Turkish inflation climbed to 36% in 2021, almost doubling expectations. There are several reasons that trigger inflation. First, Turkey was hit by an economic crisis in 2018 due to political conflicts over the past 10 years such as the Gezi protests, terrorism in Syria and the attempted coup on July 15. The government tried to solve the problem with temporary solutions as the beatings followed. Yet the woes turned into a great disease and ultimately led to an economic crisis.
In fact, things were going well at the end of 2019. For example, inflation fell below 10% in October 2019 and the US dollar-Turkish lira parity stabilized. However, the COVID-19 pandemic further worsened the recovery in 2020 and 2021. In fact, the whole world is now grappling with inflation, but the 2018 crisis in Turkey has been an additional problem for the government. and the Turkish people. As a result, the resolution of the unresolved issues resulted in a further depreciation of the pound and a double-digit rise in inflation.
It can be argued that Turkey’s main structural problem is the weakness of the pound against the dollar, which is caused by the current account deficit. The government is aware of this and is working on a permanent solution rather than offering short term cures. In addition, some solutions create new problems. For example, the dollar loses value against the lira when interest rates rise, but ordinary people and investors look to interest for profit instead of investing their money in trading. So production stops, growth slows down and people lose their jobs.
However, lowering interest rates is not a solution either, as people are turning to the dollar in this situation. Whether it’s the dollar or interest rates, all tax assets cripple the economy and enrich those with money in their pockets. The Turkish government is trying to break this vicious cycle that has lasted for decades and is focused on the diversion of capital from bank accounts to investments.
On the other hand, it appears to be trying to keep the dollar-lira parity between 13-14 TL to boost exports and reduce imports. If the policy is successful, there may be a surplus of foreign currency, which is the desired outcome. In this case, the basic structural problem will be solved and it will no longer harm Turkey. What the government is doing is like painful surgery and indeed people are suffering from the operation. The government has increased the minimum wage by 50% and mirrored the rate of inflation to other wages to ease the pain and this can work if there are no more uncontrolled price increases.
Meanwhile, as President Recep Tayyip Erdoğan’s government has chosen an unorthodox way to avoid an economic crisis and grow the economy, there are so many criticisms and accusations, arguing that the theory ( and the practice) of the Turkish president will not work. However, recently, supporting articles have been published by Turkish and foreign columnists. For example, a famous Turkish economic columnist who criticizes the government admitted that high interest rates cause inflation, at least in Turkey, since several currencies are used in the market.
In addition, Joe Zhang of South China Morning Post said, “Turkey has chosen domestic production beyond exchange rates and I think it is a wise decision” and added that the imposition of the rate. High interest by the International Monetary Fund (IMF) in Thailand, South Korea and Indonesia during the 1997-98 monetary crisis were counterproductive, resulting in a sharp contraction in economic activity. He also advises that: “If a lower exchange rate is embarrassing enough, the government should consider imposing controls on capital flows rather than trying to attract hot money with stifling interest rates. . No one likes currency controls, but it’s a lesser evil than high interest rates.
Zhang’s article is important because it mentions failed and successful past experiences. In other words, it doesn’t mention theory but focuses on practice. It can be argued that Zhang is Chinese which makes him biased, but we must not forget that China has become a superpower with such policies and the countries he mentions all have successful economies.
It is not yet known whether Erdoğan will succeed in bringing his ship ashore, but the possibility of probable success will not be surprising.