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Apr 30 2019

Erdoğan’s bill coming due as Turkish economic woes weigh

Turkish President Recep Tayyip Erdoğan is seeking to maintain his popularity by persuading the country’s central bank to keep interest rates artificially low to stave off the worst effects of an economic recession.

But the bill is coming due as the lira continues to weaken and inflation remains at elevated levels, said Chris Miller, the Eurasia director at the Foreign Policy Research Institute, in an analysis for Foreign Policy magazine.

“The sinking lira and rising prices were one reason that Erdoğan’s party lost control of the mayoralties of Istanbul and Ankara in this year’s elections,” Miller said. “The steps his government could take to improve the economy in the medium term would cause short-term suffering. And that is an unattractive prospect.”

Erdoğan’s party has made its reputation on delivering fast economic growth and was forced to step on the gas each time the country held elections, including before a constitutional referendum in 2017, a presidential election last year and local elections on March 31.

Now the prospect of a re-run of a vote for mayor of Istanbul – Erdoğan’s appeal against an opposition victory is being considered by the election board – could prompt more economic stimulus, Miller said.

“Each successive attempt to meddle with the economy has pushed inflation ever higher, from just above the central bank’s target of 5 percent for much of the past decade to 10 percent in 2017 and 20 percent today,” Miller said. “As inflation has increased, the value of the lira has declined accordingly. Ten years ago, a dollar bought slightly under 2 liras. Today, with the lira again in a downward swoon, the exchange rate is closer to 6 liras per dollar.”

The collapsing lira is making Turks much poorer and the government is doing little to stop the slide. But higher interest rates could cause a credit crunch as the country’s banks would face higher borrowing costs but will receive revenue from loans previously granted at fixed rates of interest, squeezing margins, Miller said.

Erdoğan’s economic strategy has worked well enough politically in recent years, helping him to win the 2017 referendum and last year’s presidential vote, but time may now be running out, Miller said.

“Each additional round of stimulus also brings forward the date at which the bill must be repaid,” Miller said.

“But Turkey’s government has more immediate problems, most notably a decision about whether to rerun the Istanbul mayoral race this summer. And so long as the next election is closer than the due date on his bills, Erdoğan will always opt for one more jolt of credit-fueled stimulus.”