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Turkey’s economic crisis tests Erdoğan’s power

The Turkish president is often called an aspiring sultan who sees himself rebuilding the Ottoman Empire and leading the Muslim world. Now, though, the economic model that's underpinned his popularity and power is unraveling and this economic meltdown hangs over his head like the sword of Damocles.

(CN) — Turkish President Recep Tayyip Erdoğan, the authoritarian leader who's turned his country on its head for better and worse and made it into an undisputed regional power over the past two decades, is facing his biggest challenge yet: A massive financial and economic crisis.

Turks are angry and becoming suddenly poor after years of rising wealth as their country's currency, the Turkish lira, sinks in value before their eyes and long lines form outside bread stores. The opposition to Erdogan, who faces reelection before or by June 2023, is on the rise.

The ramifications of Turkey's economic meltdown are huge: With its 83 million people and one of the world's biggest economies, Turkey plays a major role in world affairs.

It has NATO's second-largest military after that of the United States; it's a regional powerbroker and become assertive under Erdogan with military actions in Syria, Iraq, the Caucasus and North Africa; it possesses the keys to a Black Sea desperately needed by Russia; and it's a gateway between Europe and Asia, acting as the gatekeeper for millions of refugees, immigrants and asylum seekers who see jobs and peace in the European Union as their best hope.

In Turkey, fears of a catastrophic run on the banks are palpable. Since September, the lira has sunk and lost about half of its value. Ankara is doing all it can to persuade Turks to not panic and keep their money deposited in Turkish lira.

But economists are skeptical about Erdogan's unorthodox solutions, influenced in part by Islamic beliefs against usury, which means that in theory he sees interest as sinful. Central to Erdogan's regime is an Islamization of a democracy founded with the secular ideas of Mustafa Kemal, the national hero who created modern Turkey and better known by the title Ataturk, “Father of the Turks.”

“Erdogan has long pressured the central bank to keep interest rates low, because he subscribes to a crackpot theory that inflation is caused by high interest rates,” wrote Anne O. Krueger, a former World Bank chief economist, in a December piece in Project Syndicate. “Any credible economist would point out that higher, not lower, interest rates are needed to cool inflation. But Erdogan persists in his perverse belief.”

Meanwhile, inflation just keeps rising and melting away cash reserves stockpiled by households, businesses and the national government. Officially, year-on-year inflation in January rose by about 48.7%, the most in 20 years. But that's likely lowballing the economic pain Turks are suffering.

The ENAGrup, an independent Turkish research group that tracks inflation, estimates that the past year saw a 115.7% jump in the consumer price index.

In January alone, the research group found prices rising by about 15.8% across the spectrum. It calculated the cost for goods and services jumped by 31.6%. Prices at hotels, cafes and restaurants are 30.2% higher. Housing, water, gas and electricity: A whopping 33.6% increase.

“There are no prices,” said Anil Aba, an economist with Yasar University in Izmir, speaking with Courthouse News via email. “I used to know, but not anymore. Every time I shop it’s a new price. You cannot buy anything with the same price.”

“Runaway inflation stats are now part of Turkey’s news diet,” the Turkey Recap, a weekly Turkish newsletter, said on Thursday in its latest briefing.

Also part of the daily news is unrest.

“Every day, somewhere, people are protesting high power bills, low wage increases,” Aba said. “The growing public discontent is very visible now. After 20 years, the opposition has become very confident that Erdogan is going to lose.”

With their paychecks turning worthless, workers in various sectors are going on strike and demanding raises. Last week saw Turkey's largest e-commerce platform, Trendyol, cave in to demands for a wage hike. Inspired, workers elsewhere are going on strike too and demanding higher wages to keep food on their tables. Protests are breaking out too, for instance in Bodrum, where people complained about a tripling of their energy bills.

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For his part, Erdoğan is pulling out every trick in the handbook of strongmen under pressure: He's blaming others, pointing his finger at outside forces, calling for a new era of national unity and sacrifice, sacking ministers and officials, cracking down on protests, distracting the public with foreign adventures, pleading for bailouts from allies and even old rivals, and concocting economic solutions on the fly to keep his country from sliding into chaos.

In the past two years, after Turkey's economic woes began in 2018, Erdoğan has replaced the central bank governor three times. Thursday saw the chief of the Turkish Statistical Institute, Sait Erdal Dincer, thrown overboard and fired after his agency, known as TurkStat, released new – and still bad – inflation figures.

Turkish President Recep Tayyip Erdogan listens to Russian President Vladimir Putin during their meeting in Sochi, Russia, in September 2021. (Vladimir Smirnov, Sputnik, Kremlin Pool Photo via AP, File)

Aba said Erdoğan's Justice and Development party – widely known as AKP, its Turkish initials – came to power at a moment when major central banks were lowering their interest rates to offset the sharp economic downturn caused by the bursting of the dot-com bubble and the Sept. 11 terrorist attacks in 2001.

“There was a glut of savings and cheap credit,” Aba said. “AKP got very lucky to have taken power during this period.”

In the ensuing years, AKP feasted on cheap foreign investment and poured cash into construction projects in a bid to modernize Turkey and make Turks see in Erdoğan their great leader.

Construction, Aba said, “is the easiest way to trigger economic growth.”

But he added that this economic model has run out of tarmac.

“It helps the economy in the short run but to sustain the growth you have to keep the construction economy going,” he said. “This led to concretion in the big cities. Wasteful projects such as idle bridges, airports, roads and such.”

At the same time, he said Turkey's industrial sector became addicted to cheap imported raw materials and goods due to Turkey's overvalued lira and an undervalued dollar.

“This led to persistent trade deficits,” he said.

All of this, though, was sowing the seeds for Turkey's current crisis: As Turkish businesses imported their needs, the country's homegrown industries nodded off to sleep. Meanwhile, Erdoğan oversaw a wave of privatization of national enterprises and public spaces.

When central banks started to raise interest rates around 2006 as the world economy heated up again, making borrowing more costly, Erdoğan ordered Turkey's central bank to lower its rates to keep the tap of cheap foreign investment on and to keep the construction boom going.

There were other motives, too, for his fiscal policies. Erdoğan's circle of power was made up of companies, financiers, businessmen, friends and family members getting rich from the construction bonanza. It was a simple enough equation then: He kept the boom going with low interest rates and in turn kept getting reelected.

“And this worked, until now,” Aba said. An economy based around construction has its limits, he added.

“In some cities there are more houses than households,” he said. “There was an overproduction. The gap was partially closed by selling the new and modern residences to foreigners. But it wasn’t enough.”

The years of low interest rates have landed the Turkish lira in its current morass, he said, where it's depreciated and causing record inflation.

In sum, Turkey is finding it hard to find much else to build, economic growth has slowed, unemployment grown and anger mounted in recent years.

To shore up the lira, Erdoğan has burned through the nation's dollar reserves and Ankara now finds itself about $60 billion in the red. With Western capital flowing out, Erdoğan has turned to the United Arab Emirates, an old rival, and Qatar for cash lifelines.

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Erdoğan's strategy is to right the economic crisis through a new national plan to foster politico-economic autonomy in order to revive Turkey's domestic production and make the country once again an export nation.

Erdoğan is listening to Cemil Ertem, his chief economic adviser. Ertem, according to the Middle East Eye news outlet, argues that Turkey needs to increase its exports and decrease imports through a policy of keeping interest rates low.

“He believes it will make Turkish exports more competitive with a depreciated lira,” the Middle East Eye reported, citing a policy paper it obtained written by Ertem.

A seller attends to a client in a gold shop next to a currency exchange post at the Grand Bazaar in Istanbul, Turkey, on Jan. 12, 2022. (AP Photo/Francisco Seco)

Erdğan is calling on Turks to endure the hardships and argues the country must shift course.

“Of course we know that price rises are causing problems in the daily lives of our people. Of course we are aware of the volatility in the exchange rate, the instability in prices and the uncertainty this creates,” Erdoğan said in late December in a speech, as reported by the Financial Times. “But we will resist these just as we resisted tutelage, terrorist organizations, putschists and global power barons. I am telling you, there is no going back.”

There are indications his economic strategy may be paying off. A weaker lira likely is behind a substantial rise of exports in November and December, unemployment has dipped slightly and gross domestic product is edging up.

Can this “Erdonomics” model defy the forecasts of economists who warn Erdoğan's policies will create runaway inflation and financial chaos in a country so dependent on foreign investment?

Economists doubt it. Timothy Ash, an expert on Turkey's economy at BlueBay Asset Management, said the country is at risk of seeing inflation spiral out of control.

“Inflation is out of the bag, the competitive advantage will go out of the window and we are in a devaluation inflation spiral,” Ash recently told the Financial Times.

Economists also say Erdoğan doesn't really have a long-range industrial plan and warn that trashing the lira is unlikely to lead to the kind of big gains in productivity that the president and his advisers envision. Turkish business associations, meanwhile, are growing more upset at the instability.

“Erdogan’s room for economic maneuver is getting narrower and narrower,” Aba said.

In December, Erdoğan managed to stabilize the lira through a scheme encouraging Turks to convert their foreign currencies into lira and deposit them in savings accounts backed by Turkish treasury guarantees. Deposits in these accounts are guaranteed to get the same or better returns than if they are put into foreign exchange markets.

This anti-dollarization scheme was dubbed by some the “Turkish dollar.” But some analysts saw this as a reckless back-door interest hike that unfairly transferred financial risks to the general public.

“But this cannot last forever. Every time he saves the day with a palliative solution, the systemic risk of implosion is increasing,” Aba said. “He is hoping that he can carry the economy like this until the election and win another term. It worked before, at least three times. But I do not think it’s going to work this time.”

Courthouse News reporter Cain Burdeau is based in the European Union.

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