Turkey proves populism doesn’t pay
Turkey’s central bank last week raised interest rates to 50%, marking a dramatic U-turn in economic policy less than a year after President Recep Tayyip Erdogan narrowly won election for a third term. The interest rate rose from 8.5% in June last year to 45% in January this year — and now to 50%.
This is a sobering lesson for complacent South Africans on just how quickly after a gradual buildup of public finance problems — combined with populist, ideological and vote-buying policies — the economy can reach a tipping point and deteriorate dramatically.
Turkey, before this latest interest rate hike, was already struggling with a cost-of-living crisis. The latest interest hike increased the pain, with many struggling to afford basic goods as runaway inflation erodes the purchasing power of the country’s currency, the lira.
In October last year inflation was 85.5%, among the highest in emerging markets. Inflation averaged 72.89% in February this year. The central bank says it needed to hike interest rates so drastically to tackle rising inflation. And that it will raise interest rates even higher if inflation is not reined in.
It said its “monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen”. Inflation has increased throughout Erdogan’s presidency because of his unorthodox and populist policies. Long-term vulnerabilities in the country’s public finances, which were not dealt with before last May’s presidential election, combined with populist economic policies and pork-barrelling to secure votes, now haunt the economy.
Ahead of last year’s election, he ramped up populist policies as his support appeared to wane. He increased public sector wages and introduced generous early retirement from the public sector, costing billions. He increased the minimum wage by 49% ahead of the election as a vote-catching measure. However, given inflation, the public sector wage increases and welfare grant increases lost their purchasing power.
Erdogan, now in his third term, previously pursued populist economic policies such as cutting interest rates to fight inflation, which unleashed a currency crisis. The government and central bank are now scrambling to deal with the consequences
— record inflation, a plunging currency and foreign investor flight.
Foreign capital inflows slowed and the country’s foreign exchange reserves plummeted, putting the country’s lira under pressure. In late 2021, the Turkish lira collapsed 170% against the US dollar. The Turkish government has used billions of its foreign currency reserves to shore up the lira, with only moderate success. The plunging of the lira increased the costs of imported goods. The country faces a potential balance of payments crisis. Following successive bailouts of the currency using foreign exchange reserves, the lira is now around 32 to the dollar.
After winning the May 2023 presidential election, Erdogan appointed a new economic team to try to get the economy out of intensive care. He appointed Mehmet Simsek, a former Merrill Lynch banker, as finance minister and Hafize Gaye Erkan, a former Goldman Sachs banker, as central bank governor — the first woman to hold the position. In the past, Erdogan fired central bank governors who opposed his populist monetary policies. Erkan resigned abruptly in February this year, saying she was a victim of a “character assassination campaign”. She was replaced by Fatih Karahan, the former deputy governor of the central bank.
Erdogan was first elected in 2003. He expanded infrastructure through debt, foreign investment and foreign capital. Turkey’s economy rose to nearly $1-trillion, making it the world’s 19th-largest economy. However, when inflation rose above 20% in 2019, Erdogan took the unorthodox step of cutting interest rates — which increased inflation, rather than reducing it.
Turkey’s economic troubles should serve as a warning to South Africa of how quickly and how high interest rates can rise unless the country refrains from adopting populist, ideologically outdated, patronage policies and non-strategic foreign policies — and starts to appoint competent, accountable and honest managers in the public service and state-owned enterprises.