Turkey’s Buffeted Economy

On 23 June, voters are called to vote again to elect the mayor of Istanbul, after the opposition’s victory was invalidated. The deterioration of Turkey’s economic situation is likely to weigh heavily on the result.

Levent, the business district of Istanbul.

Recep Tayyip Erdoğan’s main adversary is no longer political but financial. The national currency, the lira, is plummeting faster than ever. Last year it lost 30%—and has fallen by 10% during the first four months of 2019, and dropped by 15% against the US dollar. This monetary toboggan is rapidly swallowing up the official foreign reserves held by the Central Bank of Turkey. On Monday 6 May, it spent over a billion dollars to bolster its currency, buying back nearly six billion liras to no avail, since the national currency fell below the symbolic rate of 6 liras to the dollar. In the week following May 6 cancellation of the mayoral election in Istanbul, over six billion dollars were thus squandered in vain to defend the national currency.

Dissent within the AKP

How long can the Central Bank keep this up? Officially the foreign exchange reserves amount to around 30 billion dollars. The currency drain in the second week of May has already cost 14% of these. At this rate, nothing proves that Turkey can hold out until next 23 June, the date set by the commission that invalidated the election of Ekrem Imamoğlu, the first opposition figure to be elected mayor of Istanbul in a quarter of a century. The news of this invalidation, also a first, was greeted in several neighbourhoods with loud pot-banging protests and street demonstrations. This shocking decision to cancel the mayoral election was reached because of the supposedly “inappropriate” appointments of the tellers. Yet the elections of the local councillors and district mayors, most of which were won by Erdoğan’s Justice and Development Party (AKP), were validated, even though the ballots were counted by the same “inappropriate” hands. The decision even outraged some AKP veterans, such as Abdullah Gül, former president of Turkey or Ahmet Davutoğlu, former Prime Minister. In an unprecedented gesture, they both disavowed their former boss.

But Erdoğan cannot afford to lose on 23 June. Istanbul is the business capital of Turkey, it counts for one third of the country’s GNP and no doubt even more in the finances of the AKP and its wheeler dealers, and its loss would be an unbearable confession of weakness for a man who likes to compare his strength with that of an Ottoman sultan like Suleiman the Magnificent in the glorious days of the Empire. Consequently, he will bring to bear all the necessary means to sway the electorate, using his total control over the resources of the State and its millions of civil servants, even if it means breaking once again “the universal rule of law and established practices” to quote Ahmet Davutoğlu. The recent arrests of university scholars and attacks against journalists show that he has no qualms in this respect.

But will he have the necessary logistical support? For the moment, this is not the case. Economic growth is negative (-3%). The declining lira has caused raging inflation: +20% in one year as of last March, but 30% on foodstuffs, an unbearable burden for low-income households which represent a large share of the AKP electorate. Istanbul, but also Ankara the capital and other big cities, sanctioned the ruling party with even larger margins than on the banks of the Bosphorus. In just one year, unemployment rose from 10.8% to 14.7% of the active population, i.e. nearly five million people are out of work.

Central Bank under pressure

The success or failure of “Operation Rescue” is in the hands of the Central Bank of Turkey (CBT) created in the thirties by Atatürk, the father of modern Turkey and which has been independent since 2001, in normal times. But these are not normal times and the hands of both Erdoğan and his son-in-law, finance minister Berat Albayrak, have weighed heavily on the shoulder of the Bank’s unfortunate governor. And there have been plenty of opportunities for these government interventions, since no less than seven elections have been held in the last five years.

This was evidenced on 25 April when the Bank’s monthly statement failed to conclude with the ritual phrase: “if necessary, the monetary policy will be tightened.” Thus it was made clear that nothing would be done to counter rising prices in the weeks to come. Similarly, Erdoğan has an economic theory all his own and which he is alone to to promote, to the effect that increased rates of interest actually stoke inflation instead of keeping it under control as liberal orthodoxy would have it. Thus the rates have not been raised despite the setbacks encountered in August 2016 when the dollar went over the 7 lira mark without any reaction from the CBT. One week in two, however, the refinancing of commercial banks is suspended which reduces the quantity of available lira and is supposed to diminish pressures on the exchange rate.

Another expedient is that over 40% of the CBT’s reserves, estimated at 28 billion dollars, are made up of short-term loans from Turkish banks, a situation normally avoided by an issuing institution. As a consequence of the dollarisation of the nation’s savings (dollar accounts total more than those in the local currency), over 80 billion dollars are on deposit in those banks and a three-month loan to the State is very profitable (over 8% interest on treasury bills). But the banks also have commitments which amount to more than 100 billion dollars and in order to jump-start the economy, put an end to inflation and recession as Albayrak has again recently promised to do, the banking sector must be cleansed of its non-performing loans which prevent it from financing the recovery. For the last ten years, companies have depended on foreign lenders to build the much-touted “Turkish model,” a mix of democracy and a market economy, very much in vogue with Western leaders at the time of the Arab Spring. The August 2018 crisis, which added 30% to the cost of doing business, prevented repayment of these debts.

Tensions with Washington

So something has to be done. The restructuring of the energy sector’s debt (13 billion dollars) is under discussion between the Treasury and the banks, particularly the foreign ones. According to Reuters1, an initial meeting took place in April of this year, but nothing came of it. The banks are demanding in return an increase in electricity prices so that producers may recover their investments, but this will have to wait until after June 23 municipal elections in Istanbul. And Turkey’s financial ordeal has only begun, because next in line are the property and building sectors where the short-term debt is even heavier (over 70 billion dollars according to unofficial estimations).

In Levent, the Istanbul business district, management is pessimistic. In mid-May, the employers’ organisation, TUSIAD (Turkish Industry and Business Association) warned of the threats to the economy and democracy. “We’ll settle accounts later” was the reply dictated by Erdoğan. His government, a firm believer in “too little, too late” is beset by four problems at once: electoral setbacks, plummeting currency reserves, the lack of any serious economic policy, and bad relations with Washington, which came to the rescue following the 1998 crisis. Ankara’s purchase of Russian S-400 missiles outrages the Trump administration which has made every effort to persuade the Turkish army to give this up. Thus far, to no avail. However, since the FED, the US Central Bank, under pressure from President Trump, stopped raising its interest rates in January 2019, greenbacks have become less attractive to speculators. This does not settle Erdoğan’s financial problems but does give a boost to the finance minister’s over-optimistic hopes that the recession will end during the second semester of this year. After June 23 election in Istanbul.