Issued by CEMO Center - Paris
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Turkey's Next President Faces Daunting Economic Challenges Amidst Looming Crisis

Tuesday 23/May/2023 - 05:07 PM
The Reference


Turkey's incoming president, regardless of the outcome of the upcoming runoff election, will confront a severe economic crisis as the nation grapples with soaring inflation, dwindling purchasing power, and an imminent threat of recession. The economic challenges are particularly complex if President Recep Tayyip Erdogan remains in power, as his policies have exacerbated the existing problems.

The persistent inflation rate of 44 percent has severely impacted Turkish consumers, eroding their ability to afford basic necessities. The government's attempts to prop up the currency and provide financial assistance risk impeding economic growth and potentially pushing the country into recession.

Brad W. Setser, an expert in global trade and finance at the Council on Foreign Relations, expressed concern over the sustainability of Turkey's recent economic growth, attributing it to unsustainable policies. He predicted an impending contraction or recession, which would lead to a decrease in employment opportunities and a rise in living costs, further burdening Turkish citizens.

Turkey's economic turmoil carries international implications due to its extensive network of global trade connections. Whichever candidate emerges victorious in the runoff election on May 28 will be immediately confronted with the pressing need to address the economic crisis.

During Erdogan's initial ten-year tenure, Turkey experienced significant economic growth that lifted millions out of poverty and transformed its cities. However, these gains have gradually eroded in recent years. The Turkish lira has lost 80 percent of its value against the dollar since 2018, and while annual inflation has declined from its peak of over 80 percent last year, it still stands at 44 percent, leaving many feeling financially strained.

Conventional economic wisdom suggests that raising interest rates is crucial to combat inflation. However, Erdogan has taken the opposite approach by repeatedly reducing interest rates, exacerbating the problem, according to economists.

Throughout his election campaign, Erdogan reiterated his belief that low interest rates would stimulate economic growth by providing affordable credit to bolster Turkish manufacturing and exports. He pledged to continue lowering interest rates and combat inflation through this strategy.

In an attempt to mitigate the immediate effects of inflation on voters, Erdogan introduced expensive policies prior to the election. These policies included raising the minimum wage, increasing civil servant salaries, and altering regulations to allow early government pensions for millions of Turks. The winner of the election will be bound to honor these commitments, necessitating increased government spending in the future.

Compounding the economic strain is the extensive damage caused by powerful earthquakes in southern Turkey earlier this year. The government estimated the damage at $103 billion, equivalent to approximately 9 percent of this year's gross domestic product.

To counteract the decline of the Turkish lira, the government has heavily intervened, primarily through the sale of foreign currency reserves. In early May alone, the reserves declined by $7.6 billion to $60.8 billion, marking the largest decline in over two decades.

Erdogan secured agreements with countries such as Qatar, Russia, and Saudi Arabia to bolster Turkey's central bank reserves. These agreements, although their terms remain undisclosed, are perceived as short-term measures prioritizing Erdogan's election victory rather than ensuring the long-term financial health of the country.

Should Erdogan emerge victorious, as many analysts anticipate, few expect him to significantly alter his course. Economists predict that this could result in further depreciation of the currency, restrictions on foreign-currency withdrawals, and a shortage of foreign currency to meet the government's financial obligations.

While the political opposition has promised to adopt more orthodox economic policies, including raising interest rates and restoring the central bank's independence, it remains to be seen if the opposition candidate, Kemal Kilicdaroglu, can address the urgent financial challenges awaiting the next president.