Turkish President Recep Tayyip Erdoğan is caught in a vicious circle of embarking on foreign adventures to detract attention at home from an increasingly troubled economy, the Financial Times reported on Wednesday.
Residents and business-people in Turkey’s capital Ankara are seeing a slump in income. Erdoğan’s efforts to switch their attention away from financial woes to his apparent successes abroad may be coming back to haunt him and the economy as the lira hits record lows against foreign currencies, the FT’s Turkey correspondent Laura Pitel said.
Melike Demiroğlu, a 25-year-old diabetic who lives in Mamak, a working class district east of Ankara, is facing a surge in costs for her medicine as the monthly subscription for an insulin pump she needs is indexed to the dollar, according to the FT.
Erdoğan is embroiled in a military and diplomatic standoff with Greece over territorial rights in the Aegean. Last year, he sent Turkish troops into Syria to fight Kurds allied with the United States in the battle against Islamic State (ISIS). In 2020, he has also sent Syrian mercenaries and weapons to the government in Tripoli, Libya, and to Azerbaijan, both of whom are involved in armed conflicts that have threatened regional stability.
Another resident of Mamak, Emine Şahin, 54, complained of the rising costs of fruit, vegetables and clothing. All are affected by the price of the lira, she said.
Erdoğan’s government has sought to put a positive spin on the lira’s travails, which have seen it slump by almost 30 percent against the dollar this year. Investors say many of its problems are self-made because of Erdoğan’s foreign policy steps and after the central bank, backed by Erdoğan, burnt through tens of billions of dollars of its foreign currency reserves instead of raising interest rates.
The lira dropped to a record low beyond 8.3 per dollar on Wednesday, extending a nine-week decline, the longest since 1999.
Turkish politicians are well aware of the financial impact of a weaker currency, including on Turkish companies, who are saddled with almost $250 billion of foreign currency debt, the FT said. They also know that the exchange rate is seen as a barometer of the country’s economic health by voters, many of whom have been switching their lira savings into dollars and euros.
Turkish Treasury and Finance Minister Berat Albayrak, Erdoğan’s son-in-law, says the government wants a “competitive lira” to help Turkish exporters to sell more goods abroad. But that view ignores the fact that most of Turkey’s important exports, such as cars, refrigerators and textiles, rely on imported intermediate goods and raw materials.
Exporters also need strong demand from Europe, the main market for their goods. But the continent is saddled with rising coronavirus infections, which have led to the reimposition of movement restrictions and hence less consumer demand.
Meanwhile, Turkey’s tourism industry, which earned a record $35 billion last year, is in a massive slump, pressuring the lira’s value further. The government relies on revenues from tourism to finance a widening current account deficit that has been exacerbated by a borrowing spree. Many consumers have used the cash to buy up imported goods, afraid that prices may go out of reach should the lira continue to tumble.
Turkish inflation stands at a heady 11.8 percent and rising food prices have been a main driver, the FT said.
“The buying power of our customers has gone down and down,” said Ibrahim Şimşek, 31, who owns a butcher’s store on one of Mamak’s main shopping streets. He said his income has fallen 40 per cent in a year, forcing him to lay off two members of staff, the FT reported.
Investors and economists say Erdoğan, who claims higher interest rates are inflationary, should allow the central bank to raise the benchmark interest rate to help steady the lira. But last year, he sacked and replaced the bank’s governor for failing to lower it. The bank kept borrowing costs unchanged last week at 10.25 percent, below annual inflation, confounding the predictions of many economists, who had expected a substantial hike.
Cafer Arslan, who runs a jewellery shop, is one of the few small businessmen in Mamak who are benefitting from the lira’s continuing slump against the dollar.
“There is a lot of demand. Because everyone thinks it’s going to go up [in value against the lira] even further,” he told the FT.