This week, Turkey attracted attention with positive figures from tourism and foreign trade. But inflation figures announced Thursday sharpen the focus again on the ongoing economic crisis: analysts expect consumer prices to rise 47 percent year-on-year in January - the highest level in 20 years. In December, the figure was 36 percent. President Recep Tayyip Erdogan has told his countrymen that they will have to live with high inflation "for some time to come." The central bank has doubled its year-end inflation forecast to 23 percent.
Erdogan had reacted to the unwelcome news as he often does: he fires the staff. Since 2019, he has replaced 3 central bank governors, 2 finance ministers and other top officials. Over the weekend, not only the justice minister had to take his hat, but also the head of the statistics office TÜIK, who is responsible for the inflation figures. Erdogan had appointed Sait Erdal Dincer only 11 months ago. This will hardly improve the tarnished reputation of the statistics institute, which has had to defend itself against accusations that it disseminates embellished figures.
At least the new boss, Erhan Cetinkaya, was able to report positive news on his first day at work. For example, tourism revenues have doubled to almost 25 billion dollars in 2021. The labor-intensive industry is an important foreign exchange earner. In normal times, it accounts for one-eighth of economic output. While $25 billion is still a far cry from the $34.5 billion generated in the pre-Corona year of 2019, October-December receipts were almost at the same level as at the end of 2019, raising hopes for the new year of significantly more visitors, not only from Russia and Germany, which led the way with 4.6 and 3 million tourists in 2021, respectively.
The foreign trade deficit also shrank by 7.5 percent to $46 billion in 2021. Measured in dollars, the 33 percent increase in exports outpaced the 24 percent increase in imports. Even though the December figures showed a large deficit, Erdogan may be encouraged in his policy of increasing exports to generate foreign exchange earnings. In this way, he wants to turn the deficit in the current account, which includes all revenues and expenditures of the national economy, into a surplus. Low interest rates are intended to stimulate the investments needed to achieve this.
A detrimental side effect of low interest rates and rising inflation is the currency's depreciation. For example, the lira depreciated 45 percent against the dollar last year. Since Erdogan rejects interest rate hikes, he must try to stabilize the lira by other means. One way is foreign exchange interventions by the central bank, but these are not always successful, as the "burning" of $128 billion in reserves in previous years, criticized by the Turkish opposition, has shown. In December alone, the central bank spent about $20 billion to support the lira, according to bankers' estimates circulated by Reuters.
This is flanked by SWAP agreements with foreign central banks that help settle international transactions in local currencies. Any help is welcome there: Last week, SOCAR, the state-owned oil company from Azerbaijan, announced that it had deposited a billion euros with the Turkish central bank for 6 months.
Erdogan also has his sights set on the extensive foreign currency and gold holdings of Turkish private households. In December, he initiated a state currency insurance scheme that promises to offset any currency losses for the investment period of 3 to 24 months from the state budget. Exporters are required to hold a quarter of their foreign currency holdings in lira, and since Tuesday the central bank has also been courting Turks living abroad. Those who transfer dollars, euros or British pounds to Turkey and deposit them in special lira accounts receive attractive returns in addition to exchange rate protection. State banks currently pay up to 18 percent interest, private banks even more. Beforehand, all this helps the lira. Since its price debacle of 18.40 liras per dollar in December, the exchange rate has stabilized at around 13.40 liras per dollar.
Analysts, however, doubt whether the concept will be viable by the mid-2023 election date. Dennis Shen, director of Berlin-based rating agency Scope, told the F.A.Z. that Turkey faces "numerous structural problems, such as increasing government debt, loose monetary policy, challenges to the independence of the central bank and the growing interconnectedness of the state and banks." In the past, Turkey has been able to score points with sound public finances, a stable banking system and flexible exchange rate, he said. "However, with the current policy mix, these strengths are gradually being sacrificed ahead of the crucial 2023 elections, in the name of stabilizing the economy."
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