EXPLAINER: Are Turkey’s efforts to fix the economy working? – Channel 2 of WSB-TV

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ANKARA, Turkey — (AP) — Turkey’s government and central bank have taken unconventional measures in recent weeks to support a beleaguered economy crippled by soaring consumer prices, instead of ending a much-criticized plan reduction in interest rates.

President Recep Tayyip Erdogan’s insistence on cutting rates – the opposite of what economists say should be done to curb soaring inflation – has weakened the country’s currency and driven prices even higher, which makes it difficult for people to buy basic items like food.

Here is an overview of the impact of Erdogan’s economic policies and their long-term risks:

WHAT IS GOING ON?

Erdogan, who has become increasingly authoritarian and has long declared himself an enemy of high borrowing costs, pressured the central bank to continually cut interest rates even as inflation surged 36% last month.

By comparison, inflation in the 19 countries using the euro jumped a record 5% from a year earlier, and the United States hit a nearly 40-year high of 7%.

Conventional economic thinking calls for higher borrowing costs to rein in inflation, as other countries have done, but Erdogan argues the opposite.

He has sacked three central bank governors since 2019 over interest rate differentials, saying lowering them would boost exports and lead to more growth and jobs. He also cited Islamic teachings that consider usury a sin.

Erdogan’s unorthodox policies are driving foreign investors to flee Turkey, while locals try to protect their savings from high prices and currency depreciation by converting them into foreign currency or gold. The Turkish lira hit successive record lows in November and December and lost around 45% of its value against the US dollar last year.

With prices soaring, even basic commodities are out of reach for many Turks. Opposition parties, meanwhile, dispute the official inflation figure; an independent inflation research group says the real figure is an astonishing 82%.

“Anyone who goes shopping knows that the 36% inflation is fictional,” said Ali Babacan, former deputy prime minister under Erdogan, considered the “czar of the economy”.

“The people are paying a high price (for Erdogan’s policies) in the form of hardship and poverty,” added Babacan, who has since formed his own party.

WHAT IS ERDOGAN DOING TO FIX THE SITUATION?

Faced with a rapidly collapsing currency but determined not to raise interest rates, Erdogan last month announced a program to encourage people to convert foreign currencies into liras and keep their savings in Turkish currency.

Under the system of “exchange rate protected deposits”, the government guarantees that it will cover losses if the interest it receives when the account matures is less than what it would have earned by keeping the deposit. savings in foreign currency.

The pound, which had fallen to an all-time low of 18 against the dollar, rallied after the announcement to around 11.

Since then, the government has extended the program to business accounts. The central bank said exporters would be required to exchange 25% of their foreign currency earnings into lira. And the government has increased contributions to private pension plans.

He also said he was raising the minimum wage by 50%. But at the same time, it has raised gas and electricity prices by 50% for low-consumption households and 125% for those who consume the most.

DO EFFORTS WORK?

Erdogan maintains that the lira deposit system is a success.

“We are delighted with the confidence our citizens have in exchange-protected deposits. We are satisfied with the decrease in exchange rate volatility and the maintenance of stability,” state-run Anadolu Agency quoted this week as saying.

Treasury and Finance Minister Nureddin Nebati said people had so far deposited 131 billion lira ($9.67 billion) in such accounts.

Babacan insists that Turkish investors keep their foreign currencies and only transfer all existing lira deposits to accounts under the program.

“There is no incentive for those who have foreign currency to change it (to lira),” he said on Fox TV in Turkey.

Babacan and many others say the pound’s dramatic rally last month was not due to the government’s program, but to the central bank selling billions of US dollars from its dwindling reserves to bolster the currency. Turkish.

“When we took a look, we saw that that night and the following days, the central bank furiously sold dollars through the backdoor,” Babacan said. “In December, the central bank sold $17 billion. Of the $17 billion, $9 billion was sold through covert measures.

Nebati dismissed the allegations: “Thousands of individual sellers have stepped in. They competed. People ran to exchange their currency.”

The lira, meanwhile, lost some of its gains, slipping to around 13.50 liras to the dollar.

WHAT ARE THE RISKS FOR THE FUTURE?

The depository system has given Erdogan a break, ending excessive volatility in the pound, although the move to exchange-protected accounts is limited. But analysts fear the program could create additional long-term economic problems.

If the lira falls again, the Turkish treasury would have to foot the bill for exchange rate losses, further raising inflation and financially straining the government, they say.

“The fact that these deposits are tied to foreign currencies places the central bank and the Treasury under an unquantifiable burden,” Babacan said.

Economist Ozlem Derici Sengul agreed.

“If we see a depreciation of the currency, the Treasury will have to pay the difference between the return on deposits and the depreciation. This will put an additional burden on public finances,” she said.

Experts also note that the government has not devised a plan to control inflation.

“Inflation is the real risk, of course, because monetary policy is quite loose,” said Sengul, founding partner of Istanbul-based Spinn Consulting. “Inflationary pressures will probably not go away easily unless you follow a fairly tight monetary policy.”

Erdogan insists his policy is fighting high prices.

“In fact, the result is visible. Inflation has started to come down and will continue to do so,” he said.

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