Erdogan Administration's economic policies clash with reality: The chickens always come home to roost
Within the architecture of the presidential system, those responsible for managing the economy in Turkey cannot go beyond the role of implementers. Thus, as civil servants obliged to carry out President Erdoğan's wishes, we find ourselves caught in the conflict between dreams of an economic order bathed in the sauce of political Islam, and reality.
The main axis of the erosion in the economy, which has been deteriorating since 2018, is the effort to force an obsessively ideological monetary policy into the daily realities of the present. In the President's own brief words, this is a "new programme against economic traps developed by" no other than the President himself.
In their pursuit of an interest-free Islamic economic order, implementers who aim to reduce and "neutralise" interest rates do not even realise the permanent earthquake they are creating in the economy with real interest rates as low as minus 60%. When we leave the realm of dreams and face the realities of today, we see that we are heading for a crisis of currency shortages, a sudden credit slowdown and ever increasing inflation.
The experiment, which has been implemented under Erdoğan's directives since 2018, has turned Turkey into a stop-start economy, where the needs of reason and economy come into play from time to time. In the interim period of the acute pandemic, the economic policies favoured by the AKP government have increased deep poverty and turned a low-income working life that can only meet basic needs into a prison for large segments of society.
We have reached a new phase with the introduction of an economic model based on Islam, which the President summarised as "nas" in his own words, on a full scale from September 2021. By dint of "normalising" the attacks of TL depreciation, which make visible the wrongness of things in the economy in a way that can be likened to a heart attack, the hopes of returning to the ground of reality have been exhausted. In an eclipse of reason, in a fit of hysteria, the decisions taken by all agencies, from the Central Bank of the Republic of Turkey (CBRT) to the Banking Regulation and Supervision Agency (BRSA), to save the day so as to uphold Erdoğan, are causing us to sink further into the mire as we flounder in the quagmire.
Let's take a look at the figures that these derailed economic policies have put before us at the end of the first half of the year.
The latest inflation data will be announced on Monday 4 July. Annual CPI inflation from TURKSTAT, which no longer even tries to convince anyone that the dataset reflects reality, will rise from 73% to 75%. This level cannot be said to be the maximum. The fact that the equally controversial CPI inflation was only 19% in November 2021, not six months ago, but years ago. The Istanbul Wage Earners' Subsistence Index, released yesterday, reached 4.03% monthly in June and 94% on an annual basis. According to data from the ENAGroup, which announces a level of inflation so high that Erdoğan cannot stomach, CPI inflation is 160% on an annual basis.
Following the 50% increase in the minimum wage at the beginning of the year, a further 30% mid-year increase was announced yesterday. It was raised to 5,500 lire net. The total increase, which from a bird's eye view gives the appearance of "not letting the worker be overwhelmed by inflation", reflects the gravity of the situation in AKP Turkey, where the hunger threshold is 6,319 liras, the poverty level is 20,818 liras for a family of four and, according to SSI records, 48% have to live on the minimum wage. The annual inflation rate of the trade unions' confederation TÜRK-İŞ is 117.3%. A significant part of the working class lives on hunger under Erdoğan's economy.
A medium-term snapshot is also needed on other macroeconomic data, which are not immediately tangible, but which either exacerbate inflation with the imbalances they contain, or are reflected again in inflation by depreciating the TL.
The foreign trade data for May 2022 announced last week should be at the top of the list. It should be, because this main backbone of Erdoğan's economy would supposedly rise with the depreciation of the TL and such a foreign exchange surplus would be created with record-breaking exports that the TL would start to appreciate spontaneously and thus inflation would fall in a high growth environment.
Inflation, which has spiralled out of control to the point of requiring a mid-year wage adjustment for the first time in a long time, is the clearest proof that Erdoğan's economic model is not working. Although he tries to convince us that the problem is not in the New Economic Model but with the post-pandemic world by pointing to the high rates of inflation around the world at every opportunity, the father of the Frankenstein created by the extreme negative real interest rate policy is none other than Erdoğan.
As is often underlined, although exports have broken records in numerical terms, the annual growth rate has actually fallen from around 35% last year to 15% in May. Moreover, this decline is bound to continue. In May 2022, while exports rose by 15%, imports officially exploded with an annual increase of 43.5%. It is remarkable that the President, who proudly mentioned exports when announcing the minimum wage yesterday, did not mention how imports increased due to the strange monetary policy. In fact, the foreign trade deficit has reached an all-time high of 10.6 billion dollars per month, an increase of 155% compared to last year.
Under the ''economic model'' that is supposed to provide a sustainable current account surplus, the current account deficit, which was $14.8 billion at the end of 2021, is expected to be between $45 and $50 billion at the end of 2022, which is, of course, a natural follow-up to the story based on the foreign trade deficit.
The rise in energy prices, naturally, pushes the bill for energy imports significantly upwards. Well, let's talk about the data excluding energy then. Excluding energy, the increase in exports was 11.8 percent, while the increase in imports excluding energy was 29.2 percent, almost three times the increase in exports.
This means that even if world oil prices had not risen by 45% since the beginning of the year, Turkey's foreign trade deficit would still have grown at a tremendous rate. This economic policy can certainly not be called a 'success'. With an approach that boils down to "let the TL depreciate, but not too much", those who consider a 14% policy rate to be suitable in the face of 75-80% inflation are wasting our lives struggling to contain the never-ending flight from the TL.
On the one hand, there are the policies that first pave the way for savers escaping the TL to rush out to buy apartments, cars and all sorts of consumer durables through cheap loans, thus fuelling inflation, and then try to stop them from doing so.On the other hand, there are policies such as currency-protected deposits (which have grown beyond 1 trillion lira) that caused us great troubles by indexing a significant part of deposits totalling 6 trillion lira in foreign currency just to keep the TL under control.
And on the other hand, there is the BRSA, which has recently joined to the CBRT in its pursuit of "world peace" in order to reduce inflation. The BRSA has been increasing the degree of capital control with the complex steps it has taken without analysing why companies need to reserve foreign currency; cornering the real sector, which it has strangled by making it unable to do their businesses and get loans; and putting the banking sector, for which it is the last bastion of responsibility, at risk. The CBRT, which tries to paint our eyes by claiming that the decisions announced by the BRSA are micro-prudential measures that will be a cure-all for the underlying problem and keeps trying to create an illusion about TL by selling 3 billion dollars in the last week alone, although its net reserves are at a 20-year low of 7.4 billion dollars.
Just as this series of wrongdoings has devastated the economic environment like a tsunami in the last six months, it will create even more severe economic conditions in the next six months.Just as this series of wrongdoings has devastated the economic environment like a tsunami in the last six months, it will create even more severe economic conditions in the next six months.
*She is an economist with 28 years of professional experience and a columnist on economy/politics on web-based media. She was the Director of Research and Strategy at Egeli & Co. Asset Management, previously was the Turkey Economist of UniCredit Menkul Değerler A.Ş. as the Director of the Research Department; the Chief Economist and the Manager of the Research Department at Ekspres Invest; the Economist at Raymond James Securities; and Ege Invest; an Analyst of the Research Department at Global Securities, and Karon Securities. She received her undergraduate degree in Business Administration from Middle East Technical University in 1995, before receiving her M.A. degree in Economics from Hacettepe University.
She is the mother of a lovely daughter and runs the family farm producing raisins and grains in the city of Manisa/Saruhanli, located in western Turkey.