Sunday, November 28

What is the story of the Turkish lira crisis and Erdogan’s war on interest rates?.. 7 questions to understand it

The front of news related to Turkey is the follow-up to the decline of the local currency, especially as it comes in light of Turkish President Recep Tayyip Erdogan’s keenness to reduce the interest rate raised by the former Central Bank Governor to 19%, and President Erdogan’s statements contributed to reducing the price of the local currency, with factors other.

The Turkish president’s view is that raising the interest rate is one of the reasons for the high rate of inflation in the country, and the interest rate is an obstacle to investors, because the high interest rate increases production costs.

There is another argument that the Turkish president provides, which is comparing the interest rate in his country with the rest of the G20 countries, especially those countries that belong to the European Union and America, in those countries the interest drops to between zero and 1%, and in his country it rises to 19%.

In order to see the reality of the problem, its causes, and its effects on the Turkish economy, and on the experience of President Erdogan, whose economic achievements were the most important elements of his success, we will address the matter by answering a set of questions, in the following lines.

  • What are the parameters of Erdogan’s plan?

President Erdogan proceeds from the fact that his country succeeded in its economic experience through the real economy, and its access to the 20 largest economies in the world was the result of the improvement in its gross domestic product, through the production of goods and services, and therefore this advantage must be preserved.

President Erdogan believes that reaching the interest rate of 24% or 19% is a hindrance to production and investment, and it pushes individuals and institutions to put their money in banks, and close companies and institutions, content with the interests they receive on their money.

Undoubtedly, this behavior turns the Turkish economy into a rentier economy, and loses its most important components as a productive economy.

President Erdogan’s view is consistent with the economic theory that raising the interest rate leads to an increase in inflation from the supply side, because it leads to an increase in the cost of production.

But the high inflation rates have other reasons, including the devaluation of the currency, so the economic policy maker in Turkey is in a difficult task, and he must address the matter, in the interests of investors, savers, and consumers.

  • What is the opinion of the opponents of President Erdogan?

Opponents of President Erdogan are of two types; The first is those who disagree with him politically, and these are not the place here to address their point of view, as they will disagree with him along the way. The second type is the economic violators, so they proceed from their adoption of solutions to matters in light of reading monetary policies from a capitalist perspective, which is that if the value of the currency decreases, you have to raise the interest rate to absorb excess liquidity in the market and maintain inflation rates.

Therefore, we found those in charge of the Turkish Central Bank’s order, raising the interest rate in September 2018 to 24%, which is an unprecedented rate, and the matter was repeated in March 2021, when the interest rate was raised to 19%, but the problems of the Turkish economy remained on both levels. Fiscal and monetary are the same, which led to unemployment remaining at a high rate of 12.7%, as well as inflation reaching 19.7%.

The real problem here is the lack of coordination between the components of economic policy. The solution is not only about monetary policy measures, it is necessary to look at its repercussions on investment, trade, employment, and state finances.

  • What are the repercussions of the depreciation of the lira?

Also, decreasing the price of the local currency has negatives, as it has achieved positives in Turkey, but this does not mean that the depreciation of the lira is always welcome and at any rates.

The depreciation of the Turkish lira has raised the inflation rate to close to a ceiling of 20%, and the living burdens on citizens have increased, both in terms of the prices of goods and services, or the rent of homes. It has also greatly helped the spread of dollarization within Turkish society.

On the other hand, the Turkish economy achieved some positives from the decline in the price of the lira, on top of which is the increase in commodity exports, and this would not have been achieved without the presence of a strong production base that seized the opportunity, so the value of commodity exports reached 169.5 billion dollars by the end of 2020, despite the negative repercussions of the Corona pandemic, Turkey aims to exceed the $200 barrier for its merchandise exports by the end of 2021.

The tourism sector in Turkey has also been active in light of the decline in the value of the Turkish currency. Official statistics indicate that the number of tourists during the period from January to August 2021 reached 14.1 million, which represents an increase of 93% over the corresponding period of 2020, without There is no doubt that the depreciation of the lira will increase the movement of tourism in Turkey, which is one of the important activities of the national economy.

The Turkish President’s view is that raising the interest rate is one of the reasons for the high rate of inflation in the country (Reuters)
  • What are the requirements for the success of Erdogan’s vision?

There is no single decisive factor to explain economic phenomena positively and negatively. If President Erdogan sees damage to the high interest rate on his country’s economy, and it is in the interest of investment and employment to reduce the interest rate, then the economic policy makers in his country must prepare the necessary package for the success of this vision, through:

  1. Reducing the import bill.
  2. Reliance heavily on local resources and production requirements.
  3. Reducing the flow of hot money from abroad.
  4. Rationalizing private sector borrowing, in proportion to its financing capabilities and economic activity.

It is also important for economic policy to provide investment opportunities that can absorb the available funds in the market, to prevent them from speculating on the stock exchange or the price of the currency, or in activities related to cryptocurrencies or forex and the like.

  • What are the manifestations of the political presence of the lira crisis in Turkey?

Economy and politics are two sides of the same coin, and there is a relationship that cannot be neglected in reading the reality of the devaluation of the Turkish currency, and its connection to the internal and external political performance of the Justice and Development government and President Erdogan.

Everyone knows the Turkish army’s moves in Syria and Iraq to confront the Kurdish state project, and the threats it poses to Turkish national security, as well as Turkey’s value position in supporting the Arab Spring revolutions, rejecting counter-revolutionary projects and their supporters in the countries of the region, as well as Turkey’s position in the Gulf crisis.

As well as Turkey’s position on the Eastern Mediterranean scheme, and its attempt to marginalize it, along with Turkish Cyprus, away from the wealth of natural gas, and Turkey’s keenness on a balance in its foreign relations, and its being a regional power that should not be ignored by international powers.

There are local factors represented in the failed military coup attempt in 2016, and the subsequent attempts to destabilize the Turkish economy, as an entry point to overthrow the democratic experiment, as well as combating the Justice and Development Party’s strategy of widening the base of wealth distribution and not concentrating it in the hands of a small group of holding companies.

  • What did the devaluation of the lira do to the Turkish economy?

The most prominent successes of the Justice and Development Party economically, after 2003, is that it removed the six zeros from the local currency, and raised its value against the dollar. After the dollar was equivalent to millions of pounds, in 2005 the dollar became equivalent to 1.34 pounds.

In light of the World Bank database figures, we find that Turkey’s gross domestic product in 2013 amounted to 1.8 trillion liras, equivalent to $957 billion, meaning that it was close to the ceiling of one trillion dollars in value of domestic product.

But after the devaluation of the Turkish currency over the past years, the value of the output denominated in dollars, despite its increase in the local currency, declined.

In 2020, the value of the output in local currency amounted to 5.05 trillion pounds, while the value in dollars was 720 billion dollars.

Therefore, it requires a comprehensive treatment, and not the treatment of a party or a variable, at the expense of the rest of the variables, which have a negative impact on other aspects.

It is required to encourage and stimulate investment and at the same time maintain moderate values ​​of the local currency towards foreign currencies, and as it is required to keep the Turkish production base alive and strong, and work to increase the added value of various economic activities, this should not lead to the neglect of financial and monetary indicators, from price performance The exchange rate, the inflation rate, and the budget deficit.

  • Who are the winners from the devaluation of the lira?

The lesson in evaluating the performance of the national economy of any country is the public benefit, and the interest that benefits the broad base of society, but in light of the living reality, the Turkish lira has fallen to the lowest rates since 2013, and therefore there are those who benefit from this situation, and there are also those who are affected.

  1. Winners From this situation in the first place are speculators on the price of the currency, who have been monitoring the market for a while, and are working to keep a large amount of foreign currency to sell at this time, and there are also benefits accruing to the tourism sector and the sectors of export activities.
  2. As for those affectedThey are the savers, who kept their savings in the local currency during the last period, as the purchasing power of their savings decreased, and the value of their wealth declined, so this segment prefers to raise the interest rate, to compensate them for these losses.

Also among those affected are the importers whose trade or production activities depend on imports from abroad, so their bill of imports will rise in light of the depreciation of the lira, as well as debtors in foreign currency, whether to local or international bodies. Managing their obligations in foreign currency will cost them a lot in light of the depreciation of the lira.

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