The Turkish central bank decided on a significant interest rate cut on Thursday. And that while inflation in Turkey is officially 80 percent, the highest in 24 years, and the central banks of many other countries are raising interest rates. In a statement, the bank said there was a “loss of momentum in economic activity”. With next year’s parliamentary and presidential elections in sight, President Erdogan is doing everything he can to – in his eyes – boost economic growth.
The interest rate went from 13 to 12 percent. Erdogan believes that low interest rates lead to low inflation rather than the other way around – an unorthodox view that most economists dislike. The current theory is that a high interest rate dampens inflation, because people then keep money in the bank and spend less, which depresses demand and therefore prices. But the central bank governor is a kindred spirit of Erdogan, who faithfully carries out the president’s policies. And everything now revolves around Erdogan’s re-election, who is trying to boost the economy with increased government spending, tax breaks and cheap credit.
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This is at the expense of price stability. The Turkish lira has already lost 27 percent against the dollar this year, making it one of the worst-performing currencies worldwide. The depreciation of the lira translates into higher inflation, as the Turkish economy depends on imports of energy and other products and commodities – which are more expensive due to the low lira. Rising inflation will increase citizens’ financial concerns. They have already seen their purchasing power erode since a series of currency crises.
In an interview with the American program PBS Newshour Erdogan said inflation is not a big problem. “Inflation is not a crippling economic threat.” He promised inflation would fall next year and noted that Turkish supermarkets are full. “In our country, the shelves are not empty,” Erdogan said. “In America, the shelves are empty. In France and Germany too.”
Turkish inflation is 80 percent, the highest point in more than a quarter of a century
Yet Erdogan knows that Turkish citizens are groaning under the high inflation. To ease the pain, he raises salaries and social expenses. Erdogan raised the minimum wage by 30 percent in July. This affected nearly half of Turkey’s 30 million workers. He then also increased government salaries by 42 percent, benefiting five million civil servants. Private companies felt obliged to raise their salaries as well.
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It doesn’t stop there. Just last week, Erdogan announced an aid package for low-income citizens. The government will pay 30 billion liras (1.6 billion euros) to repay loans of more than five million people. The government has already cut interest rates on student loans. Erdogan also launched a social housing project for start-ups, and a system that provides cheap credit to businesses. All these measures are aimed at important voter groups.
The consequence, however, is that the budget deficit is increasing. This is one of the few areas where there is still some financial leeway. Because otherwise the Turkish public finances are not looking good. Due to the sharp rise in energy prices, Turkey is likely to face a balance of payments deficit of USD 60 to 70 billion this year. In addition, 180 billion dollars in foreign debt must be refinanced. The central bank is running out of reserves.
That’s why some economists predict a new currency crisis in the winter when the tourism season ends and the flow of foreign exchange has dried up. To prevent that, Erdogan is eagerly looking for foreign money. President Putin is the only one who has come to the rescue so far. Russian state banks recently transferred billions of dollars to Turkey to complete construction of a nuclear power plant on Turkey’s Mediterranean coast.