Clampdown on the economy
Turkey’s economy is under pressure from successive elections. The problems are clear, and I don’t mean the structural problems that our economy has had throughout its history. Those exist, and they will continue as long as no one has the courage to deal with them. The problems I’m referring to, however, are cyclical and related to elections. For my part, I think that two problems come to the forefront in terms of their importance, their future weight and the gravity of their effects. One of these is inflation and the other is growth, which move in opposite directions. Growth slows as inflation accelerates. The increasing levels of deterioration in this countervailing pair indicate that the problems are getting worse.
The monthly rate of increase in consumer prices, which we think is the main indicator of inflation, was 9.22 percent in January 2017, whereas it was 11.92 percent in December. This figure has increased from 10.34 percent in January 2018 to 25.2 percent in October and to 21.6 percent in November. The point we need to underline is that there is a high jump in consumer prices during an election process. Some of this jump is also related to the increase in the exchange rate during the summer months.
However, the direct effect of the exchange rate on consumer prices is slow and limited. This effect is relatively higher and faster in producer prices. Therefore, it is not right to condemn the exchange rate effect for accelerated consumer inflation. The greater impact is from the election and actions related to it, for instance, the loosening of demand side economic policy and the increases in public expenditures to provoke growth in the economy.
Similarly the slowdown in growth: In Turkey, growth is unstable and fluctuates around the growth potential of the economy. There may also be structural sources of fluctuation in growth rates but political interventions have important implications for deviations from potential growth, and deviations from potential growth lead inevitability to unsustainability.
Our growth performance over the last two years confirms this. In the period leading up to general elections in 2017, economic and monetary policies have not only accelerated inflation but also caused growth to climb significantly above the potential rate of five percent. The growth rate, which rose to 11.5 percent in Q3 2017, could not be sustained and fell to 1.6 percent in the third quarter this year.
Worsen ng one problem wh le solv ng the other
The fact that there have been heavy-handed interventions on the economy in successive elections has accelerated inflation, slowed down growth and severely tightened the economy. The clamp here is the policy that attempts to solve one problem while worsening another. Gearing down inflation will reduce growth to a crisis level, and the policy to accelerate growth will push inflation to a higher level. The most important problem after the election will be how to loosen this clamp.