Erdogan has pulled the wrong policy levers and now voters are feeling the squeezeby Fadi Hakura / June 21, 2018 / Leave a comment
Turkey is in the midst of a heated presidential and parliamentary elections campaign. The votes are scheduled for 24th June but will take place against a deeply troubling economic backdrop: the Lira is plumetting and there is double-digit inflation.
So what’s going on? President Recep Tayyip Erdogan has pumped gargantuan amounts of cheap credit into the Turkish economy, loosened fiscal expenditure, relaxed monetary policy and boosted tax incentives to generate an impressive-sounding growth rate of 7.4 per cent last year.
Lurking below the surface, however, are warning signs of impending economic dangers. Total debt has exploded from less than one third to nearly three quarters of the national economy since 2008. More than half of that debt is denominated in foreign currency and much of it is held by the private sector.
Turkey has essentially been importing tens of billions of dollars each year to finance a credit-fuelled, consumption-driven economic model. It has funded mega-infrastructure projects and rampant construction.
Erdogan was determined to accelerate growth substantially beyond the capacity of the Turkish economy, a bit like spiking the fuel of a mid-sized Audi car so that it speeds like a Ferrari. As any competent mechanic knows, these tactics do not work in the long-term. Eventually, the engine will burn out.
In Turkey’s case, financial markets expected the central bank to hike interest rates to cool down the overheating, rein in unsustainable growth rates and bring down higher inflation in favour of economic stability.
But Erdogan blocked the central bank from raising interest rates until recently, and may return to that position again before too long. He believes that higher rates contribute to higher inflation rather than the other way around and has even called them “the mother of all evil.” His unorthodox policy stance and penchant for one-man rule scared investors and worsened the devaluation of the Turkish Lira. That forced major Turkish companies to renegotiate their dollar or euro loans, since they earn revenue in the less valuable Lira but have to repay loans in hard currency. Whether this represents the canary in the coalmine of future financial troubles remains to be seen.
Turkish voters have, in response, placed the deteriorating economy at the top of their list of concerns, to the disadvantage of Erdogan and his ruling Justice and Development Party (AKP). Revealingly, the percentage of Turkish bank deposits denoted in dollars is fast approaching 50 per cent, an indicator of falling confidence in the currency, and by extension the wider economy.
What will be the end result? Erdogan is leading in the polls and is probably safe, but nothing is certain. One possible outcome is that voters will choose Erdogan for president but elect an opposition-controlled parliament. This would be a receipe for infighting and confrontation. Neither side is willing to cooperate in the national interest, which means this outcome translates into more economic volatility and political instability.
Furthermore, none of the political contenders have a realistic strategy to pull Turkey from a middle-income to a high-income economy. To become a Ferrari, the car engine needs to be of top-notch design and the body has to be sleek and aerodynamic.
Similarly, Turkey must modernise its education system and ensure that exports and private investment are the main sources of economic prosperity. By any measure that is a tall order for any party, but even more so for those in Turkey.
Of course even more important is the transition from personality politics to institutionalised parties, and more crucial still is a strengthening of democracy and the rule of law. Once held up as an anchor of democratic stability in the Middle East, Turkey has slipped back into authoritarian rule.
Notwithstanding the daunting economic and political challenges, the Turkish people have witnessed some encouraging signs of hope. Turkey’s fragmented opposition, ranging from the secular left to the Islamist right, have banded together in an unprecedented coalition to take the fight directly to Erdogan and the ruling AKP in the upcoming elections.
They have agreed to reverse constitutional changes championed by Erdogan (via a controversial referendum) last year to expand presidential power, combat gender and ethnic discrimination, and ensure the separation of powers between the different branches of government. Turkey needs a government that will eliminate the authoritarian and illiberal direction pursued by the incumbent administration.
Equally, the younger generations demand not only better economic opportunities but also a stronger democratic culture and the healing of societal divisions. They are largely unhappy with the restrictive climate for self-expression and aspire for more democracy and human rights.
Erdogan should internalise the astute observation by Ernest Hemingway before it is too late: “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”