Erdogan’s zany monetary experiment is impoverishing Turkey

 

By the end of the month, the only food Emer can prepare is plain pasta. Occasionally she goes to bed hungry.

“I can’t even afford anchovies,” the retired nurse says outside a vegetable market in Maltepe, a middle-class neighbourhood in Istanbul.

She and her two sons have to get by on her monthly pension of 3000 lira, or about NZ$364. Emer is behind on gas and electricity bills and loan payments.

She is not alone. Soaring prices and a plummeting currency are turning the savings and incomes of most Turks to dust.

Turkey’s crisis is beginning to spin out of control. The latest rout began after the president, Recep Tayyip Erdogan, defended recent interest-rate cuts, foresaw new ones and suggested he was deliberately pursuing a weaker currency to drive growth.

“The competitive force of the exchange rate leads to increase in investment, production and employment,” Erdogan said on November 22. He got what he bargained for the next day, when unnerved investors began dumping the lira.

Within hours the currency fell by 15 per cent, its worst showing in years, before erasing some of its losses the next day. Small protests erupted in parts of Istanbul and Ankara. Erdogan claims Turkey is waging an “economic war of independence”. It is causing grave collateral damage.

Egged on by Erdogan, who has sacked three of its governors in under three years, the central bank has slashed interest rates by a cumulative 4 percentage points since September, to 15 per cent, despite an official inflation rate of nearly 20 per cent.

Four out of five Turks are convinced actual inflation is much higher, according to one survey.

The result is that the lira has lost nearly 40 per cent against the dollar since the start of the year. Erdogan’s latest comments poured fuel on the fire. 

There is some method to the president’s madness. A weak currency and negative real interest rates may help borrowers who do not have foreign-currency debt, exporters who do not have to rely on foreign suppliers, and the construction sector, says Selva Demiralp of Koc University.

But almost everyone else will suffer. Many potential investors will shy away from taking out loans because the economic climate is simply too volatile.

Meanwhile, Turks will be scratching their heads, wondering why, if a weak currency is desirable, their central bank has burned through at least NZ$240 billion in precious reserves to prop up the lira for more than two years.

“After the exchange rate explodes and everything gets more expensive, the government says they know what they’re doing and that now we will grow because exports will increase,” says Ali Babacan, a former economy minister now at the head of Deva, an opposition party.

“It’s like falling off your horse and saying you were going to dismount anyway.”

An even more alarming prospect is that Erdogan has decided to test his conviction, which turns basic economic thinking on its head, that cutting rates is the way to tackle inflation. As the central bank dances to his tune, the strategy risks impoverishing millions of Turks.

Many blue-collar workers, students and pensioners are no longer able to buy meat or basic household necessities. Attempts by the pro-government media to put a positive spin on this sound like cruel jokes.

A television pundit recently celebrated the impact of the crisis on the minimum wage, which had sunk from the equivalent of around NZ$550 monthly at the start of the year to NZ$320, as a chance for foreign companies to move production to Turkey. One ruling-party parliamentarian helpfully suggested Turks should eat less.

For middle-class Turks, holidays abroad and scores of imported goods are out of reach. Many young professionals say they no longer see a future in Turkey.

Since the start of last year, some 3000 doctors are believed to have moved, mostly to Germany. Another 8000 are planning to join them.

Newlyweds Taner and Busra, he a physician and she a paramedic, both in their late 20s, say they can no longer dream of buying an apartment or a new car. “We’re getting poorer each day,” Taner says. They are starting to take German classes.

Source Stuff