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Türkiye: The economy is growing, although inflation is rising and the lira is falling

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Türkiye: The economy is growing, although inflation is rising and the lira is falling

The Turkish economy is growing, but the headwinds are no longer there. President Recep Tayyip Erdogan. Sean Gallup/Getty Images

Turkey currently plays a special role in the global economy: inflation is 62 percent and the key interest rate is 40 percent. The lira is one of the weakest currencies in the world. But at the same time the economy is growing strongly.

According to the OECD, Turkey will be one of the industrialized countries with the greatest economic growth in 2023, with a plus of 4.5 percent. The rating agency S&P just raised its outlook for Turkey’s creditworthiness.

President Recep Tayyip Erdogan’s 180-degree turnaround appears to be taking effect.

Türkiye’s economy is like dancing on a volcano. People are groaning under 62 percent inflation. The lira is one of the weakest currencies in the world. In the fight against decline, the central bank raised the key interest rate to 40 percent. It wouldn’t be surprising if the economy were in ruins. But on the contrary: the OECD has just raised the forecast for Turkey for 2023 to 4.5 percent. The country on the Bosphorus is currently one of the fastest growing countries in the world.

Turkey remains a phenomenon. For a long time, President Recep Tayyip Erdogan caused people to shake heads with his economic policy. When prices rose sharply in Turkey, he demanded that interest rates be reduced. He replaced those in the central bank and the finance ministry who did not want to follow his “Erdoganomics” with willing followers. As a result, inflation rose to 85 percent in 2022. The local currency, the lira, fell into decline. Only the Argentine peso recorded larger losses.

After his narrow victory in the presidential election in February, Erdogan surprised again, this time with a 180-degree turnaround. He brought back former Finance Minister Mehmet Simsek. Erdogan had previously temporarily replaced the economist with his son-in-law. At Simsek’s suggestion, he made Wall Street-trained banker Hafize Gaye Erkan governor of the central bank – and vowed a return to economic reason.

The new President of the Turkish Central Bank, Hafize Gaye Erkan. Arif Hudaverdi Yaman / Anadolu

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The new guys got to work. Finance Minister Simsek increased numerous taxes in order to limit the budget deficit and cover the costs of the devastating earthquake at the beginning of the year. Erkan vowed the central bank to fight inflation and increased interest rates quickly, most recently on November 23, to 40 percent. Inflation initially continued to rise.

Türkiye: High inflation, weak currency

On the one hand, the soft lira makes imports expensive for Turkey. This hits Turkey hard because it has to import over 95 percent of its energy and a lot of food. On the other hand, the state fueled prices with tax increases. Thirdly, the statutory minimum wage was increased by 100 percent within one year.

After inflation temporarily fell, it has picked up again since the summer. Now a climax seems to have been reached. In November, inflation rose again, but “only” from 61.4 to 62 percent. That was less strong than expected.

The rise in inflation has slowed. In a month-on-month comparison, prices only rose by 3.3 percent in November. In July and August the price increase compared to the previous month was almost ten percent.

The central bank has so far had less success with the lira. Despite all interest rate increases, the currency fell to a historic low of almost 29 lira to one dollar at the end of November. At the beginning of December the price was only slightly better at 28.90. Since the beginning of the year, the lira has lost almost a third of its value against the euro and the US dollar.

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In view of the economic data, it was surprising when the industrialized countries organization OECD raised the growth forecast for Turkey again to 4.5 percent in its November outlook. In the G20 of the largest industrialized and emerging countries, only India, China and Indonesia are growing faster this year. Turkey is not only doing far better than recession-hit Germany, but also than any other European G20 country.

The OECD also expects Turkey to achieve growth rates of 2.9 percent and 3.2 percent in the next two years, despite horribly high interest rates. This is also more than in the OECD as a whole or the G20. And Turkey would definitely grow more strongly than Germany.

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Erdogan’s turnaround is also being noticed on the capital markets. Ratings agency S&P raised its outlook for Turkey’s creditworthiness on Friday. She now assesses the country’s prospects as “positive” instead of “neutral”. S&P left the rating at “B”. However, the positive outlook brings Turkey closer to an upgrade of its credit rating.

Three reasons for the Turkish economic miracle

There are three main factors that keep the Turkish economy going or even give it new momentum.

The population is growing. Population growth is also decreasing in Turkey, but it is still 0.7 percent per year. Türkiye’s economic performance is lagging behind per capita. The comparatively young population represents growth opportunities and a need to catch up in consumption. Companies like the Chinese online retailer Alibaba also see this billion in Turkey want to invest.

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Turkey benefits from Russia’s war against Ukraine. Erdogan has also criticized the war. However, Turkey is the only NATO member not to join the sanctions against Russia. On the contrary: Turkey has stepped into the breach as a customer and supplier to Russia. Trade between both countries is increasing. In the first eight months of 2023, Turkish exports to Russia grew by 63 percent. Russia thus replaced Germany as Turkey’s largest trading partner.

Turkey has also become a hub for trade with Russia. The EU warned Turkey at the end of 2022 from helping Russia circumvent sanctions.

One of the sectors that is growing rapidly in Turkey is the defense industry. According to the peace research institute Sipri, the Baykar company increased its sales by 94 percent to 1.4 billion euros in 2022. Baykar climbed from 100th to 74th place among the largest defense companies in the world.

The ambivalent effect of the earthquake. The devastating earthquake at the beginning of the year in the border area with Syria initially set back economic performance in the region. Tens of thousands of people died, over a million people lost their homes, factories were destroyed or had to limit their production. But for months now, reconstruction has been causing a construction boom from which significant parts of the Turkish economy are benefiting.

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