Politics
International Relations
Economics
Inflation
Unemployment
Economic crisis
Debt
Lira Devaluation
Central Bank Policy
Turkey’s economic crisis
A thread 🧵
A thread 🧵
Inflation in Turkey has risen to as high as 54% annually. Youth unemployment rate is at 22%.
Even before the COVID crisis, Turkey’s economy was struggling with huge debt, devaluation of the Lira and rising inflation. How did Turkey land itself in such a soup?
Even before the COVID crisis, Turkey’s economy was struggling with huge debt, devaluation of the Lira and rising inflation. How did Turkey land itself in such a soup?
When we look towards the RBI, we expect it to keep inflation low and set interest rates as per the need of the economy. The expectations from Turkey’s Central Bank or any central bank for that matter are similar.
Conventional wisdom says that low rates mean people borrow more, more money enters circulation and this increases inflation. Lower interest rates go, faster prices rise.
So when inflation started inching higher, people were expecting the Turkish central bank to increase rates so inflation comes under control.
However, the Turkish president, Tayyip Erdogan, doesn’t believe in conventional economic principles. He believes that low interest rates are the solution to economical woes.
Erdogan said, “By keeping interest rates low consumers will be more eager to keep shopping and businesses will be more inclined to borrow, invest money in the economy and hire more workers.
And if the lira loses value against the dollar, Turkey’s exports will simply become cheaper and foreign consumers will want to buy even more.”
While somewhat true, the cost of imports also go up with above approach(Turkey depends on imports for fuel, automobiles, medicines, raw materials, etc).
Not only that, foreign investors also begin to lose faith in the currency.
Not only that, foreign investors also begin to lose faith in the currency.
In fact, when central bankers go against Erdogan’s wishes, he fires them. (He has already fired 3 in the past 2 years).
Erdogan’s pro-growth strategies had worked earlier. He took office in 2003. He undertook expensive infrastructure projects, invited foreign investors and encouraged businesses and consumers to load up on debt. Growth took off.
However, this was not sustainable and he assumed that economic growth fueled by debt would last forever.
Back then, interest rates were significantly higher. High rates encouraged foreign investors to invest in Turkey. However, since then we have seen multiple rate cuts which have pushed inflation. Lira has also devalued significantly with US-Turkey tensions.
Interest Rates 👇
Interest Rates 👇
Tourism contributed a lot of Turkey's economy. In 2019, tourism brought in USD 34.5 billion and nearly 52 million visitors.
Covid gave a big blow to the sector. A lot of jobs were lost due to COVID along with much needed foreign exchange.
Covid gave a big blow to the sector. A lot of jobs were lost due to COVID along with much needed foreign exchange.
With inflation raging above 50%, people are finding it difficult to afford food and fuel. Businesses are choosing to hoard goods since they don’t know if they will be able to afford to replace their goods.
People have also lost faith in their currency. People are looking to sell their gold, and dollars since the lira hardly buys anything nowadays.
Turkey’s debt to GDP is also rising. High inflation, currency devaluation and huge amount of debts have put the economy into a downward spiral.
I can’t claim to know what is the best way forward but one thing is clear, rates can’t stay low. Higher rates can put inflation in check and attract foreign investments to stabilise the lira.
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