Over the last two years, Americans have experienced inflation greater than any they’ve faced in some time, but it’s been nothing compared to what the citizens of Turkey have faced. Inflation in Turkey exceeded 85% in October. The inflation forcing Turkey’s people into poverty. Stefanie Glinski reports for Foreign Policy’s DISPATCH:
ISTANBUL—On a wide staircase across the street from a popular bar in Turkey’s biggest city, crowds of people sit in the sunset, enjoying cheap drinks and snacks they brought from home. They used to go to the bar, and they’d still like to. They just can’t afford it.
“It keeps getting worse,” one waiter at the jilted bar said. “Salaries are low, but prices keep increasing. It’s frustrating for all of us,” he added, asking to remain anonymous, afraid he’d lose his job over the comment.
Turkey has, and has had for quite some time, an inflation problem. Last October, inflation hit a 24-year high of 85.5 percent on an annualized basis, meaning prices nearly doubled. This year, inflation has tempered from very high to somewhat high and is heading back toward being unsustainable. The kind of inflation that Turkey has on a monthly basis causes spasms of panic in the United States or Western Europe on an annual basis. In June, inflation was close to 40 percent year-on-year. In July, it was nearly 50 percent, and in August, it was nearly 60 percent. Investment banks and the government are in agreement that inflation will likely hit 65 percent by the end of the year. Ankara optimistically hopes to halve the inflation rate by next year.
The reason inflation went haywire is because of Turkish President Recep Tayyip Erdogan’s belief that low interest rates would somehow cap inflation. The reason it might yet come under control is because of his belated jettisoning of that very approach, experts said, marked by a sudden U-turn in monetary policy.
For a long time, Erdogan insisted that Turkish Central Bank interest rates be kept relatively low, in order to keep credit flowing and the economy humming, even though that was a recipe for inflation. Ahead of the general elections this May, Erdogan raised Turkey’s minimum wage and tapped Central Bank foreign currency reserves to prop up the lira to help stabilize the currency. It was a short-term gambit.
For now, post-elections, Erdogan seems to have gotten the gospel. In late August, the Central Bank significantly hiked interest rates for the third time since the May elections. Interest rates that were at 8.5 percent, and then leapt to 17.5 percent in July, are now at 25 percent. Higher interest rates should temper inflation by limiting the supply of easy money in an economy. They should also, in theory, prop up a country’s currency, though traders in lira haven’t gotten the memo. The Turkish lira, which in early 2008 came close to parity with the U.S. dollar, is now worth a little under 4 cents.
Erdogan has signaled a change in course by appointing Mehmet Simsek—a former deputy prime minister and Merrill Lynch banker—as finance minister, as well as Hafize Gaye Erkan as Central Bank governor. Simsek asserted Thursday that markets had faith in Erdogan’s economic stewardship. But as the musical chairs shuffle, a lot of Turks are running out of cash—and patience.
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