The Turkish lira is collapsing while inflation is surging. Image: Twitter

On December 15, one of the more telling twists in Turkey’s current currency crisis occurred, far from the boardroom of the country’s beleaguered central bank.

In Idlib – the last stronghold of Syria’s anti-Assad opposition – one of the most powerful armed factions running the Turkey-backed enclave, Hayat Tahrir Al-Sham (HTS), made a brief announcement. 

From now on, this Syrian former affiliate of al Qaeda said, it would no longer be using the Turkish lira for its local transactions but switching to US dollars instead.

With the lira hitting around 17 to the US dollar on Friday (December 17) – after starting the month at 13.50 and the year at just 7.43 – HTS’ decision appears quite fiscally responsible.

Yet, in Turkey itself, many are now questioning whether the same can be said for their own monetary authorities, as the tumbling lira leads to price hikes across the board.

“We are entering a very dark place,” Can Selcuk, from Turkish consultancy and pollster Istanbul Economics, told Asia Times. The currency fall – and its accompanying inflation –  are now, he says, “an existential threat for many Turkish households.”

With imported essentials such as oil and gas denominated in US dollars, and much of the country’s economy dependent on other hard currency-charging inputs, a tumbling lira means major price rises across the board. Yet, the political fallout from this remains to be seen.

General and presidential elections are not due until 2023, while there is also no real sign that Turkey’s veteran ruler, President Recep Tayyip Erdogan, is going to change the highly unorthodox monetary policy behind the current crisis.

Turkish President Recep Tayyip Erdogan faces declining support over his economic policies. Photo: AFP / Turkish presidency / Anadolu Agency

Prices and incomes

That policy argues that cutting interest rates will lead to greater investment in Turkey, which, in the longer run, will strengthen the lira and bring inflation under control.

There is some evidence that international investors are coming in, too.

Foreign purchases of Turkish real estate, for example, are booming – up 50% year-on-year in November, with overall sales surging 59% this year, according to the Turkish Statistical Institute.

At the same time, reducing interest rates makes bank loans cheaper and penalizes savings, meaning more money goes into circulation, creating jobs and keeping the economic wheels turning – at least, so the president’s theory goes.

“President Erdogan really believes that by cutting the rate of interest, inflation will come down and the lira will be restored,” Ozgur Unluhisarcikli, the German Marshal Fund’s Ankara representative, told Asia Times.

Since the start of the year, the central bank has cut those rates by four percentage points, with Thursday seeing a further point taken off. This is not, however, how most economists think.

Economic orthodoxy states that while cutting interest rates does indeed put more money into circulation, it will also most likely cause inflation and weaken the country’s currency. The evidence that this is what is now going on seems stark – not only in the tumbling lira.

Officially, inflation is now around 21%, up from around 12.2% in 2020.

Many suggest the official figures are far below the reality, with the Istanbul Statistics Office saying wheat prices have jumped 109% this year, sugar prices 90% and sunflower oil – a cooking staple in Turkey – 137%.

Rents have also skyrocketed. The Barinamiyoruz (‘We can’t find shelter’) student movement says that average accommodation costs have gone up between 70% and 290% year on year, depending on the city, with Istanbul the most expensive.

A money changer counts U.S. dollar bills, with Turkish lira banknotes in the background. Photo: Reuters, Murad Sezer
A money changer counts US dollar bills, with Turkish lira banknotes in the background. Photo: Agencies

To tackle some of this, President Erdogan also announced a 50% hike in Turkey’s minimum wage on Thursday – an amount well over the official inflation rate. The minimum wage now stands at 4,250 lira – about US$275.00 a month at current exchange rates. Around 40% of Turks are on this level of income.

Combine that with a recent survey by Istanbul Municipality that showed average rents in the city at $290 a month in September 2021, and for many accommodation costs may amount to more than their entire monthly wage.

“You can see the impact of all this in the streets,” Unluhisarcikli says. “There are now long queues at the public bakeries that sell subsidized bread.”

These outlets, known as “Halk Ekmek”, or the “People’s Bread”, sell a loaf for around half the starting supermarket price of 2.50 lira, or about $0.18.

Poverty and politics

President Erdogan’s popularity has undoubtedly taken a knock from all this.

According to an early December poll by Istanbul Economics, when asked to rate Erdogan’s “success” on a scale of 1-10, respondents gave him an average of 4.5 – down from just under 6 this time last year.

The poll also saw support for Erdogan’s Justice and Development Party (AKP) drop from around 40% in June 2020 to 24.2% in December 2021. The AKP’s far-right coalition partners, the National Movement Party (MHP), have seen their support drop from around 11% to 6.4% over the same period.

Meanwhile, support for the opposition has been growing.

“In the past, the only thing that united the opposition was that they were all opposed to Erdogan,” says Unluhisarcikli. “But that is now not the case. The opposition has come together with a real blueprint for change.”

With the opposition also spanning the political spectrum, from the secular left to the Islamist right, it has also “had to give up identity politics,” Unluhisarcikli adds.

Kemal Kilicdaroglu, the leader of the largest opposition grouping, the Republican People’s Party (CHP), has even apologized for past mistreatment of the country’s Kurdish minority. This won praise from Selahattin Demirtas, the jailed leader of the largest pro-Kurdish group, the People’s Democratic Party (HDP), and further united the anti-AKP block.

Erdogan’s forcing through of a new presidential system that concentrates power in his own hands may also have worked against him. The new system took power away from the Turkish parliament, which now largely rubber stamps Erdogan’s presidential initiatives.

This, however, “disrupted all the patronage networks AKP parliamentarians used to have and also disconnected Erdogan from the AKP’s grassroots,” Unluhisarcikli says.

Many a slip

Yet, while Erdogan’s popularity may be declining, for many his position in office remains unassailable.

“For now, there are no elections, no institutions, no capacity in the system for it to self-correct,” says Selcuk.

Erdogan has fired a succession of central bank governors who disagreed with his policy, while also sacking less senior figures who might have argued against his unorthodox views.

A subsidized bread line in Istanbul. Image: Twitter

“President Erdogan has continued to dictate to the heavily-purged central bank to test out his unorthodox view,” wrote Jason Tuvey, senior emerging markets economist from London-based Capital Economics, in a note following Thursday’s rate cut.

At the same time, the AKP itself has little capacity to challenge Erdogan.

“Other founding members of the party have either left over the years and started their own parties, or they have left politics altogether,” says Unluhisarcikli.

Many more Turks, then, may have to take their places in the bread queues this winter, as  Erdogan’s unorthodox economics leaves them out in the cold.