Frida Ghitis
It’s never a good sign for a country’s leader when fluctuations in the value of the national currency become a dominant concern for everyday people. That is the case today in Turkey, where President Recep Tayyip Erdogan is taking a huge gamble with his monetary policy, setting a controversial interest rate policy that runs contrary to firmly established economic theory and has caused the local currency, the lira, to nosedive. Slashing the value of savings, spooking investors and further fueling inflation, the policy is already causing significant hardships for the Turkish people, who polls show have lost faith in the government’s competence after several years of economic turmoil. The country may now be approaching a potential turning point in its politics, which have been dominated by Erdogan for nearly two decades.
Erdogan’s bet is that lower interest rates will act as rocket fuel for the economy, igniting growth to a level that would not only increase economic activity, but also bolster his own sagging political fortunes. Yet most economists say he’s playing with fire, risking a catastrophic overheating. The Turkish people, meanwhile, seem to have had enough of soaring inflation, of the sinking value of their savings—and of the president.
Economic theory established long ago that when inflation rises steeply, the right course of action is to boost interest rates to cool growth. But Erdogan, who like many autocratic leaders enjoys an inflated sense of his own brilliance, has insisted on pushing rates lower, arguing—against ample evidence—that bringing them up would make inflation worse. As his handpicked officials do his bidding, repeatedly slashing interest rates, the results have been exactly in line with what economic models predict: higher inflation and a plunging currency. The collapse of the lira has been spectacular—and for many, spectacularly painful.
The currency has lost nearly half of its value this year, and roughly half of these losses have come in just the past few weeks, after Erdogan made yet another unexpected interest rate cut in the midst of climbing inflation. Less than a decade ago, it took just two liras to buy one dollar. At the end of 2020, the exchange rate was 7.7 liras to the dollar. It’s now around 13 liras to the dollar.
The real-life impact is that savings in local currency have been decimated; the prices of imported good have soared; and the cost for local businesses and the government to service debt in foreign currency has increased steeply. Inflation, now at 20 percent, could reach as high as 50 percent if the lira doesn’t bounce back, experts warn, noting that Turkey could soon face a balance-of-payments crisis. Lower interest rates do tend to stimulate growth and make exports more competitive. But there’s little chance that the benefits of Erdogan’s reckless approach will outweigh the costs.
Erdogan’s desperate push is partly a response to his own dimming fortunes. Opinion polls show that most Turks side with the economists, not the president, and an October poll found that more than 80 percent believe the economy is being mismanaged. In an alarming result for Erdogan, that negative view is shared by 60 percent of voters who describe themselves as supporters of his Justice and Development Party, or AKP.
Indeed, the president’s job approval rating has been falling, reaching just 38 percent in an August poll. Backing for the AKP is down, too, at about one-third of voters, much lower than it drew during the 2018 parliamentary election. In fact, a majority have even soured on the presidential system itself, which was introduced by Erdogan in a 2017 referendum as a means to prolong and tighten his hold on power.
The polls are not surprising. Poverty and inequality have been worsening since 2018, and the arrival of the coronavirus pandemic in 2020 only accelerated those trends. The government didn’t respond to the crisis with the largesse that became common in the West—and its reticence had painful results. Government figures in 2019 showed 17 million living in poverty and the World Bank says poverty increased by about 20 percent last year, from 10.2 percent in 2019 to 12.2 percent in 2020.
The Turkish people seem to have had enough of soaring inflation, of the sinking value of their savings—and of the president.
It’s worth noting, too, that this increase in poverty has occurred even as gross domestic product has expanded. Erdogan is presiding over an economy that has grown more unequal, as confirmed by the country’s rising Gini coefficient, a measure of income inequality.
Making matters worse for the populist president, the rumor mill is rife with speculation about Erdogan’s health. Social media and respected publications are now openly discussing whether his mental and physical condition is declining, perhaps due to a hidden ailment.
It all adds up to one of the most precarious situations Erdogan has faced since emerging as Turkey’s leader more than 18 years ago and becoming one of its most powerful leaders since Kemal Ataturk, the founder of modern Turkey. Erdogan has hollowed out Turkish democracy, taken control of major institutions and created an uneven playing field for electoral contests. Yet some key elements of democracy—notably, elections—are still in place. That means Erdogan’s troubles could now be opening a possible path to power for the opposition.
In early October, half a dozen opposition parties decided to start working together to defeat Erdogan and the AKP in the next general election in 2023. Cooperation like this previously yielded results in the 2019 municipal elections, when an alliance of two major parties was able to secure the top jobs in Turkey’s largest cities, Istanbul and Ankara.
Today’s burgeoning alliance includes some prominent former Erdogan allies, such as former Prime Minister Ahmet Davutoglu and his Future Party. Its leaders have focused on highlighting their most significant philosophical contrast to Erdogan: their commitment to liberal democracy, including the need to restore the independence of the judiciary and the media.
Erdogan’s interest rate gamble has given the opposition another big boost. Leveraging public anger, the alliance called on Turks to join a series of rallies against the currency collapse, even as experts’ calls for repealing the policy grow louder.
Despite facing stiff headwinds, Erdogan still has much propelling him forward. Amid rising poverty, a badly handled pandemic, poorly managed forest fires and floods, and a dangerous economic policy, the Turkish media, which is dominated by Erdogan supporters, is essentially gaslighting the public by relentlessly promoting flowery portrayals of conditions in the country. But the propaganda, like the president, seems to have lost some of its persuasive power.
The 2023 election is a long way off, and Erdogan, despite his counterproductive economic policies, is nowhere near defeated. If nothing else, he has proven himself a wily politician, capable of inspiring fierce loyalty. No one knows this better than the people of Turkey, not least those who have tried for years to bring an end to Erdogan’s rule.
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