It is often said that the excess of anything is detrimental. Well, guess what! This holds true even for the most sought-after commodity - money. In a case of excess money in circulation in an economy, the value of the currency falls, which is in consonance with the basic economic principles of supply and demand. This is what is called ‘inflation’. In such a situation, it is generally the responsibility of the Central Bank of the country to ensure the stability of the economy by keeping a lid on inflation. This is often carried out by following a ‘dear-money policy’ by raising the interest rates, thereby restricting the supply of money in the economy and bringing down inflation. Stabilising the economy is perhaps the most important function of any Central Bank in the world. No wonder then, that keeping Central Banks autonomous is a generally-accepted norm globally. But what if that isn't the case? What if the political executive takes over the reins of the Central Bank?

 

Welcome to Turkey - The Land of Inflation!

Turkey is a land of historical and cultural significance. Spanning across two continents, Turkey has been a cradle of various cultures, ethnicities, religions and empires. The history of Hagia Sophia in Istanbul is a great embodiment of the history of the nation at large. A Church, a Mosque, a museum and then a Mosque again, the historic sixth-century monument has witnessed various epochs, and so has Turkey. From being the seat of the Byzantine, the  Latin and the Ottoman empire to following extreme forms of ‘Secularism’ under Mustafa Kemal Atatürk, Turkey has gone through a plethora of changes.

Since the time of Atatürk, Turkey has moved towards structuring itself a lot on the lines of Europe. This has ushered in closer economic and social ties with the Western world. Turkey has benefited from such relations as it has made significant economic growth over the years - particularly in the last couple of decades. Till the mid-2010s, Turkey could have been called an economic success as it had progressed to a GDP per capita of close to 13 thousand USD. It seemed like Turkey would soon be considered a major economic power - but things have nosedived since. The figure stands at 8 thousand today.

 

Turkey’s Woes

On February 20 last year, 1 USD was being traded for 6.96 Liras - the official currency of Turkey. The figure reached 18.4 on December 19. Lira has lost 44% of its value last year alone. Meanwhile, the annual inflation rate remains excessively high at 36% (Business Standard). Some independent organisations claim it to be even higher at a whopping 58% (The Indian Express). After the pandemic-induced lockdowns in 2020, the global economy rebounded drastically. Consequently, economies worldwide are facing price pressures due to supply-chain bottlenecks and shortages of raw materials. Inflation is on a rise globally. However, Turkey differs from any other country in the approach it is taking to deal with the inflation crisis.

 

Defying Economic Sense

The textbook economic policy during inflation is to raise interest rates so that credit creation is restricted and so is the money supply in the market. This leads to a fall in the purchasing power in the economy and demand is lowered. The inflation is, thus, kept a lid on. This is a very basic principle of economics. It is one of the primary measures to control inflation. However, Recep Tayyip Erdoğan, the President of Turkey seems to have formulated his own economic doctrine - Erdoganomics - which is appalling economists worldwide. In complete contrast to the convention, the interest rate is being continuously slashed in the country, which is, obviously, fuelling inflation further.

The power to control monetary policy is generally vested in the Central Bank of a country. In Turkey, however, this authority of the Central Bank seems to have been usurped by the political executive. The Central Bank of Turkey is no more an autonomous institution which is evident from the fact that in the last 2 years alone, 3 Governors of the Central Bank have been shown the door by President Erdoğan. The economic policies have, therefore, become a playground for political interests and Mr. Erdoğan seems determined to defy any economic sense. His rationale - Lower interest rates would support exports, which will help Turkey's economy. 

To be sure, it is indeed true that lower interest rates lead to a growth in the export value of an economy. This is because, with lower interest rates, the national currency depreciates in relation to other currencies. This in turn makes exports cheaper and their demand increases. However, such a step can't be recommended when the currency is already in a free fall and inflation is skyrocketing. Alas, that is the very condition of Turkey currently.

Turkey has a high Current Account Deficit too - the value of imports being greater than that of exports. Many of the essential commodities, including fuel and food, are imported into the country. The crash of the Lira means that the values of such imports are rising exponentially, causing severe distress to Turkish households - particularly the lower-income ones. Savings are fast eroding too. The situation has become so dire that many in the country are preferring US Dollar and Euro to the national currency. This might end up severely curtailing the economic autonomy of Turkey and its government.

 

What’s the Reason?

Why is Erdogan following such a disastrous economic policy then? Well, he did clear his intentions in a statement last month. “We are lowering interest rates. Don’t expect anything else from me. As a Muslim, I’ll continue to do what is required by nas.” The Turkish President is invoking Islam as a pretence to justify his Erdoganomics. This is in line with his recent political moves. Remember Hagia Sophia, which we talked about earlier? A secular museum since 1935, the historic monument was converted into a mosque last year. Erdogan’s support base lies predominantly in the conservative sections of Turkey. It is obvious that economics is being compromised for the politics of the Turkish President.

 

What’s in Store?

The bridge between Asia and Europe goes into elections next year. The approval ratings of President Erdogan have slipped to less than 39% in the recent reports. It won’t be a surprise if the incumbent is unable to retain his post in 2023, provided the elections remain free and fair and the opposition stands up to the task. However, the Turkish people are still a long way from 2023. They are suffering now and the near future doesn’t seem optimistic either. Erdogan has confirmed that he would continue slashing the interest rates. The economy is expected to witness inflation to the tune of 27% to 47% in 2022. On the other hand, the GDP growth, which was recorded at 10.1% in 2021, is expected to decline to 3.5% in 2022. The going, as per most estimates, is expected to get tough for Turkey, especially for the poor. Meanwhile, it would be critical to see how long Erdogan would continue with his economics defying policies - Erdoganomics.

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Hope not much longer!