The economic situation in Turkey is getting worse by the day. Inflation is skyrocketing and the Turkish lira is falling. Turks are lining up at stores to buy cheap bread. Prices for milk, medicines, toilet paper, etc. are skyrocketing. As the Turkish lira is falling, Turkish President Recep Tayyip Erdogan has raised the minimum wage by 50 percent. Economists say it is no surprise that the Turkish economy is deteriorating so rapidly.
The impact of COVID-19 on the Turkish economy
The Turkish economy has been adversely affected by the COVID-19 outbreak and subsequent lockdowns, which have led to a deterioration in the national economy.
The Turkish Trade Union Confederation said unemployment, rising living costs and inflation had taken their toll on workers and that the situation had worsened today..webp)
Turkey had already been in an economic crisis for two years before the COVID-19 outbreak. This was before the pandemic disrupted global supply chains in advanced economies. Turkey was trying to pull itself out of recession, but its growing national debt made it difficult to maintain the value of the lira, contributing to the country’s economic decline. Meanwhile, the slowdown, which had been slow before, has accelerated rapidly in recent weeks. Many blame President Erdogan for this economic downturn.
Turkey decides to cut interest rates despite inflation soaring to 80%
Of course, Turkey’s financial problems are deeply rooted, but the recent crisis was caused by President Erdogan’s insistence on cutting interest rates. Despite rising inflation rates in Turkey, President Erdogan ignored the advice of leading economists and cut interest rates. Generally, when inflation rates rise, the amount of money in circulation increases, so most economists recommend raising interest rates as a way to overcome this situation. This is why most central banks raise interest rates to limit the amount of money in circulation and reduce the amount of money in circulation..webp)
The current President of Turkey, Erdogan, was elected as Prime Minister in 2003, and at that time, the cabinet was the most powerful in Turkish history. Erdogan served as Prime Minister from 2003 to 2013, and then ran for President in 2014. Erdogan became the first Turkish President to be elected through a popular referendum. In the early days of his term, President Erdogan attracted foreign direct investment (FDI) by investing in large-scale infrastructure projects, and transformed the Turkish economy by reducing the national poverty rate. These policies of President Erdogan helped Turkey grow into an upper-middle-income economy.
However, a coup attempt in 2016 led to a state of emergency that lasted until 2018. Since then, Erdogan has faced criticism for his authoritarian rule and for silencing the opposition ahead of next year’s presidential election.
The Impact of Inflation on the Suffering Turkish Economy
The Turkish government and the Central Bank have been indifferent to the country’s record-breaking inflation and have focused solely on stimulating economic growth. The Central Bank has cut interest rates several times to encourage consumption, which has fueled inflation. However, the soaring inflation has had the effect of reducing real incomes for many households, leaving them with no purchasing power to buy consumer goods. Investor sentiment under President Erdogan is at an all-time low, which could lead to a decline in foreign direct investment in Turkey. The Turkish lira has now lost more than 30% of its value since the beginning of the year and could depreciate further.
What is happening in the Turkish economy today?
Until the beginning of this year, you only needed 15 lira to exchange one US dollar, but now it takes 18 lira with the exchange rate rising. Turkey’s inflation rate reached 83% in October, the highest in any country. The inflation situation in Turkey is getting worse as the Turkish government is pursuing economic growth at all costs.
President Erdogan believes that high interest rates will lead to higher inflation and that low interest rates will help the national economy. This view is diametrically opposed to the economic principles accepted by most countries. President Erdogan is trying to stimulate economic growth by encouraging consumption, and to achieve this, he is lowering the policy interest rate.
But as household incomes fail to keep pace with rising prices, many families are struggling. Investor confidence in the Turkish government is rapidly disappearing, and many experts are warning that the Turkish economy is at risk of collapse..webp)
What does the future hold for Turkey? 4 predictions
Even with the inflation rate in Turkey reaching 83%, the Central Bank of Turkey cut interest rates by 1.5% in October, which drew a lot of criticism. The Central Bank of Turkey cut interest rates by 1% in August and then cut rates again in September to stimulate the national economy. So, here we can ask the question: did the interest rate cut work? To put it simply, to some extent, yes.
In a situation where many countries are not even achieving 1% GDP growth, Turkey recorded a GDP growth of 7.6% in the second quarter of 2022. This economic growth was largely contributed by a 22% increase in household spending. This increase in consumption fueled record high inflation, which has led to much criticism.
Only time will tell whether President Erdogan’s unorthodox monetary and fiscal policies will be effective. In the meantime, if the Central Bank of Turkey maintains its policy of cutting interest rates and encouraging consumer spending, Turkey will continue to post impressive GDP growth figures in the short term.
The lira has depreciated significantly against the dollar this year, and this trend is likely to continue unless the Turkish government changes its monetary and fiscal policies. Many Turkish households are struggling with soaring inflation, which could force the Turkish government to rethink its policies.
Accordingly, I would like to make four predictions:
- Turkey is expected to see GDP growth in Q3 and Q4 of 2022.
- Turkish inflation reaches record high and will continue to rise.
- But things could change ahead of next year’s general election.
- The lira will continue to depreciate against the dollar.
What action should you take here?
Forex traders can profit from whether the currency pair rate rises or falls. For example, investors who predicted the lira to weaken and bet on the USD/TRY rate rising at the beginning of the year saw a return of 38.77%.
However, using other major currency pairs, you can get much better trading opportunities than with the lira. Meanwhile, traders can also make money by betting on a currency pair to fall.
