Analysis |

Even the Turkish Lira Stopped Believing President Erdogan

The currency is at roughly half the value of a year ago, but Turkey’s president refuses to raise interest rates. His popularity is plummeting as prices rise; lucky for him, he can forestall an election by over a year

A photo of Dr. Zvi Bar'el.
Zvi Bar'el
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Turkish President Recep Tayyip Erdogan addresses businesspeople during a meeting in Istanbul, on Monday.
Turkish President Recep Tayyip Erdogan addresses businesspeople during a meeting in Istanbul, on Monday.Credit: Murat Cetinmuhurdar/Presidential Press Office/Handout via Reuters
A photo of Dr. Zvi Bar'el.
Zvi Bar'el

“Let’s not forget this: As long as we don’t take our own money as a benchmark, we are doomed to sink. The Turkish lira, our money, that is what we will go forward with. Not with this foreign currency, that foreign currency,” Turkish President Recep Tayyip Erdogan declared a week ago.

But the lira hasn’t yet decided what it wants to do. On December 20, Erdogan published his new economic plan, under which savers who don’t withdraw their deposits in Turkish lira for three months will have their money protected by the government. And if the currency continues to decline, the government will compensate savers for their losses. The immediate goal is to stop the frenetic buying of dollars and stabilize the exchange rate.

This step indeed triggered a turnaround. In one day, the lira strengthened from 18.5 to 11 to the dollar. Turkey’s leaders sang paeans to the wisdom of Erdogan’s economic plan. The pink returned to the cheeks of new Finance Minister Nureddin Nebati, with the central bank having to convince the public that it did not flood the market with dollars in order to heal the lira, and that the quick recovery was the result of the public’s faith in the economic plan.

Either way, over New Year’s weekend and early this week, it seems the lira decided to have some fun and seesawed. It dropped by 5 percent, then climbed by 3 percent. On Monday it was trading at over 13 liras to the dollar. It’s still too early to tell if the currency will stabilize at between 12 and 13 – compared with 7.4 early last year – or continue to fluctuate.

It’s hard to believe that the only factor was the public's faith in the currency – that the lira didn’t get massive help from the central bank. Official data shows that the week the lira skyrocketed, dollar savings also grew – to a record $239 billion.

Demonstrators in Istanbul last month protesting the government's economic policies.Credit: Dilara Senkaya / Reuters

Also, the bank’s foreign currency reserves dropped to a two-decade low at $8.6 billion. This means that despite its denials, the central bank has put its hand in the market, or rather shoved both hands in, and not for the first time. In 2019 and 2020, the bank intervened with $128 billion into the market, a move that unleashed a political furor and left the people demanding to know where the money went.

A dollarized Turkey

The deposit protection, which raised the lira’s rate, caused huge losses to dollar savers – in one day their savings were cut by nearly half. And while wondering how to manage their investments and savings, Turks were informed of a series of painful price hikes.

Cooking gas will rise by 25 percent, electricity by 50 to 125 percent – and the same for bridge tolls and gasoline. These increases come on top of the rise in the price of food staples, up last year by over 15 percent, completing the litany of losses for the average Turk, who is paid in Turkish lira but whose expenses are linked to the dollar. Images from Turkish stores and bazaars show that dollarization is a done deal – prices of fruit and vegetables are displayed in dollars (with translation to lira in parentheses), as are the prices of suits, shoes, and of course cars.

This inflation also has a lethal side. Last year 110 people died after drinking bootleg alcohol, not being able to afford legal spirits. The police recently launched an operation to eradicate moonshine. Around 20,000 police officers raided liquor stores and plants, confiscated and destroyed tens of thousands of liters of bootleg alcohol, and arrested the manufacturers and distributors. Many Turks attribute the operation to a plan by Erdogan to stamp out alcohol consumption around the country, more than a concern for the public’s welfare.

In any case, the lira’s recovery only strengthens Erdogan inclination to stick with his economic policies. This includes lower interest rates, which have been cut to 14 from 19 percent as part of his idea that the Turkish economy depends on the ability of investors, contractors, manufacturers and home buyers to spur growth via cheap loans.

A money changer counting Turkish lira at a currency exchange office in Ankara in September.Credit: Cagla Gurdogan / Reuters

A general theory of inflation

Indeed, as opposed to the lira’s general performance, the Turkish economy is growing; 7.4 percent in the third quarter of last year. Exports broke a record last year, easily topping $200 billion, while trade agreements with the United Arab Emirates will provide $10 billion in direct investment in the coming year.

These are the numbers Erdogan likes to brag about, while the annual inflation rate – which neared 40 percent in December – doesn’t frighten him. Erdogan promises to reduce inflation to only 7 percent within the year.

Global financial institutions like Goldman Sachs are less impressed by the Turkish president’s magic wand. They predict that inflation might top 40 percent and force the Turkish government to adopt a particularly expensive aid program – even for the evaporating middle class.

The traditional solution that they suggest, of course, is raising interest rates, a notion Erdogan treats as a ploy by manipulators to undermine the Turkish economy. And he has resorted to religion to explain his policy. The demanding of interest payments runs contrary to Islam, he explained, so as a religious person, he can’t support it.

To demonstrate his intolerance, he ordered legal action against people who criticize his economic plan on the grounds that they are disturbing the public order. So far, 26 such cases have been opened, including two against former governors of the central bank.

At the moment, Erdogan’s popularity appears to be plunging to the same degree that prices are rising. Opinion polls show that just 39 percent of the public supports his policy and believes in his ability to run the country. A general election is only scheduled for next year, but the opposition parties want it moved up – to use the crisis to oust Erdogan.

“There won’t be an early election,” he vowed. “The opposition leader should study the country’s laws. The election will be held as scheduled.”

Sure enough, without the consent of Erdogan, whose party controls parliament with the right-wing MHP, there won’t be an early election. Also, there is no alternative candidate at the moment to enchant the public. But Erdogan won’t be able to control the public’s reaction if it becomes clear that his economic plan is only worsening poverty.

Of course, Turkey isn’t similar to other countries in the region where the people have taken to the streets over economic issues – and have even overthrown governments. But when a wave of protests begins, it’s hard to know where it will end.

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