Two years in: Turkish economy suffers, unemployment soars under presidential system

Turkey has faced severe economic losses under its executive presidential system.

Thursday marked the second anniversary of Recep Tayyip Erdoğan taking the presidential oath on July 9, 2018. Rising unemployment, plummeting economic output and surging inflation have become top concerns of most citizens in the country. Outside of Turkey, foreign investors are shying away.

Turkish voters approved the introduction of the executive presidential system by a narrow margin in a nationwide referendum on April 17, 2017, which was marred by allegations of vote-rigging.

Just over a year later, on June 24, 2018, Erdoğan, the leader of the ruling Justice and Development Party (AKP) and Turkey’s long-time prime minister and incumbent president, was re-elected, but this time with vast new powers.

The day after the July 9 swearing in ceremony in the capital Ankara, Erdoğan issued the first of many presidential decrees afforded to him under the new system to announce his cabinet. He officially began his current presidential term the next day.

In the two years since, the presidential system that replaced Turkey’s parliamentary system of government has been the focus of much debate. Discussion has centred on a diverse range of issues, including the system’s impact on foreign policy, the executive and legislative powers afforded to Erdoğan and surging presidential spending.

Still, the presidential system has impacted the economy the most. Erdoğan had promised voters that the new arrangement would bring economic stability, growth and increased investments and prosperity. Instead, GDP has shrunk by $125 billion, the budget deficit has posted record highs and inflation has soared.

The lira had traded at around 4.73 per dollar when Erdoğan assumed his enhanced role. It hit a record of 7.269 per dollar in early May. Today, it trades at 6.85 per dollar.

While the lira has slumped, Inflation has been heading upward. Annual price increases now stand at 12.6 percent compared with 8.6 percent last October despite a slump in demand caused by the COVID-19 outbreak.

Turkey’s central bank, on Erdoğan’s orders, has slashed benchmark interest rates to 8.25 percent from 24 percent in July last year, helping to spur consumer demand and economic activity.

Inflation and monetary policy is perhaps where the impact of one-man rule in Turkey has been felt the most economically. Erdoğan asserts that, in order to bring inflation down, you must lower interest rates. This assertion flies in the face of conventional economic theory.

A currency crisis in the summer of 2018 and the outbreak of the COVID-19 pandemic has also taken its toll on the economy, and no more so than in the jobs market.

Unemployment stood at 12.8 percent in the three months to May, the Turkish Statistical Institute said on Friday. That rate fell from 13.2 percent in April but had risen from 10.1 percent in July 2018.

The number of people employed in Turkey has contracted dramatically. The figure dropped by 2.59 million people to 25.6 million in the three months to May compared with the same period of 2019. The employment rate, or the proportion of the working age population in a job, was 41.1 percent, declining by 4.9 percentage points.

Erdoğan and his government have taken several measures to help boost jobs since the outbreak of COVID-19 in early March. Among them is barring companies from laying off workers. That means jobless figures are effectively massaged because businesses in Turkey may only put workers on unpaid leave and the data does not include those persons.

Meanwhile, Turkey’s budget deficit has widened to record levels as the government sought to stimulate the economy and cushion the impact of the coronavirus.

The budget deficit was 17.3 billion liras in May, widening 44 percent from a year earlier and pushing the gap to 90.1 billion liras for the first five months of the year, a figure equating to 65 percent of the government’s year-end goal of 138.9 billion liras. The deficit was 43.2 billion liras in April, just short of the record gap of 43.7 billion liras posted for March.

Meanwhile, Turkey’s economic output has declined to $758 billion in the 12 months to March. That figure is 16 percent lower than GDP of $883.9 billion registered for the same period to March 2018, just prior to the introduction of the presidential system.

At the same time, foreign investment in Turkey’s financial markets has plummeted. The value of stocks floated on the Istanbul Stock Exchange owned by institutions and persons abroad has slumped by $8 billion this year to $24.4 billion. That means foreign capital now equates to less than 50 percent of total investment in the exchange for the first time in 16 years.

Turkey has been paying the significant price for the transition from a parliamentary to a presidential system of government, economist and professor at Yeditepe University’s Faculty of Commerce, Veysel Ulusoy, told Deutsche Welle

“The picture we see now reflects the impact of economic policy and a lack of oversight,” Ulusoy said.

There is now serious doubt over who controls a myriad of key economic institutions that were once independent, including the central bank, the Capital Markets Board, the Court of Accounts and the Banking Regulation and Supervision Agency (BDDK), according to economists.

Management of the economy has become more difficult as the government’s goals and society’s expectations do not match, according to Öner Günçavdı, professor at Istanbul Technical University’s Management Engineering Department. That has meant that the economic results of the past two years are exactly the opposite of what the government promised, he said.

So long as the government fails to implement projects to deal with Turkey’s most chronic problems such as employment and inflation, the crisis will only deepen, Günçavdı said.

“Looking at several indicators, we see that the economy is not in fact soaring, like some say, but that it has started to spiral downwards.”