsibility for the decline of the lira or later price hikes.

I reject policies that will punish our people with unemployment, hunger and poverty”, he said last year, calling on his supporters to be patient.

The Turkish wave weakened on Monday (January 3rd), trading at 13.4 lira per dollar, following the publication of inflation data.

The lira dropped by $18.4 to the peak of the crisis last month, after it began about 7.4.

How serious is the crisis?

Turkey's official inflation target is five percent, but it has remained suspicious in the past two years.

Monthly reading of inflation has become a controversial political issue, with opposition leaders claiming that the Government is reporting less current price increases -- a charge government denies.

Independent economic institutions such as Inflation Research Group (ENAG) calculated last month's annual inflation rate at 82.8 per cent.

Even in figures they invent, domestic producers' inflation is nearly 80 percent,” wrote on Twitter the leader of the main opposition party, Kemal Kilicdaroglu.

The opposition is demanding early elections to address the crisis, but Erdogan insists they will be held as scheduled in June 2023.

The cost of living is expected to increase further, especially after the price of electricity and consumer gas bills increased by about 50 percent and 25 percent, respectively.

What does Erdogan expect?

The president is giving priority to growth, in the economy expected to expand by nine per cent to 2021 and 3.5 per cent to 2022.

During another wave crisis in 2018, the central bank aggressively raised the main interest rate, but the likelihood of a repeat under a more determined Erdogan is low.

Erdogan has earlier cited Islamic rules against allegations to justify failure to meet standards, suggesting that those trying to preserve their savings by turning them into currency and gold were traitors.

Some experts believe Erdogan may try to make Turkey more attractive as a centre for cheap production, with local salaries worth less in dollar terms.

During a television talk in Istanbul, Erdogan on Monday welcomed a 32.9 per cent increase year-on-year in exports, amounting to $225.3 billion in 2021.

A man holds goods on his back in a shopping area in Istanbul, Turkey on Tuesday, November 2nd, 2021. Many Turkish consumers are facing growing difficulties, as prices of food and other goods have risen in recent years.

How has Erdogan responded?

Aware of the importance given to the freedom value against the dollar and euro by consumers and businesses, Erdogan unveiled a new policy last month to protect local currency against fluctuations in the exchange course.

While the lira has increased since then, experts question whether it is stable and will be sufficient to avoid further weakening of the currency.

Turkey's net foreign currency reserves fell to $8.6 billion last week from $2.2 billion two weeks ago, further supporting the government's opposition claims were running out of money while indirectly trying to support the exchange course.

The government has reported only limited currency intervention.

Erdogan has also raised the minimum monthly wage to 4,253.40 lira (about $325), which is still lower in dollar terms than the minimum wage was worth in January 2021.