An objective look on Türkiye’s economic dilemma away of political debates


By: Contribution to Syrializm


As the dust of the Turkish elections settled, which the Turkish people and the world were eagerly awaiting, it become clear that President Recep Tayyip Erdoğan isn’t going anywhere and will remain in power, along with his party, the Justice and Development Party, and his alliance who capture a majority in parliament.

The results of the elections, which upsets many inside and outside Türkiye, sparked discussions and concerns about the country’s future, particularly the economic situation.

As soon as the election results were announced, and with the gradual decline in the weeks leading to May, the exchange rate of the Turkish lira reached approximately 20 lira against the US dollar.

This indicator reflects the market’s dissatisfaction with the election results or perhaps the entities that control the exchange rates in/out of the country.

The Turkish president still relies on a set of measures aimed at preserving the value of the Turkish lira, including support from Gulf Arab countries to the Turkish economy through financial deposits to the Central Bank of Turkiye aiming support the Turkish economy and the currency.

In March of last year, the Kingdom of Saudi Arabia deposited 5 billion dollars, while Qatar signed an agreement to deposit 10 billion dollars.

The United Arab Emirates and Kuwait are also doing the same.

The Turkish opposition accuses the government of President Erdoğan of exerting control and influence over the decisions of the Central Bank.

The opposition demands that the Central Bank remain independent and away from government’s political authority in terms of making monetary decisions in the country.

On the other hand, the Turkish president claims that he offers advice to the governor of the Central Bank.

However, in reality, as it’s well-known, the Turkish president has dismissed the governor of the Central Bank three times in less than five years due to his insistence on lowering interest rates.

A group of experts, economists, bankers, and investors argue that the recent continuous decline in the value of the Turkish lira attributed to the fact that the Turkish president intends to implement a new interest rate cut.

This approach is pursued to combat inflation in the country on one hand, and because the concept of interest contradicts the teachings of Islamic religion.

Mr. Erdoğan believes that high interest rates lead to inflation; therefore, he continues to direct the Central Bank to lower interest rates.

This theory, as is known, contradicts the prevailing principles of economics worldwide.

His efforts to reduce interest rates have become one of the goals he seeks to achieve, to the extent that discussing this has become part of his promises and electoral campaign.

The most renowned American economist, recipient of the Nobel Prize in Economics in 1976, Milton Friedman, says that the solution to the problem of inflation lies in reducing the money supply in the markets, which achieved by raising the interest rate.

The American economist remarks, “It’s a major mistake to judge policies and economic programs based on their intentions, not their results… Therefore, if inflation rates rise, there should be an attempt to reduce the money supply, and with an increase in interest rates, inflation decreases, and vice versa”.

This principle is the approach adopted by all countries and governments around the world, however, in Ankara, Mr. Erdoğan is swimming against the wave.

When studying the numbers in the country, we find that in October 2020, when the world and Türkiye were grappling with the Covid-19 pandemic, the inflation rate in the country reached 20%.

In October 2021, the inflation rate reached 19%, and with the continued decline in the value of the Turkish lira, inflation in the country skyrocketed to a terrifying level, reaching a peak of 85%.

This matter has put international economists in a state of astonishment.

Economists speaking to the American CNBC network stated that in September 2022, when the interest rate was 13%, the Turkish president reduced it to 12%, and three months later, in December 2022, the inflation rate reached 64%.

The same scenario occurred at the beginning of the current year, as the inflation rate also dropped to 57.7% in January, followed by a decrease to 55.2% in the following month, February.

During that period, the Central Bank gradually reduced the interest rate.

It was reduced to 10.5% in October 2022 and then to 9% in November 2022.

Looking at the previous figures, we find that the Turkish president’s approach of lowering the interest rate to combat inflation plays a role that somewhat contradicts the theory of Milton Friedman, who was awarded the Nobel Prize in Economics for his very theory.

It seems that Erdoğan’s recipe for combating inflation is successful somehow, while indicators show that the economic crises which Türkiye is facing are the result of internal and external efforts to undermine Erdoğan’s approach.

In 2018, the Turkish president made a bold statement, saying, “There are those who threaten us with destroying our economy and imposing sanctions on us, exchange rates, interest rates, and inflation… We tell them that we have uncovered your plot and we’re challenging you!”

What the Turkish president intended to say is that there are internal opposition forces supported by external adversaries manipulating the Turkish economy’s capabilities in an effort to overthrow him and his ruling party, after their attempt by using the same old military coup method failed in July 2016.

Analyzing the exchange rate differentials for the Turkish lira over the past decade reveals that in 2013, the exchange rate against the US dollar was 1.8 lira, and in 2021, it was 8.4 lira.

In mid-2022, the exchange rate reached around 17 lira, and today it fluctuates around 21 Turkish lira.

The figures are clearly show that the Turkish currency has significantly collapsed over the past decade, indicating significant risks surrounding the lira value.

However, in order to maintain the value of the Turkish currency, it is necessary to raise interest rates, which is contrary to what Erdoğan is doing.

Erdoğan claims that interest rates are the mother and father of all evil, and the root of calamity.

There’s no secret that Erdoğan’s religious commitment is one of the main motivations driving his war against interest rates, which are considered one of the gravest sins in Islamic religion.

Islamic laws consider dealing with interest, known as “Usury,” as the second major sin that God doesn’t forgive his servants for right after polytheism in his worship.

The problem, in fact, isn’t in applying the rules of Islam… The problem lies in the fact that the very foundations and system of the economy in Türkiye is similar to other countries, which built on principles and rules governed by economic and financial policies practiced worldwide.

There are interest rate ratios that govern market mechanisms in terms of controlling inflation rates, borrowing and exchange rates.

Türkiye itself, as a country with over 88% of Muslims, has an economic system consisting of both traditional and Islamic banking systems.

Therefore, for the Turkish president’s recipe to be valid, he must separate Türkiye and its economy from the global economy.

This means that interest rates should eventually reach 0%, and Türkiye should be self-sufficient in over 90% of its needs in all domains.

Its production should be high enough to meet the domestic market’s various product needs at reasonable prices that align with people’s income… Additionally, the surplus of products should be exported to other countries.

Furthermore, there should be flourishing sectors such as tourism, various service sectors, and strategic industries that linked to technologies/high-tech and raw materials that may not be fully available in the country, especially in energy products, technology industries, and military industries, which have reached significant high levels during Erdoğan’s years in power.

The Turkish financial system, fundamentally, isn’t Islamic as we mentioned, it is a mixture of traditional and Islamic banks, with a greater prevalence of traditional banks accounting for over 90% of the Turkish banking system as a whole.

The reduction of interest rates aligns with the concept of distancing from “Usury” which refers to high interest rates that hinder growth rates.

Interest rates, in their economic concept, represent the price of money; however, money shouldn’t inherently have a “price” as it is a value and an element of life and production.

According to Islamic laws, money as a value should be linked to productivity rather than time in order to have value.

Friedman’s foundation in his widely accepted theory based on the idea that as interest rates rise, inflation decreases.

This implies the use of interest or “Usury” to control the global market and financial system.

To avoid being solely critical of Milton Friedman’s theories, let’s consider the disagreements among many economists, especially those who came before him in this field, such as the British economist John Maynard Keynes (1883-1946).

Keynes, the author of “The General Theory of Employment, Interest, and Money,” emphasized the necessity for the state and government to create economic equilibrium through government spending, welfare, and private investments.

Keynes served in the British Treasury during World War I, where he became famous for his opposition to the conditions imposed on defeated Germany in the Treaty of Versailles, which included harsh terms, such as forcing the German government to pay war costs and reparations.

At that time, Keynes argued that this would destroy Germany and all of Europe, and his government rejected his opinion, he resigned and return to teaching at the University of Cambridge.

Keynes observed that the policies of the British central bank, through interest rate manipulation, failed to solve the problem of unemployment in Britain after World War I, which had reached 10% at that time.

He proposed that the British government increase spending and provide unemployed individuals with money to encourage them to start projects and motivate them to work.

During that period, Keynes predicted the outbreak of World War II in his other book, “The Economic Consequences of the Peace,” in his book; he argued that the humiliating and submissive surrender treaty imposed on Germany after World War I would eventually lead to another European war.

By the way, most countries around the world adopted his approach after the end of World War II to combat unemployment and support economic growth, and this policy succeeded in achieving the desired results for more than two decades.

John Maynard Keynes considered the godfather of the World Bank and The International Monetary Fund when he led the negotiations at Bretton Woods in 1944.

Currently, Milton Friedman’s theory hasn’t been successful in curbing inflation in Britain, where interest rates have reached around 4% and inflation is around 8.7%.

In another example, Japan where the interest rate is -0.1%, while the inflation rate is 2.5%.

The causes of inflation vary from one country to another, so adjusting interest rates may succeed in controlling inflation in some countries but fail in others.

In the United States, this mechanism is successful in controlling inflation because inflation in America linked to the country’s ability to print the US currency at any desired time.

Therefore, controlling inflation achieved by withdrawing US dollar supply off the markets.

It’s worth mentioning the American dilemma related to the debt ceiling, which causes a crisis in the United States every few years, as currently, the US debt ceiling has reached around $31.5 trillion.

During its efforts to cope with the consequences of the Covid pandemic, the United States engaged in massive money printing, printing about $3 trillion in just three and a half months in 2020.

Interestingly, inflation in the United States has only increased by 9%.

The ironic part is that countries that already suffer from a shortage of foreign currency reserves resort to raising interest rates to control the exchange rate and keep up with the United States.

This leads to real economic disasters, pushing them to float their local currency exchange rates while continuing to spend recklessly on projects that don’t generate returns through borrowing from abroad, overloading the state budget and its resources with foreign debts with interests that are increasing terrifyingly.

In the case of Türkiye, amidst its ongoing economic battle, we find that reducing interest rates primarily benefits the Turkish government because governments are usually among the largest borrowers from banks.

In cases of low interest rates, the government borrows from banks at lower interest rates, and thus the general state budget isn’t depleted, with the government paying the interest on the loans from it.

Therefore, since the general state budget belongs to the people, supposedly, the people are the first beneficiaries of the interest rate reduction.

When interest rates raised, borrowing from banks decreases, investment opportunities diminishes, production and growth decline, and unemployment rates increase.

Looking to the growth rate in Türkiye, we find that it achieved a growth rate during the period of the Justice and Development Party’s tenure in power (2002-2022) of approximately 5.8%, while the global growth rate during the same period was 3.8%.

Despite all the talk about the economic crisis in the country, the Turkish economy witnessed growth in the first quarter of 2023, reaching 4%.

What is good about this is that the high growth rate contradicted expectations that the Turkish economy would suffer as a result of the aftermath of the destructive earthquake that hit 10 Turkish provinces on February 6th of the past year.

According to a report by the World Bank issued in April last year, it was expected that the growth rate in Türkiye in 2023 would reach around 3.2%, contradicting its previous expectations that the growth increase would not exceed 2.7%.

It’s worth noting that the World Bank projected that the global economic growth rate in 2023 wouldn’t exceed 1.7% only.

The World Bank also raised its expectations for the Turkish economy’s growth rate in the next year, 2024, to reach around 4.3% instead of its previous expectations of 4%, with an expectation that the economic growth rate in Türkiye would reach 4.1% in 2025.

The World Bank had projected that the earthquake would cause losses amounting to $34 billion.

Thus, the Turkish economy has achieved growth by not following the path of raising interest rates to control inflation.

The reduction of the interest rate in Türkiye, which leads to a depreciation of the Turkish currency, pushes the country towards moving away from imports and focusing on domestic production.

Consequently, the trade balance will be in favor of the Turkish economy through increasing exports at the expense of imports.

According to a US report published by Reuters in January 2023, the value of Turkish exports increased to $254 billion in 2022.

Useful to recall that raising interest rates leads to inflation due to the higher cost of borrowing, which in turn increases production costs that ultimately, these costs are borne by the consumer, i.e., the Turkish citizen.

Here, we can summarize the situation with questions of Will the exchange rate of the Turkish lira stabilize.

Will inflation decrease, and Türkiye’s challenge in replacing imported products with Turkish made products done.

In addition, securing the materials used in local production process, which would reduce the inflation rate.

This leads us to the main question… Will the Turkish president continue with the policy of lowering interest rates, or he be forced to raise them again?

In conclusion, no one can predict the outcomes of the Turkish president’s policies in advance, considering the fact that Türkiye is in the middle of real economic saga with all its difficulties and hardships on the people.

Tayyip Erdoğan’s statements about conspirators causing the collapse of the Turkish lira raise questions about Türkiye’s ability to confront those conspirators.

Erdoğan’s statements accusing the West of being behind all the conspiracies against his country/government haven’t been concealed by Western media, which launched a fierce campaign against him during the elections, all which hopes for him to lose.

Therefore, he must find a group of true allies and friends to support his conquest to confront and overcome the economic challenges.

The BRICS countries may be the top of those friends, along with perhaps the Arab Gulf states.

Indeed, monitoring the results of economic policy decisions cannot achieve immediate results under any circumstances, however, in the case of Türkiye, despite the apparent difficulties; the pursued economic policies will serve as inspiration to many countries around the world.

The Turkish political system has also demonstrated, during the elections, that it has a sophisticated and class civilized democratic model that defies all expectations.

It’s fair to say that after all, no matter whether you support Tayyip Erdoğan or anon else.

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