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| A man at a market in Ankara, Türkiye. (Source: Reuters) |
The economy is in crisis
For years, the Turkish economy has been in crisis. Inflation is running at nearly 40% - as of May 2023. Last year, inflation soared to over 80% in some places.
The raw material-poor country has traditionally imported more than it exports, resulting in a persistently high current account deficit. Türkiye's external financing needs are currently estimated at more than $200 billion (€183 billion).
At the same time, the national debt is growing. According to calculations by Turkish economist Tahsin Bakirtas, the country's public budget deficit exploded to 1,870% compared to the same period last year in the first four months of 2023. Private households are also heavily indebted, at around 180% of Turkey's gross domestic product (GDP).
The country’s currency has also fallen sharply. By the end of May 2023, the lira was at 20.75 lira to 1 USD. Due to the sharp depreciation of the currency, the cost of importing raw materials and goods continues to increase.
Instead of raising interest rates to curb inflation like central banks around the world, the country's central bank has kept interest rates low for years.
Meanwhile, the Turkish state has struggled to stay afloat. Foreign exchange reserves have been nearly depleted. This year alone, the central bank has spent about $25 billion to finance a huge current account deficit and prop up the weakening lira.
Loans are now largely provided by banks from Muslim countries, such as the United Arab Emirates (UAE).
According to a recent Bloomberg News report, two banks from the UAE — Abu Dhabi Commercial Bank and Dubai-based state-owned Emirates NBD — provided Turkish banks with more than half of the loans needed.
At the same time, currency deals – known as currency swap agreements – worth around $20 billion have been signed by Türkiye with the UAE and Qatar in recent years to replenish the country's Central Bank's nearly depleted foreign currency reserves.
"Thirst" for foreign currency
Official data released by Türkiye showed that the country's central bank's net foreign exchange reserves recorded a negative $151.3 million on May 19, due to a sharp increase in foreign currency demand. This issue brings many risks to the economy, which is among the 20 largest economies in the world.
The central bank has tried to offset the adverse effects of the low interest rate environment on the exchange rate by selling foreign currency, said Selva Demiralp, professor of economics at Koc University in Istanbul.
As of the end of May, Türkiye's foreign exchange reserves were almost depleted and after adjusting for swap agreements, net foreign exchange reserves turned negative.
According to Professor Demiralp, for an economy with a monthly current account deficit of about 8 billion USD, the fact that net foreign exchange reserves have fallen to a negative level is very alarming.
This is because it could disrupt trade, sever supply chains and halt production not only in Türkiye but also in its partners in the current global production network.
Recently, Russia had to agree to let Türkiye postpone the payment of 600 million USD for natural gas imports until 2024. Previously, in March, Saudi Arabia also had to deposit 5 billion USD into the country's Central Bank to ease its "thirst" for foreign currency.
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| Turkish currency plummets. (Source: sailblogs.com) |
Don't let people be crushed by inflation
Türkiye recently announced it will raise its monthly minimum wage by 34% starting July 1, marking the second increase this year in an effort to protect households from severe inflation.
The minimum monthly net wage will increase to 11,402 Turkish lira (nearly $483), Turkish Labor and Social Security Minister Vedat Isıkhan said in a televised speech. The increase will boost workers' purchasing power and help tackle inflation for households, he said.
President Recep Tayyip Erdogan has pledged that the government will not let workers be "crushed by" high inflation.
A critic of high borrowing costs, Mr Erdogan has over the past two years advocated a “new economic model” that prioritizes ultra-low interest rates. The model aims to achieve price stability by cutting borrowing costs, boosting exports and turning a current account deficit into a surplus.
However, the President has recently signaled that Ankara could change its fiscal policy and return to raising interest rates to fight inflation, reforming policies focused on monetary stimulus.
Türkiye's Nationalist Movement Party (MHP) leader Devlet Bahceli also said the government needed to take "painful" economic measures including tightening monetary policy.
“MHP’s position on interest rates is clear: it has not changed. In theory and in practice, raising interest rates is a political choice that discourages investment, hinders production and makes credit more expensive. However, there are short-term and sometimes painful measures that need to be taken for Türkiye to achieve economic stability,” he stressed.
Economists at JPMorgan Chase expect the Turkish Central Bank to raise its current key interest rate by about three times to 8.5 percent at its next meeting.
Meanwhile, many US banks predict that interest rates in Ankara may rise to 25% today (June 22). By the end of the year, analysts at JPMorgan even expect interest rates to reach 30%.
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