Istanbul It’s a short word, and yet it’s unmistakable in any conversation in Turkey these days: “Zam”. In German that means price increase. Whether at the bazaar, at the bakery, in industry or at tea in the evening with the family. Inflation hits everyone in Turkey.
“It’s a vicious circle,” says a restaurant owner in the Kasimpasa bazaar in Istanbul’s working-class district of the same name. “Because the groceries are getting more expensive, I have to raise the prices for my dishes.” Her customers are people from the neighborhood themselves. And if they had to pay more, they in turn demanded higher wages from their employers.
Recep Tayyip Erdogan grew up in this neighborhood himself. And if the Turkish president has his way, his old neighbors will have to get used to this spiral for a while. What’s more, you should still vote for him on election day.
On Thursday, the country’s central bank announced that it would keep interest rates stable at 14 percent. The Turkish money watchdogs have thus stopped their series of interest rate cuts. However, key interest rates are still far too low to stem inflation, which is now at 36 percent.
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“Anyone who sees today’s inaction by the Turkish central bank as a purification is probably wrong,” comments Thomas Gitzel, chief economist at VP Bank. “The withdrawal of confidence by the financial markets is a fait accompli.” Opposition politician Meral Aksener comments sardonically: “Thanks to Mr. Erdogan and his talented economic team, our inflation has risen to a record high.”
Economists have not understood Erdogan’s strategy for a long time
In the case of Erdogan’s economic policy, it’s about more than a question of talent. It’s about his re-election. And it’s about millions of his voters who have benefited socially and economically from the rise of Erdogan’s AKP. Erdogan must at least maintain their prosperity. The low interest rates should help here.
Economists haven’t been able to explain Erdogan’s strategy for a long time. And he and his AKP have also lost approval in opinion polls so far. Most recently, the ruling party fell to second place in a poll for the first time since taking power in 2002, behind the Republican CHP.
However, Erdogan sees himself on the right track and wants to counteract this with a program that can be described as “Turkish mercantilism”: with increasing exports and an artificially weak currency that foreign buyers and tourists can hardly resist. So he lets interest rates go down.
As a result, the lower the interest rates on loans, the more loans are in demand, both from companies and from private individuals who use them to buy machines, cars or refrigerators. At the same time, the large amount of credit money dilutes the value of one’s own currency. The lira is weakening – and the same products are becoming cheaper for foreigners.
The increased demand for such products ensures economic growth and rising prices. Inflation is rising. In order to counteract this development, the central bank can raise the key interest rate. Then fewer credits will be demanded, less will be produced and sold. Inflation will be dampened, but so will economic growth.
A consequence of Erdogan’s policy: Turkish combat drones are becoming an export hit
Erdogan wants to avoid that at all costs – in the truest sense of the word. In his eyes, only an economically active Turkey is a politically strong Turkey. And that’s what it’s all about. Despite his 66 years, the Turkish President regularly travels around the world, most recently to Africa and this week to Serbia. There Erdogan then emphasizes that he wants to increase Turkey’s trade volume with these countries. As a result, Turkey is gaining economic weight in these countries – and ultimately political influence.
This applies in particular to the armaments industry. Under Erdogan’s aegis, Turkey has developed from a dependent NATO partner into a medium-sized power that produces weapons, tanks, warships and high-tech combat drones. While the Federal Republic does not want to deliver weapons to Ukraine, for example, Turkey has long since sold several Bayraktar-type drones to Kiev.
The EU members Poland and Latvia, but also Morocco, Qatar and even the United Kingdom are interested in the semi-autonomous weapon systems.
The weak lira ensures that even emerging countries can afford these purchases. And with every drone export, Turkey gains a piece of political influence in the respective country. Too strong a lira would jeopardize this boom in arms exports.
Erdogan’s strategy has other positive side effects. Despite the corona pandemic, employment is increasing and export companies can hardly save themselves from orders. This also includes German companies that have their products manufactured in Turkey. According to a survey of 77 of the 327 member companies by the Istanbul Chamber of Commerce, a growing majority views the company situation more positively.
Companies in Turkey with German capital are therefore significantly more optimistic compared to spring of this year, they want to hire more and invest more. At the same time, a growing number of respondents state that the country’s economic situation has deteriorated and may continue to deteriorate.
The taxpayer should pay for the currency loss
The victims of this policy are many of Erdogan’s voters. Since the central bank changed course in September 2021, the lira has lost almost 50 percent in value. Some staple foods such as flour, olive oil or vegetables are more than twice as expensive as they were half a year ago. Important building materials such as cement, iron or bricks have also become more expensive by more than 50 percent. Most recently, the government raised prices by 50 to 125 percent, depending on consumption.
“People are paying a high price for Erdogan’s course in the form of misery and poverty,” says Ali Babacan, a former deputy prime minister under Erdogan, who was considered the government’s “economic czar” and has since founded his own party.
To protect themselves, many people in the country have invested their savings in other assets, such as real estate, cryptocurrency or the dollar. This has partly exacerbated the situation: Demand for apartments and houses continues to drive up real estate prices and those for building materials, and the flight to hard currencies is further weakening the lira – an economic vicious circle.
Since December of last year, the Turkish state has guaranteed that savings in Turkish banks will not lose their equivalent value in US dollars. So if the value of the Turkish currency falls against the dollar, the state compensates for the difference. In the end, the taxpayers have to pay for it, and thus those who are not supposed to exchange their lira.
According to Finance Minister Nureddin Nebati, people have so far deposited 131 billion lira (around 8.5 billion euros) into such accounts. At the same time, he has required exporters to convert 25 percent of their foreign currency earnings into lira.
Economy is more important than ideology
The Turkish president is trying to use a crowbar to restructure the country’s economic model. Those who benefit from this could thank him with their vote on election day. Erdogan is already ignoring everyone else.
This also makes it clear: Erdogan no longer relies on an ideologically trimmed voter base. The restructuring of the country and its economy is more important to him. In the end, he shouldn’t care who votes for him – as long as it’s more than 50 percent.
However, if his poll numbers continue to fall by the scheduled election date in June 2023, he is likely to increase the pressure on his own population. The next year and a half will not be easy for Turks. New political repression could soon join the “Zam”, the constant price increases.
More: Imminent escalation: Turkey’s inflation rate rises unexpectedly to 36 percent