Istanbul: State data revealed that the annual inflation rate in Turkey has surged to a 20-year high of 48.7% despite months of assurances by President Recep Tayyip Erdogan that the soaring figures were just temporary and that his government could ease the pain on Turks weighed down by rising living costs. Turkish citizens are the most affected since prices of consumer goods rose by 11.1% from December to January, according to the Turkish Statistical Institute. Analysts predicted that the prices of consumer goods increased between 9% and 10%.
Moreover, the Turkish lira (Turkey’s currency), lost 44% of its value in 2021 in a rout driven by the president’s refusal to raise interest rates as the inflation consistently climbed. Evidently, the currency’s turbulence has hit Turks hard, as the value of their salaries dropped and costs of goods and energy dramatically increased. The president has prioritized credit and exports, while constantly arguing against economic orthodoxy that raising interest rates worsens inflation rather than taming it.
How did this happen?
Nations around the world have been grappling with price spikes caused by supply chain snarls and shortages of raw materials due to COVID-19. However, inflation in Turkey has been exacerbated by a dramatic fall in the value of the Turkish lira, which lost more than 40 percent of its value against the United States dollar last year. The lira’s crash in the final quarter of 2021 was triggered by a series of central bank interest rate cuts championed by Turkish President Recep Tayyip Erdogan, who still insists that lower interest rates combat rising inflation – a view that runs opposite to mainstream economic theory, which holds that lower borrowing costs typically increases price pressures thus leading to lower purchasing power in all.
“We are in sorrow to see our yearly inflation hitting 36 percent,” said Erdogan. “Nevertheless, as a government that managed to decrease inflation to 6 percent, we will repeat our success to protect Turkish citizens from financial troubles.”
Attempt to combat inflation by increasing minimum wage
To help cushion the blow of rising prices, the Turkish government raised the minimum wage by 50 percent and boosted the government match on private contributions to public pensions.
However, the minimum wage hike was also accompanied by price increases in regulated sectors of the economy. Electricity tariffs have shot up by 125 percent for higher-demand customers and 50 percent for lower-demand residential customers. Natural gas prices have gone up 50 percent for industrial use and 25 percent for residential use. The cost of public transportation in Istanbul has also seen a drastic increase by 36 percent.
Therefore, the government has attempted to assist the poor in this financial crisis while the burden has partially fallen on middle-class consumers.
Politics and Inflation
Turkey’s opposition parties have seized upon the variation between official TurkStat inflation numbers and what many members of the public and experts think. Ali Babacan, a former Erdogan ally who served under him as finance minister and now heads the Democracy and Progress Party, called TurkStat the “Institute for Adjusting Numbers” in a tweet shortly after the December inflation figures were announced.
Last month, during a live television broadcast, the head of the largest opposition party, Kemal Kılıçdaroğlu, attempted to visit TurkStat’s head offices in the capital Ankara to inquire about how inflation is being calculated, only to be turned away. Thus, it is evident that the Turkish government is trying to hide their numbers while reassuring the citizens through futile attempts.
A new economic model?
Treasury and Finance Minister Nureddin Nebati outlined Turkey’s new economic path to investors in London, pledging to keep the exchange rate stable, bring inflation down to single digits and keep dollarization at bay.
Speaking to investors and bankers in meetings, Nebati also said that the government would soon announce a new scheme to get households to convert holdings of gold into Turkish lira.
President Recep Tayyip Erdoğan has been endorsing a model based on lower borrowing costs, which he says will boost production, employment and exports, and also eventually help Turkey solve its chronic current account deficit problem and contribute to stabilizing the Turkish lira.
Gold Savings Scheme
Two investors who attended meetings said the minister had told them about the plans to ensure part of the $250 billion-$350 billion worth of gold held by Turkish households would find its way into the domestic savings system.
“The important thing for us is the stabilization in the exchange rates. With this package, we will have put the gold under-the-mattress into the system, which is estimated to be around 5,000 tons of gold equivalent to 250-350 billion US dollars (the “under-the-mattress” term refers to a long-held tradition in Turkey of turning to gold to safeguard wealth and storing it at home).
A certain amount of this will support the Central Bank of the Republic of Turkey (CBRT) and meet the need for foreign exchange, he noted. “But most importantly, it will shore up the Turkish lira, which forms the basis of our model.” The government will make announcements soon on how to convince people to let go of their gold holdings. An investor stated that if the gold finds its way back into the banking system, it will certainly help to broaden the monetary base in terms of the Turkish lira.
Investors are also eyeing Ankara’s foreign borrowing plans. The Treasury did not immediately comment on the possible sale. According to Refinitiv data, Turkey is due to pay off a $2 billion eurobond on February 21th and a $1.1 billion domestic bond on February 25th.
Nebati also said at investor meetings that the government had held very productive talks with Abu Dhabi, Saudi Arabia and Israel in recent days, and swap lines were being agreed upon. He declined to give further details.
In conclusion, more details on the new economic model are yet to arrive. Most of the government’s efforts have gone in vain – the Turkish citizens have been hit hard due to this crisis with a hike in the prices of basic necessities such as gas, food and transportation.