Why & How Turkey’s Economy Collapsed | How Inflation Affects Turkey

The economic situation in Turkey is getting worse daily. Inflation is soaring, and Turkey’s Lira currency continues to decline. There are long queues at shops as people try to buy cheap bread. The prices of milk, medicines, and toilet paper have skyrocketed. Turkish President Recep Tayyip Erdogan has increased the minimum wage by 50 % amid a fall in the Turkish Lira’s value. Experts were not surprised by why and how Turkey’s economy has deteriorated so fast.

Impact of the COVID-19 Outbreak on Turkey’s Economy 

Turkey’s economy was negatively affected by the COVID-19 outbreak and the ensuing lockdowns, which triggered the deterioration of the country’s economy.

The Turkish Confederation of Trade Unions had said that unemployment, inflation in living expenses, and rising prices were hurting workers, and the situation had only worsened since then.

ATFX-Turkey_economy_covid_19 (2)

The economic crisis in Turkey was already bad for 2 years before the outbreak of the COVID-19 epidemic. This was before the global supply chain system of the world’s leading economies started falling apart due to the pandemic. Turkey was trying to get out of a recession, but its rising debt burden made it challenging for the lira to hold on to its value, which contributed to its decline. However, the slow pace of the decline has accelerated in the last few weeks, with many blaming Turkish President Erdogan for the worsening economic conditions. 

Turkey Cuts Interest Rates Despite Inflation Soaring to 80%

Turkey’s financial problems have deep roots, but the recent crisis was caused by President Erdogan’s insistence on lowering interest rates. Erdogan took this step despite rising inflation, ignoring advice from leading economists. Generally, most economists recommend that countries raise interest rates to combat rising inflation, which usually indicates a lot of money circulating in an economy. This is why most central banks are raising interest rates to limit borrowing and reduce the amount of money in circulation. 

ATFX-Turkey_interest_rate (2)Recep Tayyip Erdoğan became the Prime Minister of Turkey in 2003, which at the time was the most powerful office in the country. He was Prime Minister from 2003-2013 before deciding to stand for election as President in 2014. He was the first Turkish President to be elected via a popular vote. In the early years of his rule, Erdogan was credited with transforming Turkey by investing in large infrastructure projects, attracting foreign direct investment, and lowering the poverty levels in the country. His policies transformed the country into an upper-middle-income country. 

However, things changed in 2016 following a coup attempt, which led to a state of emergency that lasted up to 2018. Since then, Erdogan has been accused of authoritarian rule, including silencing opposition parties ahead of next year’s elections. 

How Inflation Affects Turkey’s Struggling Economy

Turkey’s government, and Central bank have paid zero attention to the record-high inflation in the country, instead choosing to focus on promoting economic growth. The central bank has cut interest rates several times, encouraging spending and fueling inflation. However, runaway inflation affects many families whose incomes have fallen behind and can no longer afford to buy everyday consumer items. Investor confidence in Erdogan’s government is at an all-time low, which could lead to reduced foreign direct investment in the country. The Turkish lira has lost over 30% of its value since the year started and could fall much further. 

What Happened to Turkey’s Economy Now ? 

At the start of the year, you could have bought one US dollar with 15 Turkish lira, and the exchange rate has since risen to over 18 Turkish lira for a dollar. The country has the highest inflation rate in any major economy, which was 83% in October. The inflation situation is worsening as the Turkish government pursues economic growth at the expense of everything else. 

ATFX-Turkey_economy_now (1)Turkey’s President Recep Tayyip Erdoğan believes that high-interest rates will lead to more inflation and that lower interest rates are better for the economy. This view goes against established economic principles followed by most countries. The President wants to encourage spending to grow the economy and has been cutting lending rates to facilitate his policies.

However, runaway inflation is causing problems for many households as their incomes cannot keep up with the rising prices of most items. Investor confidence in the government is quickly evaporating, and many experts are warning that Turkey’s economy is in danger of imploding.

What is the Future of Turkey? 4 Predictions

Despite inflation in Turkey running at 83%, the Central Bank of the Republic of Turkey cut interest rates by 1.5% in October, a move that has attracted criticism from various quarters. The central bank slashed interest by 1% in August and again in September to boost the country’s economy. The question remains, are the rate cuts working? The short answer is yes to some extent. 

Turkey recorded a GDP growth rate of 7.6% in Q2 2022, while many countries struggle to achieve a 1% GDP growth rate. The economic growth was largely driven by a surge in household consumption, which rose 22%. The increased spending continued to fuel record-high inflation, attracting criticism from many. 

Only time will tell whether the current unorthodox monetary and fiscal policies being pursued by Turkey’s President Recep Tayyip Erdoğan will work. Meanwhile, it is quite evident that over short-term Turkey will continue generating impressive GDP growth figures as the central bank cust interest rates and encourages consumer spending. 

The lira has weakened significantly against the US dollar this year a trend that will continue unless the government changes its monetary and fiscal policies. Many households are finding it hard to keep up with the soaring inflation, which may force the government to rethink its policies. 

Therefore, these are my 4 predictions:

  • Turkey will record some GDP growth in Q3 and Q4 2022. 
  • Inflation will remain at record highs and will keep rising. 
  • However, the situation may change ahead of the general elections next year. 
  • The lira will continue weakening against the dollar. 

What Can You Do ?

Forex traders can benefit from the movement in currency pairs regardless of whether a currency is falling or rising. For example, investors who bet on the USD/TRY currency pair rising at the start of this year as the Lira weakened are up 38.77%. 

However, other leading currency pairs provide much better trading opportunities daily when compared to the Lira. Traders can also bet on a currency pair falling and make money from the same.

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