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The Cost of Control: President Erdogan and Turkey’s Economic Crisis

Turkey- Huber Mansion
Turkish President Tayyip Erdogan arrives at the news conference room at Huber Mansion in Istanbul, Turkey March 31, 2019, following local elections. Photo AFP ©AFP ⁃ BULENT KILIC

For years, many regarded Turkey as a bastion of economic strength in the Middle East and one of the most impressive developing economies in the world. However, in a matter of months, it has fallen apart, with staggering inflation, urgent government measures to alleviate pressure on the average citizen and no sign of investor confidence returning.

The inflation problem

The economy officially went into recession at the end of 2018, according to the country’s statistical institute, shrinking by 2.4 per cent in the final quarter of the year. This was only the latest in the downturn of the economy, which has been struggling since early 2018. President Recep Tayyip Erdogan’s taste for expensive, high-profile infrastructure projects has propped up the economy for years. Yet with fears mounting over growing authoritarianism, investor confidence has been declining since 2016, undermining Ankara’s fiscal strategy.

The real trigger for the country’s current woes came in 2018. In August, amid mounting tensions with the United States (US) over the hostage-taking of an American priest and several Turkish-American citizens alongside an American court case against Turkey’s Halkbank and two banking executives, the Trump administration imposed trade sanctions against Turkey.

This trade war led to an almost 40 percent drop in the value of the lira against the dollar in the first eight months of 2018. This, in turn, made imported goods more expensive, raising the cost of living.

Despite the president’s long-running aversion to raising interest rates – he is most likely wary of the effect on his party’s core working– and middle-class electoral base – in September, the Central Bank raised interest rates, making borrowing more expensive. As a result, industrial production slowed and car and housing sales dropped, hurting several sectors.

This has all been a marked contrast to the economic boom of Erdogan’s early years, during which the economy enjoyed annual growth of as much as 7 per cent. Sadly for the Turks who have suffered as a result of the recent economic woes, the trigger for this crisis – the spat with Washington – could easily have been avoided. Unfortunately, it appears that Erdogan’s bullish geopolitical wran-gling has had an unintended consequence for his citizens.

A market-stall economy

In response to rising inflation (and the popular anger that accompanied it), in February 2019, the government established vegetable stands selling subsidised groceries. This move also aimed to cut out retailers, whom the government blamed for rising prices, with Erdogan even declaring them ‘food terrorists’. Such scapegoating has become almost government policy when it comes to addressing these economic difficulties, with Ankara blaming retailers, malign foreign forces and po-tentially internal saboteurs. Retailers instead blamed the weather as well as the rising price of labour and transport.

The stands attracted media attention from around the world, but they have also proven very popular at home. One stand in Istanbul’s main public square serves between 3,000 and 4,000 people every day. Vegetable prices are up to three times cheaper than in supermarkets, although customers are restricted to buying 3kg each.

Ahead of recent local elections, many saw the stands as a vote-winning gimmick. The vote in late March posed a difficult test to the long-ruling Justice and Development Party (AKP) because of the economy’s fragile state.

In the run-up to the elections, the economy became the electorate’s most pressing issue. It speaks volumes that the economy beat out of the top spot the government’s woeful human rights record, Erdogan’s clam-tight grip on power, the country’s involvement in the war in Syria and Ankara’s struggling geopolitical stance. One poll said that over 63 per cent of voters said that their economic situation had worstened over the last year, testing the loyalty of even self-identified AKP voters (44 per cent of whom said they were undecided ahead of the election). The loss of the mayorships of Istanbul and Ankara – both traditionally bastions of AKP support – will have been a painful blow to Erdogan. Although the AKP dominated in non-metropolitan Turkey, and its coalition with the nationalist MHP won just over 50 per cent of the vote, cities are an essential voter base for any party. It looks like the country’s economic downturn and the AKP’s bullish fiscal policy have shown Erdogan’s achilles heel.

No confidence in the King

Throughout this difficult period, investors and stock markets have appeared wary of further involvement by the president in economic affairs. Erdogan has a long-standing belief in the evil of high interest rates, apparently seeing them as an obstacle to the prosperity of the average Turk. As the impact of US sanctions began to be felt, this belief was widely seen as further damaging the economy. More worryingly, Erdogan has proved completely unresponsive to the advice of almost all economists and market observers, who have called for higher interest rates to ward off reces-sion. This stubbornness has impaired investor confidence at a time when Turkey needs it most.

Since taking over the newly empowered presidential position in 2018, Erdogan has gifted himself the authority to appoint the Central Bank governor, sidestepping figures that were seen as far more market friendly, further spooking international markets. He also appointed his son-in-law as finance minister in July 2018, a decision that was greeted with mixed reactions by the global financial community.

While US-educated Berat Albayrak was viewed as more capable than many in the AKP, his appointment marked a circling of the wagons for Erdogan, who has been cementing his personal or familial control over nearly all of Turkey’s state functions outside the military. However, in the nine months since, Albayrak’s presence appears to have done little to stabilize the economy or temper his father-in-law’s control of financial affairs. The Central Bank did raise interest rates in September, however, in direct defiance of Erdogan, providing some reassurance that economic checks and balances still exist.

Offence is the best form of defence

In March 2019, Turkish financial watchdogs launched an investigation into US bank JP Morgan after the lira slumped more than 4 per cent. The watchdog said it had received complaints alleging that a JP Morgan report was ‘misleading’ and was at the root of speculation on the Istanbul stock exchange.

The 4 per cent drop was the largest single-day currency tumble since the currency crisis last August. The drop prompted concerns that Turks are buying foreign currency as Ankara’s geopolitical position and relations with the West founder.

Economic indicators suggest that the worst is yet to come, with investors skittish, citizens angry and business lethargic. However, the government’s response has been shocking: deny accusations of guilt and attack any would-be aggressor. With tensions over the purchase of Russian military equipment still souring relations with the US, an American bank makes an appealing target, especially given the US’ legal action against Turkey’s Halkbank.

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