The Turkish anomaly: record growth at the expense of anti-inflation
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In Turkey, the central bank continues to act against the current of its competitors: This Thursday it is supposed to lower its key interest rate. This policy, led by President Erdogan, is producing contradictory effects: inflation is rising dangerously, but growth remains robust.
The central bank governor, the third man appointed in two years to implement policies dictated by Recep Erdogan to the letter, was to cut its key interest rate by a point and a half to 9.5%. That rate has halved over the past year. A totally anti-conformist anti-inflation policy. According to economic theory – and practice! – we manage to curb inflation by raising interest rates and thereby cooling the engine. But President Erdogan doesn’t care, he believes the opposite works. The miracle did not happen: inflation continues to rise; according to official figures, it rose from 20 to 84% within a year. Behind President Erdogan’s pseudo-belief lies a different economic choice: maintaining robust growth at all costs to flatter his constituency, which is made up in part of small business owners. With six months to go before the presidential election in which he hopes for a third term, the central bank has only one mission: to offer an attractive interest rate to boost growth.
And for now, Turkey’s growth remains sustainable
Since January it has exceeded 7%. This good macroeconomic development is reflected in the stock market. It has taken up more than 60% in one year, a record incomprehensible compared to other emerging financial centers. Last source of astonishment: the state is maintaining the confidence of the markets, the bond issued at the beginning of November generated three times more demand than necessary. The state was able to raise $1.5 billion at 10% over eight years.
These extravagant results stand in contrast to the difficulties faced by Turkish households
The prices of food, accommodation and transport have almost doubled. This price increase is partly fueled by the collapse of the Turkish lira. It lost 30% against the dollar. This increases the bill for essential imports of daily life, such as oil or medicines, and widens the trade deficit. Unemployment, at 10%, mainly affects the east of the country. Employment is going well on the western facade. Thanks to tourism from the Gulf States and Russia and thanks to the construction industry driven by this macroeconomic boom.
How are such different indicators to be interpreted?
According to critical economists, this race forward is taking place on the backs of Turkish citizens. With inflation galloping, they took on large debts to compensate for the decline in their purchasing power. On the other hand, public debt remains moderate: it is less than 40% of GDP. These pro-growth policies are weakening the fundamentals of the economy. In order to avoid the financial crisis threatened by the collapse of foreign exchange reserves, President Erdogan has won the support of his allies. China, the United Arab Emirates and especially Qatar have replenished their foreign exchange reserves. Riyadh, in turn, could deposit $5 billion into central bank accounts. (Six years after the attack in Istanbul on the Journalist Jamal Kashoogi this gift would seal Turkey’s reconciliation with Saudi Arabia). Without this external and temporary support, foreign exchange reserves are in deficit. The Turkish economy is therefore based on a precarious and very artificial equilibrium. Its atypical growth should be quickly diluted in 2023. I’m not sure if Recep Erdogan’s bet will hold up until the next election.