The Turkish lira regained color on Tuesday following emergency measures announced by Turkish President Recep Tayyip Erdogan. To end the flight of capital, Turkey’s strongman announced the advent of an exchange rate protection system, aimed at preventing losses suffered by savers due to the volatility of the exchange rate. the pound. Other measures accompany this announcement – such as a reduction in the corporate tax rate or the end of the taxation of government bonds.
These announcements sound like a last-ditch plan to save the national currency from the abyss after an endless fall. Since January, the pound has indeed lost 57% of its value against the dollar. This trend has accelerated in the past three months: while one euro was trading against 10 Turkish lira in September, this rate briefly fell below 20 Turkish lira on Monday. The Turkish currency thus recorded the worst performance for an emerging currency this year, far ahead of Argentina and Ethiopia, which lost 19% and 18% respectively this year.
Decrease in purchasing power
The decline in purchasing power induced by the plunge in the Turkish lira is fueling the anger of the population – demonstrations against economic policy have taken place in Istanbul as well as in Ankara. President Erdogan, whose popularity has plummeted as the Turkish lira has declined, is playing for re-election with these announcements. The Turkish opposition parties have been demanding for several weeks early elections and the return to a parliamentary system that would reduce the power of the presidency.
To respond to the anguish of a middle class crushed under the weight of inflation, Recep Tayyip Erdogan announced Thursday the revaluation of the minimum wage to 50% – the latter from 2,825 to 4,250 TL, or 295 euros. With the central bank’s lack of independence – whose President Erdogan has sacked three directors since 2019, unorthodox interventionism and extreme dependence on external funding – the Turkish economy is a textbook case of sinking.
Contrary to classical economic theories, Erdogan is convinced that lower interest rates lead to lower inflation. This catastrophic economic situation is paradoxically associated with strong growth, estimated this year at 7.4% compared to 2020, due in particular to a sustained volume of exports. But unfortunately this growth does not rhyme with an improvement in the standard of living of Turks, so high is inflation.
“God willing, inflation will drop”
Companies, heavily dependent on imported products, are hit hard by fluctuations in the national currency. Faced with the head of state’s stubbornness in advocating the lowering of interest rates, the employers’ organization Tüsiad, claiming 85% of exporting companies in Turkey, expressed its concern at the interventionism of the chief of State. “The political choices implemented here not only create new economic problems for companies, but for all our citizens”, declared the lobby of large companies, before calling for “Assess the damage to the economy and return to a free market economy”.
Erdogan justified his monetary policy by asserting the precepts of Islam. “As a Muslim, I will do what our religion commands me to do”, he said in a speech broadcast on Sunday evening. Usury is indeed prohibited by Islam, and the Turkish president considers interest rates to be “An evil which makes the rich richer and the poor poorer”. “God willing, inflation will drop as soon as possible”, he added.
In the meantime, the mistakes of Turkish economic policy have very real consequences on the daily lives of millions of families haunted by the specter of poverty. In Istanbul supermarkets, where anti-theft devices have appeared on baby milk cans, the price of basic foodstuffs – such as sunflower oil – have seen their prices soar by 50% in one year. In front of the bread depots run by the opposition Istanbul City Hall, endless lines of people hope to acquire a 250-gram loaf sold for 1.25 pounds (6.8 cents) – against three pounds on average in Istanbul bakeries. A difference of a few cents that has become crucial for Turkish households struggling with inflation of 21% in one year.