ANKARA (AP) — Recep Tayyip Erdogan was re-elected as president of Turkey last month, even though the economy is in bad shape and there is a cost-of-living problem that experts say is made worse by his unusual economic policies.
The longtime leader put a well-known former banker in charge of finance and the budget, and on Friday, he put a former co-CEO of a bank based in the US in charge of the central bank.
But doubt about Erdogan’s plans for the economy and what seems to be a move by the government to loosen control over foreign currency trades have caused Turkey’s currency to drop to record lows this week against the US dollar.
Since the beginning of the year, the Turkish lira has lost about 20% of its value against the dollar. People already battling to pay for things like rent and food because of high inflation are now worried that prices will go up even more.
“I have worry. I am sad. A 63-year-old man in Ankara named Sureyya Usta said, “Soon, my income won’t be enough to pay the rent.”
Here’s a look at how people have been affected by the falling value of the ruble, what the future holds for the economy, and what’s next:
ERDOGAN’S ECONOMIC POLICIES
Since 2021, Turkey has been struggling with a currency crisis and soaring inflation. Economists say this is because Erdogan’s unusual view that raising interest rates will make inflation go up is to blame.
The way most economists and central banks around the world think about economics calls for the opposite: rate hikes to stop price spikes.
Erdogan has pushed Turkey’s central bank to lower the cost of borrowing money.
Even though inflation hit an incredible 85% last year, the bank has cut its key policy rate from around 19% in 2021 to 8.5% now. The stated number for inflation last month was 39.5%, but an expert group says the real number is more than double that.
Economists say that the government actively interfered in the markets to prop up the lira before the elections, using up Turkey’s foreign currency savings to keep the exchange rate in check. This is another policy that is thought to be out of the ordinary.
Ozlem Derici Sengul, an economist at the Istanbul Spinn Consultancy, said, “Pressure on the lira had been high for a while, but the central bank was intervening too much.” This kept the currency from going through the roof in recent weeks or months.
A RETURN TO “COMMON SENSE”?
Erdogan said that Mehmet Simsek, a former Merrill Lynch banker who had been his finance minister and deputy prime minister, would return to the Cabinet after a five-year break from politics. Simsek had served as Erdogan’s finance minister and deputy prime minister.
Simsek said that Turkey couldn’t do anything else but return to “rational ground.” Simsek also said that there were no “shortcuts or quick fixes” and that Turkey’s finances would be run with “transparency, consistency, accountability, and predictability.” This could be a sign that Erdogan’s new government will follow more traditional economic policies.
In another sign, Erdogan chose Hafize Gaye Erkan to be the new head of the central bank on Friday. He will take over for the current head, who has been pushing for rate cuts since 2021. Erkan, who used to be co-CEO of a bank in the United States, will be Turkey’s first woman head of the central bank.
Economists, on the other hand, don’t know how much Erdogan, who has been running the country with a tight grip, will give Erkan and Simsek free reign.
Sengul said that Erdogan’s move back to more traditional policies hasn’t yet won over the markets. She said it’s not clear if Erdogan will “give the central bank and other institutions unrestricted freedom of action” or have a different plan.
WHY IS TURKEY’S CURRENCY FALLING?
This week, the Turkish lira fell to a new low against the dollar. On Wednesday, it fell by 7%, and on Friday, it fell by 1.6%.
Economists say that the sharp drop at the beginning of the week was caused by the government relaxing its control over the currency after Simsek was hired. But the drop might have been greater than what was expected.
On Thursday, the lira fell by only 0.5% because it was said that state banks had been told to start selling foreign currency again to help the currency. The lira fell to a new all-time low of 23.54 to the dollar on Friday.
“Loose interventions and some uncertainty led to a big drop in the value of the lira in just one day,” Sengul said about the drop on Wednesday. “Right now, the banks are getting involved in the exchange market. Because of this, we won’t have another 7pc drop.”
HOW DOES IT CHANGE PEOPLE?
Due to high inflation, food, energy bills, and other things are getting more expensive for both families and companies. A lower currency means that Turkey, which imports most of its raw materials, will have to pay more for everything that is priced in dollars, like oil and food.
Usta, a 63-year-old woman from Ankara, works at a company that sells cash register machines to add to her income, but she still has trouble paying her bills because inflation is so high.
She is scared that the sharp drop in the value of the lira this week will lead to more price hikes and make her finances even less stable.
“I keep cutting back so I can afford to live and pay for things like gas and power. But how much more can I cut?” Usta said. “I forgot about going to the theatre, the movies, and going out with friends.”
Usta says that her rent has already gone up twice this year, and the owner wants to do it again. Even in her low-income neighbourhood, rents have gone through the roof, so she can’t move.
Sengul, an expert, says that the one-day shock to the currency is not likely to have a big effect. She warns, however, that “market pricing behaviour will change dramatically” if the decline is not stopped.