Turkey is at the epicentre of an economic crisis

MOSCOW, 12 Jan 2022, RUSSTRAT Institute.

The crisis that continues in Turkey throughout 2021 will go down in history as the “currency crisis”. While the depreciation of the Turkish lira has exceeded 100% since September, no one can predict what will happen to exchange rates, as well as what level poverty will reach.

What is happening in the economy can be described as a “state of insanity”. The new economic model, which the AKP government “discovered” at the end of the 19th year of its rule, only aggravated the existing poverty. Never before, in the entire history of the republic, has the Turkish lira depreciated to such an extent. In 2013, the per capita income was about $12,500. For seven years in a row, it has been showing a decline, and in 2020 it fell to $8,597.

Economist Steve Hanke, who reacted to Turkey’s involvement in the epicentre of the economic crisis through the measures taken by President Tayyip Erdogan, and, in particular, his statement that “the interest rate is the cause and inflation is the result,” shared his thoughts on this on his social network account, noting that it was a figment of the imagination.

Hanke added, “In the real world, interest rates follow inflation”. Stating that the inflation announced by the Institute of Statistics of Turkey (TUIK) at 21.31% is far from the truth, Hanke said that the real inflation rate is 137.76%, which is more than six times higher than the stated level.

There is an academic segment in Turkey that speaks openly about the problem. Noting that exchange rates have increased by 100% in 2.5 months, the Academy of Sciences stated: “The rapid depreciation of the Turkish lira, caused by the monetary policy pursued since September, turned into a real currency crisis by mid-December.”

The Academy, which issued a statement, stressed that the current crisis is not the conjuncture of the world market, but a direct result of the recent monetary policy pursued in the country in combination with an already weak economic base. It is also noted that monetary policy itself is a tool that provoked and aggravated the crisis.

Contrary to the government’s claims, it is emphasised that the depreciation of the Turkish lira was not the result of a conscious strategy, but of an unstable bad economic policy, and that producers in Turkey will not be able to achieve long-term competitiveness in such a crisis situation. It is also noted that the exchange rate, which on some days showed an increase of even more than 10%, caused a price crisis in markets across the country, and it is reported that these events in a very short time will lead to the destruction of trade channels, the postponement of investments, and a rapid reduction in production and demand:

“In case of persistent adherence to this policy, carried out by ignoring the scientific postulates of economics and empirical conclusions, we should expect mass bankruptcies and closures of companies, as well as layoffs throughout the country.”

Lack of will to implement rational solutions

The bad thing is that despite the obvious actions that should be taken in such cases, there is no will capable of implementing rational decisions. Because the will is now concentrated in the hands of one person, and the mechanisms that can balance it have been destroyed. If the administrative system depends on one person, and this person pursues an incomprehensible goal and insists on erroneous actions, then various strata of society should take the initiative to balance the mistakes.

To be very clear, all sectors of society and all responsible institutions should publicly declare the causes and consequences of the economic crisis Turkey is experiencing and the ways to resolve the crisis. It is necessary to immediately determine what needs to be done and make statements to the public. Let everyone see that such statements are not just a political statement, and that this is done to protect the interests of the segments of the population they represent.

“Manipulation by external forces”

But if you look from the side of the authorities, then everything is fine! There are minor issues. “External forces” are trying to bring Turkey to its knees through manipulation, but the AKP government is waging an “economic liberation war”. According to them, the increase in the exchange rate “does not correspond to the realities of the economy”… All this (in their opinion) is manipulation!

While Erdogan does not back down from his idea that interest rates are one of the reasons, he is convinced that he can reduce inflation by lowering interest rates. Claiming that he managed to reduce inflation to 4% when he came to power, Erdogan said that he would be able to achieve this again.

Erdogan, not agreeing that the current situation in the economy is the result of his own decisions, argues that Turkey has become a place where certain games are played, and that it’s all for nothing, and the country will get out of this situation in a short time, becoming even stronger. However, the figures show that the problem lies within the country.

Citizens of Bulgaria, Azerbaijan or Armenia come to Turkey for shopping… The Institute of Statistics of Turkey (TUIK) published data on the Consumer Confidence Index for December 2021, according to which the consumer confidence index, seasonally adjusted, decreased by 3.1% in December compared to the previous month; in November, the index index was 71.1%, in December – 68.9%. The minimum wage, which in January was $384 in foreign currency, has now dropped to $162.

Sellers do not want to sell their goods, because they know that if they sell a refrigerator, washing machine, car, etc. today, tomorrow they will not be able to buy these goods at the same price. Prices are not rising because sellers are “stockpiling”, people are stocking up because inflation is out of control…

In what healthy economy does a country’s currency depreciate by 5% within a few hours? In which healthy economy do the regime’s supporters make proposals to “declare a state of emergency and introduce a controlled exchange rate”? In which healthy economy, after the news about the increase in fuel prices, do queues line up at gas stations? In what healthy economy do people stand in kilometre-long queues for bread for several hours?

2022 will be a year of “catastrophe”

National income is important from the point of view of demonstrating the economic power of the country. National income per capita is considered an important indicator that gives an idea of the average income level of citizens of the country. Per capita income in Turkey has been declining for the past 7 years.

On September 5, the Official Gazette published a Medium-term Development Program (OVP) covering the period 2022-2024, which is a three-year roadmap of the Turkish economy. With a dollar value of about 8.5 Turkish liras, according to the Medium-term Development Program, the gross domestic product (GDP), which was 5 trillion 47 billion Turkish liras in 2020, was expected to grow to 6 trillion 648 billion Turkish liras in 2021 and to 7 trillion 880 billion Turkish liras in 2022.

The expected GDP in dollar terms was calculated as $801 billion for 2021 and $850 billion for 2022. It was predicted that in 2023 this figure would amount to $925 billion, and in 2024 it was expected that it would exceed $1 trillion. But now the dollar exchange rate is changing from day to day, and on December 17, the dollar exchange rate reached 19 lira. Thus, the Medium-term Development Program is good for nothing.

In Turkey, per capita income in dollars has been declining since 2014. According to official data, for the first time in the history of the republic, per capita income shows a decline for seven years in a row, which even became the topic of news reports. GDP per capita, which was $4,739 in 2003, rose to $1,582 in 2013. Since then, it has been trending towards a constant decline. The national income per capita, which in 2019 amounted to 51,834 Turkish lira ($9,127), in 2020 amounted to $8,597. Thus, the national income returned to the indicators of 2007.

In other words, even if we assume that the dollar has never risen and the targets of GDP and the Medium-term Development Program have been achieved, the indicator of national income per capita reflects a drop even below $6,000. If we take into account that the dollar continues to grow under the influence of inflation and the government’s economic policy, and the average exchange rate is 20 lira per dollar, this figure falls even lower, to $5,300. A drop in per capita income below $6,000 means complete impoverishment. The AKP’s “new” economic policy will make the rich richer and the poor poorer. The middle-income strata of the population will approach the lower-income strata.

At a meeting with economists and scientists, the President, AKP leader Recep Tayyip Erdogan spoke about the changes in economic policy they have initiated.

“These changes have not just begun. They have been going on for a long time. We have abandoned the classical understanding of the economy of keeping inflation under control with the help of high interest rates. Instead, we turned to an economic policy based on the growth of the country through investment, employment, production, exports and the current surplus,” Erdogan said.

The leader of the “Good Party” Meral Akşener sharply criticised Erdogan’s statement: “The AKP, believing that the industry will collapse without Syrians or Afghans, provides them with jobs instead of Turkish workers, thereby committing a crime against humanity. The AKP is not trying to solve the problem of unemployment.”

As a result, according to the Institute of Statistics of Turkey (TÜIK), more than 50% of the population works on the minimum wage. The introduction of a new economic model will lead to an even greater increase in this indicator. Young people’s dreams of studying externally or accumulating savings are crumbling. This leads to the fact that young people either go abroad, or draw conclusions about the meaninglessness of getting an education: “What is the point of me getting an education if I will still receive a minimum wage?”

On the other hand, other segments of society, that is, with an income above average, are approaching the minimum wage. However, if the minimum wage falls below the poverty line, it creates a massive layer of the poor, a poor nation. Turkey is experiencing an unprecedented crisis of confidence and a severe economic crisis. The monetary unit of the country is depreciating in relation to all currencies of the world. Years of work and hard-earned savings are worthless. Ports and strategic facilities are transferred to the sheikhs of the Persian Gulf on the cheap.

Institute for International Political and Economic Strategies – RUSSTRAT

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