Turkey’s lira is at a new record low. The financial markets are nervous because Erdogan can continue with his economic policy and prices continue to rise. What does that mean for the people in Turkey?
Why is? After the re-election of Recep Tayyip Erdogan On Sunday, the Turkish lira fell 1.2 percent to a new record low of 20.36 lira per dollar. And that after the Turkish currency, the lira, had already experienced a record decline: since the beginning of the year, the lira has fallen by more than six percent against the dollar. Within the last 10 years it has lost over 90 percent of its value. To illustrate: The pink 200 lira note was worth 130 dollars 10 years ago – today it is just under 9 dollars.
And at the same time there is officially inflation in Turkey of around 45 percent. According to experts, it may even be higher than officially reported by Turkey. The prices are rising rapidly.
What does that mean for the people in Turkey? The Turkish population is getting poorer and getting into debt. 10 years ago, a 200 lira note was enough to buy groceries for an entire family. Today, a whole bundle of 200 notes has to be put down for this. With the money that was enough for a car back then, you can just barely buy a smartphone in Turkey today.
Because of high inflation, prices are rising rapidly and money in Turkey is worth less and less. Turkish people therefore try to spend the money they have quickly before it loses even more value. And at the same time they take on debt because interest rates are low and they prefer to consume today rather than tomorrow.
Erdogan’s economic policy – what next? Money is getting tighter and tighter: the country imports a lot of energy and raw materials from abroad, which is now becoming more and more expensive. In addition, the President has increased the wages of state employees as an election gift. All of this has to be paid for. In addition, Erdogan has spent huge sums to stabilize the lira through gold and currency sales.
With inflation at around 45 percent, Turkey should actually raise interest rates. Under Erdogan, however, the opposite is happening: in Turkey, the central bank is lowering interest rates, thereby driving inflation even further. For comparison: The European Central Bank started raising interest rates when inflation was around 8 percent and the Swiss National Bank when inflation was just over 3 percent.
Why isn’t Erdogan raising interest rates to keep rising prices under control? In March 2024 there are local elections in Turkey. Experts assume that Erdogan will continue to pursue the “economic policy of inflated growth” at least until then in order not to lose any votes. It is an act of desperation: Erdogan does not want to raise interest rates because he is afraid of further slowing down an already weak economy. According to economists’ estimates, the Turkish economy will only grow by 2.7 percent this year, after 5.6 percent in the previous year.
The fact that the Turkish economy is still growing at all is mainly due to consumption. And though it’s growing, people are getting poorer. Because real incomes are falling due to rising prices. According to experts, Erdogan has no other option than raising interest rates in the long term if he wants to stabilize the lira in the long term and fight inflation.