The wannabe Sultan is in trouble. The Turkish President Recep Tayyip Erdogan believes in an economic theory that few others support. He has argued over and over again that high central bank interest rates are causing inflation.
The more accepted theory is that inflation is caused by too much money chasing too few goods (among other reasons). An increase of interest rates above the level of inflation lessens the amount of available money to buy goods and will thereby, over time, lower inflation.
Erdogan has been told that over and over again but he sticks to his personal theory. Over the last 18 months he has fired three central bank governors because they would not lower the interest rates as much as he had wanted them to do.
Şahap Kavcıoğlu, a banker and columnist from Erdogan’s own party, had defended his policies. In March Erdogan elevated him to be governor of Turkey’s central bank. Interest rates were promptly lowered from 19 to 16% while inflation in Turkey was running up to 20%.
Yesterday Erdogan demanded another interest rate drop:
Turkish President Tayyip Erdogan said on Wednesday he will continue his battle against interest rates “to the end”, sending the lira currency to new depths a day before the central bank is expected to slash rates further.
A day before a central bank policy meeting at which it is expected to ease again, the president repeated his unorthodox view that higher rates were the cause of inflation and questioned why some of our “friends” defended tight policy.
“We will lift this scourge of interest rates from people’s backs. We certainly cannot allow our people to be crushed by interest rates,” he told lawmakers from his ruling conservative AK Party in parliament.
“I cannot and will not stand on this path with those who defend interest rates,” Erdogan said.
The central bank has bucked expectations and cut its policy rate by 300 basis points since September, even as inflation climbed to near 20%, delivering the stimulus long sought by Erdogan.
Unfortunately for Erdogan the policy of keeping interest rates below the inflation rate has the side effect of lowering the value of Turkey’s currency. Yesterday the Turkish lira had already dropped 1.5%. Today, after the central bank lowered the interest rate to 15%, the lira dropped further.
Turkey’s real interest rate is now at a negative 5%.
The country is not rich. It has only few domestic hydrocarbons and must buy nearly all energy from abroad. Oil and gas are paid for in U.S. dollar. Energy prices have already risen globally. The effects of the lira loosing much of its value plus higher import prices for energy will have a harsh impact on Turkey’s people. Prices for everything will increase sharply and the current inflation rate will shoot up further to reach hyper-inflationary territory.
Another problem is the low amount of foreign currency reserves the central bank is still holding:
The Turkish Central Bank also lacks foreign reserves due to past policies under previous governors who have intervened in the markets to keep the Turkish lira stronger by burning US dollars through backdoor methods.
The policy backfired and melted the bank’s net reserves below zero. Excluding swaps with other financial institutes, the Central Bank’s foreign deposits are currently minus $35bn.
Meanwhile, Turkish companies and the government have to repay $13bn in external debt in the next two months, according to Bloomberg. More than half of the debt, which stands at $8bn, must be repaid in November.
Turkey has some agricultural exports and a decent but still somewhat rudimentary export industry. But many of its factories depend on imports of raw materials, semi-finished products and on credit from abroad. While the lowering of the lira makes their end-products more competitive in global markets the now higher costs of importing the necessary parts, machines and energy may well erode that advantage.
Erdogan and his AP Party have been recently been losing in polls and the opposition to him is now more united. But the next election is only in 2023 and until then much can still happen.
To divert from the economic situation Erdogan had planned for an additional incursion into Syria to fight the U.S. supported Kurdish ‘Syrian Democratic Forces’ and to take more Syrian land. It was supposed to happen this month but neither Russia nor the U.S. would allow him to do it:
Turkey has suspended its potential military operation against northeast Syria, as a result of the continued refusal from Russia and the U.S. and the absence of any consensus in this regard.
Over the past period, the Turkish army and its affiliated Syrian opposition factions mobilized along the contact lines with the SDF in the west and east of the Euphrates, which indicated that a large-scale military operation was about to begin.
Turkey launched a series of drone attacks targeting civilian cars in several areas in northeast Syria, causing deaths and injuries.
The Russian side [..] stressed its rejection of any Turkish military operation against northeast Syria, in order to prevent the expansion of the Turkish influence in a region that Russia is trying to expand in as well.
Russia’s rejection was expressed through carrying out exercises in the northwestern countryside of Hassakeh, east of the Euphrates River, with the Syrian government forces and the SDF, each separately.
The Russians went a further step by sending a Sukhoi Su-57 fighter to Qamishli Airport, not far from the Syrian-Turkish border, in a clear indication of Moscow’s dissatisfaction with Ankara’s carrying out any military operation without its consent, according to observers.
Erdogan will have to look for other ways to distract the public from his disastrous economic policies.
Erdogan’s AKP is in a coalition government with the ultra nationalistic MHP. Yesterday the head of the MHP, Devlet Bahçeli, gifted Erdogan a map which shows the Turkic world which in either mind should be Turkey’s true extension.