Shaped by rising consumer demand following the pandemic and the Russian-Ukraine conflict limiting the supply of food and oil, countries worldwide have faced rapidly rising inflation. Inflation, defined as a sustained increase in the general price level of goods and services, has recently been making headlines. Rising prices globally have diminished the purchasing power of consumers, many of whom are now struggling to pay for necessities such as food and rent. In the United States, inflation rose to 9.1% in June 2022, the highest figure since November of 1981. In the UK, inflation is currently at 9.4%, over 400% of the Bank of England’s target figure. Yet the problems faced by the US and the UK pale in comparison to Turkey, who is currently reporting a staggering 79% inflation rate.
Turkey’s Inflationary History
Turkey is no stranger to high inflation rates, and has consistently experienced rates above global averages, with years in the 1980s and 1990s where inflation toppled over 100%. Turkey’s current hyperinflation issues began in 2014, when conservative Recep Tayyip Erdoğan was elected into presidential power. The Turkish President is a firm believer in the principles of Islamic Finance, which sees interest payments as exploitative, favouring the lender over the borrower.
Erodgan’s Influence
As most central banks around the world tightened their monetary policy to help offset global surges in inflation, the Turkish central bank was faced with continued pressure from the Turkish President to continually lower interest rates. Analysts believe that Turkey’s central bank maintains no independence from their President, as Central bank governors who opposed President Erdogan’s ideals were fired; the bank has seen four different chiefs in just under two years.
Instead of increasing interest rates to combat inflation through higher costs of borrowing, the Turkish Central Bank lowered the interest rate from 19% to 14%, where it currently sits. This has resulted in the Turkish Lira rapidly decreasing in value. Consequently, the increases in prices have made everyday goods difficult to afford for many in Turkey.
Impact on Exports and Imports
President Erodgan remains convinced that raising interest rates is usury. He also believes having a less valuable dollar in the foreign exchange markets is valuable as Turkish exports will become more price competitive globally. This is not an incorrect statement, as devaluing a currency does make its exports cheaper, and countries like China have devalued their currency many times in order to export more goods and services. The issue for Turkey is that they are heavily reliant on imported goods such as fuel and food, which means that the costs of production have largely increased for businesses, meaning they in turn have to increase their prices to be able to stay in business.
Impacts on Consumers
This had massive impacts on the Turkish population, who have had to contend with food prices that have doubled in just under a year. Shortages of food are common, and consumers are faced with grave uncertainty. Prices continue to rise and prices of goods are changing daily. Some have even been forced out of retirement due to the skyrocketing inflation, their pension no longer enough to cover their basic living expenses. Economists and statisticians await to see how the Turkish economy will fare in the coming months. There remains to be no sign of increasing interest rates. No matter the strategy taken to curb inflation, it must be done. Otherwise, Turkey’s economy and population will continue to suffer the consequences of misinformed economic policy.
