Turkiye 2024: The uncertainty in inflation and exchange equations

Inflation remains a fundamental policy issue for Turkiye, not only for this year and next year, but in the medium term. As one of the most important explorers in the world, Captain James Cook said after visiting many countries: “Inflation makes the wealthiest people richer and the masses poorer”.

This is only the second-worst inflation crisis in recent Turkish history. In 1994, inflation reached a staggering 126 per cent. Then, as now, Turkiye managed to calm the inflationary storm, thanks to a highly dynamic consumer market and equally vibrant industrial output, mainly in the automotive sector.

Since the 1960s, Turkiye has become an important production base for several major automotive manufacturers, including Mercedes-Benz, Ford, Fiat, Toyota, Hyundai, Honda and Renault. Today, most of Ford’s light commercial vehicles (LCVs) delivered across Europe are made in Turkiye, as are millions of cars and trucks from other brands.

The automotive sector has emerged as one of the main drivers of Turkiye’s economic recovery. As a result, the inflation rate, which has been increasing steadily since 2021, is predicted to slow down from the second half of this year. The fleet market is eagerly anticipating this development, as it will allow it to start growing again.

READ: Turkiye’s new Central Bank chief assures that work to combat inflation will press on

Yet, the car industry will not be enough to calm inflation storm. Inflation continues to worsen Turkiye’s income distribution gap. In terms of ensuring domestic and foreign borrowing under more favourable conditions, Turkiye’s primary goal is to reduce inflation permanently. Therefore, they must all work together to ensure a smart and effective package put forward to reduce this does work properly.

Positively, beside domestic automotive sector, I see that Turkiye is rapidly moving towards a much more effective point in the world defence industry market than it is now. This is an element that makes a very serious contribution to Turkiye’s foreign policy. There is an ecosystem in Turkiye to balance inflation via defence industry. Soaring inflation, the poor performance of the Lira against the US Dollar (and the resultant lack of purchasing power) and high levels of government debt have left Turkiye in need of a financial boost. In 2022, Turkish defence exports were valued at more than $4 billion, up from $3.1 billion in 2021. The growth of this revenue stream shows why Turkiye is so determined to realise its domestic defence production goals. Turkiye’s defence and aerospace exports totalled $5.5 billion in 2023, up about 25 per cent from the year prior, according to a local organisation that tracks foreign sales. Turkiye’s defence industry is on the rise.

In the report, an international institute based in Stockholm, SIPRI, highlights that Turkiye’s arms exports increased by 69 per cent from 2018 to 2022 compared to 2013-2017, with a significant increase in its share of the global arms trade. According to SIPRI, Turkiye’s share of the global arms market doubled during the same period to reach 1.1 per cent of global arms exports.

According to the Istanbul Chamber of Commerce, Sekib Avdagic, Turkiye is, by far, “number 1” in the world in terms of the rigidity of business life. Avdagic said that it is the only country where 5 mechanisms under the heading of “severance pay”, the additional burden faced by the employer in case of retirement, unemployment insurance, job security and union compensation are implemented.

According to Fitch Ratings, current policies are consistent in reducing Turkiye’s current account deficit. The current account deficit, which was at the level of 60 billion dollars on a 12-month basis in May 2023, started to decrease and closed the year at the level of 45 billion dollars.

As an energy expert, I want to briefly point out energy prices and inflation relations. Last October, Turkiye increased natural gas prices for businesses and electricity producers, adding to inflationary pressures that had forced the Central Bank to raise interest rates sharply. And a 20 per cent increase in electricity prices for industrial consumers that came right after natural gas. Last February, energy prices increased by approximately 36 per cent compared to the previous year.  Since the pandemic, dependency on energy is very high in Turkiye. How Turkiye can nationalise its own energy is the main case in that regard. Nationalising energy with the domestic renewable energy source should be kept as the most important option to tackle rising energy prices. Otherwise, enormous price fluctuations in global energy markets, geopolitical events such as the war in Ukraine or rising interest rates will put all households at risk. This market fragility has already led to the bankruptcy of several energy suppliers. It raises the threat of national blackouts and increases the costs to consumers, when the government must bail out bankrupt firms.

On top of these issues, the uncertainty in inflation and exchange equations makes it difficult for investors to access loans. Therefore, indicators of steady progress in Turkiye’s fight against inflation and increasing confidence that the rebalancing process will lead to a sustainable decline in inflation are among the factors that will increase the rating.

READ: Turkiye inflation for January climbs as housing and utility prices rise

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.