ejsnah
30-04-2019, 21:52
Turkey’s core problem is that the government keeps trying to stimulate the economy even as higher inflation suggests it should be doing the opposite. Since Erdogan’s Justice and Development Party made its reputation on delivering rapid economic growth, it had to keep stepping on the gas to halt the economy’s slide through each subsequent vote.
The strategy has worked, but with a cost. Thanks in part to these stimulus programs, Erdogan keeps winning elections—with much assistance, of course, from suppression of the opposition and ironclad control over the media. Yet each successive attempt to meddle with the economy has pushed inflation ever higher. As inflation has increased, the value of the lira has declined accordingly.
The collapsing lira has made Turks substantially poorer. Compared to a decade ago, it takes roughly three times as many liras to buy a dollar’s worth of goods from abroad. And Turkey is a relatively trade-dependent economy, so the decline in the exchange rate hurts.
Why not increase interest rates further? For one, Erdogan himself has repeatedly argued that lira volatility is a “U.S.-led operation by the West to corner Turkey” and that “the inflation rate will drop as we lower interest rates.” The reality, nearly every economist agrees, is the opposite. But set aside Erdogan’s unorthodox musings on exchange rates, and he there is still a political logic for keeping interest rates relatively low.
The reason is that higher interest rates will reduce inflation by reducing economic growth.
As banks cut back lending, consumers buy less, businesses invest less, and the economy slows—the exact opposite of what Erdogan needs to maintain political support. Thus the Turkish government has pressured the central bank to keep interest rates lower than they should be, even at the cost of letting inflation sail away while the lira sinks yet further.
For now, this strategy has worked well enough in political terms. It helped Erdogan win the 2017 referendum and the 2018 presidential election. But the bill is coming due. The sinking lira and rising prices were one reason that Erdogan’s party lost control of the mayoralties of Istanbul and Ankara in this year’s elections.
http://https://foreignpolicy.com/2019/04/29/erdogan-is-writing-checks-the-turkish-economy-cant-cash/
The strategy has worked, but with a cost. Thanks in part to these stimulus programs, Erdogan keeps winning elections—with much assistance, of course, from suppression of the opposition and ironclad control over the media. Yet each successive attempt to meddle with the economy has pushed inflation ever higher. As inflation has increased, the value of the lira has declined accordingly.
The collapsing lira has made Turks substantially poorer. Compared to a decade ago, it takes roughly three times as many liras to buy a dollar’s worth of goods from abroad. And Turkey is a relatively trade-dependent economy, so the decline in the exchange rate hurts.
Why not increase interest rates further? For one, Erdogan himself has repeatedly argued that lira volatility is a “U.S.-led operation by the West to corner Turkey” and that “the inflation rate will drop as we lower interest rates.” The reality, nearly every economist agrees, is the opposite. But set aside Erdogan’s unorthodox musings on exchange rates, and he there is still a political logic for keeping interest rates relatively low.
The reason is that higher interest rates will reduce inflation by reducing economic growth.
As banks cut back lending, consumers buy less, businesses invest less, and the economy slows—the exact opposite of what Erdogan needs to maintain political support. Thus the Turkish government has pressured the central bank to keep interest rates lower than they should be, even at the cost of letting inflation sail away while the lira sinks yet further.
For now, this strategy has worked well enough in political terms. It helped Erdogan win the 2017 referendum and the 2018 presidential election. But the bill is coming due. The sinking lira and rising prices were one reason that Erdogan’s party lost control of the mayoralties of Istanbul and Ankara in this year’s elections.
http://https://foreignpolicy.com/2019/04/29/erdogan-is-writing-checks-the-turkish-economy-cant-cash/