President Erdogan is presiding over a dramatic reversal in Turkey's fortunes. Image: Twitter

When Turkey’s President Recep Tayyip Erdogan announced on December 20 his government would prop the collapsing Turkish lira with billions of dollars of state funds and that the state would cover foreign exchange losses on certain bank deposits, the move produced electrifying results.

The lira see-sawed back from a historic low – 60% down on the US dollar over the year – to jump 38% the following day and was up 50% by December 24, marking the currency’s strongest week on record. State media went into overdrive, claiming long queues of Turks were changing their dollars back into lira while retailers were supposedly slashing prices.

Erdogan promptly announced that the plan was part of Turkey’s “economic war of independence,” and that in this, “we will emerge victorious.”

Soon thereafter, his Justice and Development Party (AKP) asked the Supreme Election Council how soon it could call a snap election, sparking speculation that the government was angling to cash in politically on its self-proclaimed economic “victory.”

Fast forward to the present, there seems precious little evidence that the country’s dire economic realities have significantly changed. Indeed, the new year began with a swathe of new price rises in power, grains, transport, tobacco, alcohol and fuel, adding to the woes of many Turks already struggling with two-decade highs in inflation.

“People are really hurting,” Erdem Aydin, from consultancy RDM, told Asia Times from Istanbul. “Whether you are taking a ferry or walking down the main street, all you hear is people talking about the economy and how to survive another week.”

At the same time, the sustainability of the “new” policy to support the lira has been increasingly called into question as the lira wobbles anew, down 22% over the previous nine trading sessions on January 6.

“Large falls in the lira,” Jason Tuvey of Capital Economics wrote in a recent note to investors, “will now result in an increase in the government’s financing needs. The public finances, considered to be a pillar of strength in the past decade or so, now risk crumbling.”

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

Erdogan thus faces a difficult dilemma over whether to call a snap election ahead of its scheduled date in June 2023.

2023 is one full of symbolism for the pro-Islamist Erdogan, as it marks the 100th anniversary of the establishment of the Turkish Republic by its secular founder, Kemal Ataturk.

At the same time, those opposed to Erdogan’s now 20-year rule are increasingly alarmed that any move towards the ballot box may also go hand-in-hand with a new major crackdown on the opposition.

Recent warnings from Erdogan against street protests and calls from his coalition partners for the prosecution of his potential main rival for the presidency, the mayor of Istanbul, Ekrem Imamoglu, have reinforced the fears.

“The goals of the government’s policy decisions are political and makeshift,” Murat Somer, professor of political science at Istanbul’s Koc University, told Asia Times, “and they are made with just one objective in mind: keeping the government in power.”

Economic ambush

Erdogan’s “new” economic policy hinges on a government promise to guarantee deposits of Turkish lira in the nation’s banks against fluctuations in the exchange rate.

It came after months of crushing depreciation of the lira, largely sparked by interest rate cuts announced by Turkey’s central bank. Given already high inflation in Turkey, these flew in the face of economic orthodoxy, which dictates that interest rates should be hiked, not slashed, to contain galloping prices.

Yet the interest rate cuts also helped keep money in the economy, with Erdogan arguing that they generate growth that in turn will eventually stabilize prices and exchange rates.

Erdogan had also argued that interest rates are also against Islamic principles, and only “make the rich richer and the poor, poorer,” on December 31.

International currency markets do not see things the same way, however, and by December 19, the day before the new policy was announced, the lira had hit historic lows – forcing up prices, as Turkey’s economy relies heavily on imports usually priced in dollars or euros.

Erdogan’s announcement of the guarantee was also accompanied by a major intervention by the central bank and two of the country’s three state banks – Vakif Bank and Halkbank – that are controlled by Turkey’s national wealth fund.

 “The CEO of Turkey’s wealth fund is Erdogan himself,” says Aydin.

Turkish President Recep Tayyip Erdogan faces an early election dilemma. Photo: AFP / Turkish Presidency / Anadolu Agency

Somewhere between US$5.5-$5.7 billion of the central bank’s foreign currency reserves were depleted in the two days after Erdogan’s “economic war” policy was announced, along with around $3 billion from Vakif Bank and Halkbank, according to Reuters.

This appears to have been what reversed the lira’s decline, with few ordinary Turks actually taking advantage of the guarantee and changing their dollars into lira to put into the banks, as government officials claimed.

At the same time, Erdogan’s policy is not really “new.” A similar scheme was run by the Turkish government back in the 1970s but was then quickly abandoned. That was because it heaped pressure on Turkey’s Treasury to follow through with guarantees when the lira kept depreciating.

If “the lira suffers large falls, the Treasury would be on the line for a large bill,” says Tuvey.

This thus ties the fortunes of the lira much more closely to public finances. These are relatively robust at present – Turkey’s public debt is only around 40% of GDP – but sharp falls could drain coffers rapidly, analysts say.

This, in turn, is giving rise to a clear political dilemma for Erdogan.

“With the economic policies and dysfunctional government system it has locked itself into,” says Somer, “if it waits for an election in 2023, things will be even worse.”

Yet if Erdogan takes the country to the polls earlier, he will have to contend with a disgruntled population suffering major price hikes and a visible erosion in its standard of living.

While officially annual inflation is at 36%, independent survey outfit ENAGrup said on January 3 that the real annual figure was 82.81%. The new year saw electricity rates for businesses rise 125%, while households faced power price hikes of 50%.

Grain prices rose 25%, train tickets were up 20%-36%, Istanbul bus fares increased 36% and taxi prices hiked by around 33%. Seeking solace in cigarettes and alcohol also became more expensive, with a special consumption tax on them increasing by 47% on New Year’s Day. 

A rock and a hard place

Caught between a rock and a hard place, Erdogan and his allies seem to be turning on the opposition.

On January 4, Turkey’s parliament announced the start of proceedings to lift immunity on 24 members of the country’s third-largest party, the pro-Kurdish People’s Democracy Party (HDP), enabling their further prosecution. Another case to shut down the HDP entirely continues while its head, Selahattin Demirtas, has been imprisoned without trial for five years.

An Interior Ministry investigation has also been launched into the Istanbul municipality headed by Mayor Imamoglu. Meanwhile, Devlet Bahceli, the head of Erdogan’s main coalition partner, the far-right National Movement Party (MHP), is calling for him to be dismissed if the investigation proves links to “terrorism” amongst municipal employees.

Ekrem Imamoglu celebrating in front of thousands of supporters at Beylikduzu in Istanbul on June 23, 2019. Photo: AFP / Onur Gunal / Republican People’s Party

Metin Gurcan, a key figure in the leadership of DEVA, a center-right party headed by former AKP economy czar Ali Babacan, now faces 20 years in jail for “espionage”, a charge he strongly denies.

On December 31, Erdogan himself characterized the leader of the main opposition Republican People’s Party (CHP), Kemal Kilicdaroglu, as a “bandit” creating “chaos and disorder.”

Erdogan also threatened to meet any street demonstrations against his government with a similarly violent response to the crackdown that followed a failed July 2016 coup, which entailed mass arrests and forced media shutdowns.

“This is how you hold your own constituency hostage,” says Somer. “You increase anxiety, fear, and people start looking for a safe harbor,” says Somer, “even an authoritarian one, as opposed to a more uncertain, democratic one.”

Follow Jonathan Gorvett on Twitter at @jpgorvett