As Turkey approaches the presidential and parliamentary elections this weekend, its economic challenges have dominated the headlines. Soaring inflation rates and a plunging lira have marked the country’s turbulent economy over the past month, after credit rating agency Moody’s slashed Turkey’s prospects again in May, predicting lower growth amid heightened uncertainty.
The latest challenges have been motivated primarily by rapid economic growth rates; Turkey was the fastest growing economy among G20 countries last year, achieving a rate of almost 7.5 per cent, surpassing those of India and China.
Whilst the expansion is reported to have created around one million jobs, inflation stands at 12 per cent as a consequence, with some analysts putting the figure closer to a staggering 40 per cent. As the purchasing power of the currency has fallen, the costs of basic goods have increased, putting pressure on families struggling to make ends meet.
Turkey’s success has also been mitigated by global economic circumstances. Its gross domestic product (GDP) decreased in terms of dollars from $863 billion a year ago to $851 billion this year, reflecting the significant fall of the currency against the rising US dollar, as the Federal Reserve increased its interest rate last week for the seventh time since 2015. Likewise, GDP per capita has also dropped from $10,883 to $10,597 in current prices year-on-year.
Critics also point to Turkey’s domestic growth having been driven by tax cuts, government incentives — particularly in the construction sector — and excessive borrowing for large scale projects, as opposed to structural changes and investments in the real economy.
“Turkey has failed to attract long term capital for foreign direct investment,” says Mehmet Asutay, Professor of Middle Eastern and Islamic Political Economy and Finance at Durham University. “Capital inflows come and circulate in the stock market, but do not enter the productive economy.”
Turkey’s expected growth for this year stands much reduced, with an estimated real GDP increase of only two per cent as global institutions warn that the economy is overheating rapidly.
In a slump
Rising growth rates have also had an impact on the lira, the value of which has been falling steadily since March, when Moody’s downgraded Turkey’s credit rating on account of the country’s rising public spending deficit and the weakening of economic and political institutions.
“The current account deficit has brought about the end of political parties historically,” explains Professor Asutay. “This remains a major issue for Turkey.”
Earlier this month, Turkish President Recep Tayyip Erdoğan reluctantly raised the central bank’s benchmark interest rate in an attempt to strengthen the currency. He accompanied the policy change with a request for the public to convert their foreign currency into lira, prompting many to film themselves burning their euros and dollars and uploading the footage onto social media.
The falling lira also presents a problem for Turkish companies which have borrowed in international markets, since it makes it more expensive in lira terms to repay their debt.
Moreover, less than two weeks later, the lira fell by six per cent, sustaining the heaviest blow since 2008, reflecting the ongoing uncertainty felt by investors. Meanwhile, Erdoğan announced that he would take greater control of monetary policy if the Justice and Development (AK) Party wins the election. With the independence of the central bank seemingly at risk, whether the government can draw the lira back to its level at the beginning of the year is uncertain.
Not on the agenda
Turkey has been keen to hail the strong growth rates as a sign of the country’s success, but critics have pointed to this frequent denial of the current crisis as only serving to entrench problems further. The government has maintained that the economic challenges originate from abroad, with Foreign Minister Mehmet Cavusoglu last month including Muslim states in a group of foreign countries that were attempting to “demolish the economy” following the failure of the attempted military coup in 2016.
The sentiment was backed by Prime Minister Binali Yildirim, who said at the end of last month that manipulations were behind the foreign exchange rate volatility ahead of the general election, emphasising that Turkey’s economy was built on strong foundations. The interference alleged has not been specified, with many considering the accusations to be an attempt to distract voters from the economy’s domestic fragility.
Although President Erdoğan has vowed “new and serious” steps to tackle the economy after the election, economic promises remain vague across the political spectrum, intentionally so, according to Professor Asutay. Whilst parties are united in declaring that their respective leaderships would witness the beginning of a new economic paradigm, specific policy prescriptions have not been highlighted.
“Turkey’s political culture has not enabled us to shift from identity politics,” he argues. “The question of what happens to taxpayers’ money has not found its way into the minds of people yet. Frequent elections have also suggested the manipulation of the economy for the elections. However, I think Erdoğan will have to deal with austerity after the poll.”
The government has also been reluctant to heed warnings from global organisations; senior presidential advisor Cemil Ertem slammed the cautionary advice of the International Monetary Fund earlier this year, calling the suggestions to rein-in spending “failed economic theories” before concluding that the government is “going to do the exact opposite.” President Erdoğan has also threatened to conduct a post-election “operation” against Moody’s after the rating agency placed Turkey on review for a further downgrade.
Whilst Turkey’s growth and national development has soared in the past decade under Erdoğan’s leadership, recent political challenges, including the state of emergency that has gripped the country since the coup attempt, as well as the ongoing conflict in Syria, have strained Ankara’s financial management. Structural issues, including the country’s dependency on imports and nearly one in every five young people failing to find work, continue to pose an obstacle to long term improvement.
Government officials insist that a solid executive administration after the elections will bring about stability and growth. What that will look like after the election, though, remains to be seen.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.