The talk on the Turkish street is about a charge for plastic bags to carry groceries but much bigger problems loom. High economic growth rates enjoyed by the Turkish economy for almost a decade are a distant memory. With local elections in March, Turkish President Recep Tayyip Erdogan’s Justice and Development Party (AKP) faces perhaps the most testing period in its 16-year rule.
Experts have long said Turkey’s policy of keeping interest rates low despite surging inflation amounted to little more than kicking the can down the road. Well, that can has been kicked to pieces and will travel no further.
Turkey’s economic growth stood at 7.4% of GDP in 2017 but is expected to slow to 2.3% this year, official estimates state. A year ago, inflation was a little more than 10%; by October, it had hit 25%. Interest rates are at 24%; a year ago, they were 8%.
Furthermore, the lira lost almost half its value against major currencies in 2018. With that, Erdogan’s dream of Turkey joining the ranks of the world’s top ten economies has gone up in smoke.
For years, AKP leaders held up Turkey’s high growth rates and spending binge as proof that all was well. Growth rates of 7% and 8% were not uncommon, which made Turkey’s economy the only bright spot in political and security-related tumult.
However, the figures quoted by AKP apparatchiks during public rallies did not present the full picture. Turkey had wider economic problems: unemployment rates had been stuck for years at more than 10%. The central bank’s policy of keeping interest rates low (Erdogan is a self-described “enemy” of high interest rates’ looming shadow) while growth and spending surged, meant that a painful correction was likely.
All that was needed was a spark. That came last summer when international attention focused on Turkey’s detention of American pastor Andrew Brunson on espionage charges. US President Donald Trump announced sanctions on Turkey for detaining Brunson and the lira collapsed, precipitating wider turmoil that continues to spill into 2019.
The outlook is not encouraging. “The International Monetary Fund expects Turkey’s nominal GDP to come in at $631 billion for 2019,” reports bne IntelliNews. “That would mean the country retaining its position as having the world’s 17th largest economy but the anticipated output figure pales in comparison to 2017’s $849.5 billion.”
Ankara has tried to fight back. In December, the government announced a 26% rise in the minimum wage. Consumer spending remains strong, driven by population growth and easy credit. Additionally, the cheaper lira has led to exports rising almost 8% in the year to November 2018.
This, however, may not be enough. Timothy Ash, an analyst at BlueBay Asset Management, warned against cutting interest rates too early. Then, he said, “the lira melts and this would just send the economy into a death spiral… It could also be terminal for the AKP’s chances in local elections.”
The AKP has flourished because it transformed Turkey’s economy. International media dubbed Kayseri, Konya and Bursa, once seen as provincial backwaters, the “Anatolian Tigers” on account of their high industrial output over the past decade. The AKP invested billions of dollars in bridges, highways and major public transportation projects. The mood in Turkey was optimistic.
Now, sections of the AKP leadership and the party’s most committed voters, polls indicate, admit Turkey’s finances are in bad shape. Erdogan’s decision to appoint his son-in-law, Berat Albayrak, as finance minister has not gone down well. Should the economy slide further in the months ahead, Erdogan can expect a backlash at the ballot box.
In the past, Erdogan has blamed others — the Kurds, the United States or cleric Fethullah Gulen — for the difficulties faced by Turkey. This time it’s not so easy: The roots of Turkey’s economic malaise lie squarely at the president’s door.
Stephen Starr is an Irish journalist who lived in Syria from 2007 to 2012. He is the author of Revolt in Syria: Eye-Witness to the Uprising (Oxford University Press: 2012).
This article was originally published in The Arab Weekly.