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In the Turkish election, incumbent President Erdogan did not win 50% of the vote to win, but he still maintained the leading position. (Source: Reuters) |
Whoever becomes the next Turkish president will have to shoulder an extremely difficult "mission", which is to bring the economy out of crisis and rebuild the country after the earthquake disaster.
President Erdogan's own argument
However, what makes observers and those who are following every step of the current Turkish President Recep Tayyip Erdogan in politics, in order to maintain his 20-year power, still wonder about his promise to "continue to cut interest rates to fight the sky-high inflation" if he is re-elected on May 28.
“Watch me after the election and you will see that inflation will come down along with interest rates,” he asserted in a recent CNN interview.
Asked if that meant there would be no change in economic policy, Erdogan replied: “Yes, definitely.”
In fact, Türkiye's lira has been steadily depreciating in recent years, falling more than 40% last year as the current government's economic policies fueled soaring inflation and falling to near historic lows when markets opened on the first round of elections.
While central banks across most major economies have been raising interest rates at a rapid pace to control rising prices, Türkiye has done the opposite.
“I have a thesis that interest rates and inflation – they are directly correlated. The lower the interest rates, the lower the inflation will be,” Erdogan said.
“In this country, inflation will come down along with interest rates, and then people will breathe a sigh of relief... I say this as an economist, not as a fantasy.”
Back in late 2021, as prices began to rise rapidly around the world, President Erdogan ordered the Turkish Central Bank to cut interest rates.
By October 2022, the consumer price inflation rate reached 85%, before falling to 44% in April this year, according to data from the Turkish Statistical Institute.
Commenting on Erdogan’s plans, James Reilly, an economist at Capital Economics, said, “The incumbent’s unexpectedly strong showing in the first round of the election means that a return to normal economic policy is unlikely. As a result, the Turkish lira looks set to come under severe pressure this year.”
This expert further analyzed that in the near future, a victory will most likely come to Mr. Erdogan, which means continuing to maintain a policy of low interest rates and high inflation in the economy.
Economists say Türkiye is experiencing its worst financial crisis in decades, with the lira losing around 55% of its value against the dollar. The conflict between Russia and Ukraine has also made matters worse, pushing energy prices to new highs.
Skyrocketing prices are hurting Turkish consumers and the economy as a whole, as the country struggles to recover from a devastating earthquake in February. The disaster killed at least 45,000 people, left millions homeless and caused an estimated $34 billion in immediate damage, according to the World Bank — about 4 percent of Türkiye’s annual economic output.
Türkiye's official data also showed that its net foreign exchange reserves fell into negative territory for the first time since 2002.
Specifically, the Central Bank of Türkiye (CBT) recorded net foreign exchange reserves of -151.3 million USD on May 19. Experts say this is related to the government's recent controversial efforts to stabilize the local currency Lira by implementing unconventional policies and trying to maintain low interest rates amid rising inflation. This has brought many risks to the economy of the world's 20 largest economies.
The CBT has tried to offset the negative impact of the low interest rate environment on the exchange rate by selling foreign currency, said Selva Demiralp, an economics professor at Koc University in Istanbul. Turkey's foreign exchange reserves have been almost depleted so far, and after adjusting for swap agreements, net foreign exchange reserves have turned negative.
According to Ms. Demiralp, for an economy with a monthly current account deficit of about $8 billion, a negative net foreign exchange reserve is very alarming, because it can disrupt trade activities, cut off supply chains and stall production not only in Türkiye but also in its partners in the current global production network.
Türkiye's GDP per capita will be $15,000
“Türkiye will need to contain inflation, protect financial stability and put the economy on a sustainable growth path regardless of the election outcome,” according to analysts at JPMorgan.
Experts also note that the country’s prospects will depend on how quickly it returns to normal. “If policies are shifted to a more orthodox stance, the deflationary process will accelerate.”
Meanwhile, Mr. Erdogan appeared to be fully confident in his optimistic message, saying: “We have overcome challenges in the past. We are now strong as Türkiye.”
Quite certain of the economic results, Mr. Erdogan cited the success of his 20 years in power, which has increased Türkiye's GDP per capita - a measure of national prosperity - from about $3,600 to $10,650 today. "And the number that will definitely be achieved in the next few months is $15,000," President Recep Tayyip Erdogan affirmed.
Türkiye's per capita GDP stood at $3,641 in 2002, the year before Erdogan became prime minister, and reached $9,661 in 2021, according to World Bank data.
Meanwhile, analysts are concerned that Türkiye's economic crisis is showing signs of worsening after Mr Erdogan topped the polls. Analysts fear that Mr Erdogan's victory could lead to further instability with high inflation and the lira, which has slid to record lows against the euro and the dollar, losing nearly 80% of its value in the past five years.
Turkish President Erdogan - Türkiye's longest-serving leader, will extend his rule into a third decade - until 2028 - if he wins more votes in a second round of voting on May 28.
As the decisive days approach, Mr. Erdogan received more good news when he won the support of Mr. Sinan Ogan - who ranked 3rd in the first round of the election. If he gets 5.2% of the votes from Mr. Sinan, incumbent President Erdogan will win the second round of the election and continue to hold power.
The International Monetary Fund (IMF) in April lowered its forecast for Türkiye's economic growth in 2023 to 2.7% but raised its forecast for next year to 3.6%.
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