Turkey’s consumer prices have soared by the highest rate since 2002, further undermining President Recep Tayyip Erdoğan ‘s unorthodox battle for his developing country’s “economic independence.”
Analysts attribute the jump of the official reading to 36.1 percent last month to the surging cost of imports, which range from energy to many of the raw materials Turkey’s manufacturers turn into exports.
Those costs jumped because of a historic collapse of the lira, which last year lost 44 percent of its value against the dollar.
But ultimately, analysts blame both inflation and the lira crisis on Erdoğan ‘s fervent belief that high interest rates cause inflation.
Conventional theory says the opposite is true because higher interest rates slow economic activity by making borrowing more expensive and providing incentives for people to keep their money in the bank.
Here is a summary of Turkey’s economic conundrum.
How did the problems start?
Calling high interest rates “the mother and father of all evil,” Erdoğan orchestrated a series of rate cuts starting in September that further undermined economists’ trust in the central bank’s independence.
Erdoğan, who has sacked three central bank governors since July 2019, has refused to accept any responsibility for the lira’s collapse or subsequent jump in prices.
“I reject policies that will condemn our people to unemployment, hunger and poverty,” he said last year, calling on his supporters to be patient.
The Turkish currency weakened on Monday, trading at 13.4 lira to the dollar, after the inflation data was published.
It fell as low as 18.4 to the dollar at the height of the crisis last month, after starting the year around the 7.4 mark.
How bad is the crisis?
Turkey’s official inflation target is 5 percent, but it has remained in the double digits for the past two years.
The monthly inflation reading has turned into a contested political issue, with opposition leaders claiming the government is underreporting the actual price jumps, a charge it denies.
Independent economic institutes such as the Inflation Research Group (ENAG) calculated last month’s annual inflation rate at 82.8 percent.
“Even in the figures they make up, domestic producer inflation is nearly 80 percent,” main opposition party leader Kemal Kilicdaroglu tweeted on Monday.
The opposition is demanding snap elections to address the crisis, but Erdoğan insists they will go ahead as planned in June 2023.
The cost of living is expected to rise further, especially after hikes in the price of consumers’ electricity and gas bills of around 50 and 25 percent, respectively.
What does Erdoğan expect?
The president is prioritizing growth, with the economy expected to expand by 9 percent in 2021 and 3.5 percent in 2022.
During another currency crisis in 2018, the central bank aggressively hiked the main interest rate, but the likelihood of a repeat under a more determined Erdoğan is low.
Erdoğan has previously cited Islamic rules against usury to justify not increasing rates, suggesting those who try to preserve their savings by converting them into foreign currency and gold were traitors.
Some experts believe Erdoğan may be trying to make Turkey more attractive as a hub for cheap production, with local wages worth less in dollar terms.
During a televised speech in Istanbul, Erdoğan on Monday hailed a 32.9 percent year-on-year increase in exports to $225.3 billion in 2021.
How has Erdoğan responded?
Aware of the importance given to the lira’s value against the dollar and euro by consumers and businesses, Erdoğan last month unveiled a new policy to defend local currency holdings against fluctuations in the exchange rate.
While the lira has since rallied, experts question whether it is sustainable and will be enough to avoid further currency weakness.
Turkey’s net foreign currency reserves fell to $8.6 billion last week — from $21.2 billion two weeks earlier — further supporting opposition claims that the government was running out of money while indirectly trying to support the exchange rate.
The government has only reported limited currency interventions.
Erdoğan has also raised the monthly minimum wage to 4,253.40 lira (about $315), which is still lower in dollar terms than what the minimum wage was worth in January 2021.