The Turkish lira suffered a historic crash Tuesday, dropping by more than 15 percent against the dollar after President Recep Tayyip Erdogan gave an evening speech in which he defended an unorthodox economic policy that economists have dubbed “insane” and “irrational.”
In his remarks Monday evening, Erdogan framed the economic crisis as another foreign plot against Turkey, comparing it to a 2016 coup d'etat attempt that failed to push him from power.
“With the help of Allah and the support of our nation, we will emerge victorious from this war of economic liberation, just as we brought our country out of all these traps and calamities,” Erdogan said after leaving a meeting with his cabinet.
Erdogan’s insistence on low interest rates is driven by the view that Turkish businesses should have easy access to cheap loans. He argues that high interest rates not only slow the economy but cause prices to increase.
That second theory flies in the face of conventional economic wisdom. And so far, reality has flown in the face of Erdogan, with inflation nearing 20 percent in October, exacerbated not only by economic mismanagement but by global woes amid the pandemic recovery.
Omer Taspinar, a professor at the National Defense University, said Erdogan was motivated by a desire to continue double-digit economic growth in Turkey, with cheap money for the country’s booming construction sector. A weak lira may be desirable for Erdogan, Taspinar said, making Turkey more affordable for foreign tourists and boosting exports.
“He believes in this unorthodox theory that you can spend your way out of inflation by growing the economy, by increasing supply and sooner or later, prices will stabilize,” Taspinar said. “This is a very self-serving way of analyzing the situation because it doesn’t correspond to the reality of a country that has a growing deficit and no reserves.”
But analysts reacted negatively to Erdogan’s refusal to change course. “Insane where the lira is, but it’s a reflection of the insane monetary policy settings Turkey is currently operating under,” strategist Tim Ash wrote in one analyst note for BlueBay Asset Management.
“We need to abandon this irrational experiment, which has no chance of success, and return to quality policies that will protect the value of the Turkish lira and protect the welfare of the Turkish people,” Semih Tumen, a former Turkish central bank deputy governor who was dismissed in October, wrote on Twitter.
In a statement Tuesday evening, Turkey’s central bank emphasized that it did not control currency exchange rates. The bank said the statement was necessary to “warn our companies and citizens against possible losses in extremely volatile market conditions trading at values that are completely far from economic fundamentals.”
The only time in Turkey’s history that saw a one-day slide as bad as Tuesday’s was in 2018, when it dropped 18 percent against the dollar. That dive came after President Donald Trump tweeted that he would be doubling steel and aluminum sanctions on Turkey amid a diplomatic standoff between Washington and Ankara.
Erdogan’s political opponents will lay Tuesday’s spiral, and Turkey’s broader economic turmoil, squarely at the feet of Erdogan, who has been in power since 2003, first as prime minister and since 2014 as president.
Ali Babacan, a former economy minister for Erdogan’s ruling Justice and Development Party, or AK Party, is among the mounting chorus of former insiders to criticize Erdogan’s approach.
“They are trying to disguise the increase in the exchange rate as a liberation war,” wrote Babacan, who now leads an opposition party. “They are trying to deceive people who are left with dry bread in their hands as if they are defending their homeland.”
“This is no longer ignorance, it’s BETRAYAL!” former prime minister and Future Party leader Ahmet Davutoglu wrote on Twitter, calling on all political party leaders to stand up against Erdogan’s policies.
In a joint news conference following an extraordinary meeting between the two opposition parties, Republican People’s Party (CHP) leader Kemal Kilicdaroglu said it was unsure where the crisis would end. “Turkey is going through one of its most fundamental and deepest crises,” Kilicdaroglu said after meeting with Davutoglu.
Turkey is set for elections in 2023, if not before. But so far, there’s little sign that the Turkish president is set to budge, though official sources noted that he had met with Turkey’s central bank governor Tuesday in Ankara. In his speech Monday, Erdogan had said that his economic theories would be proved right — eventually.
“I would like to underline once again that with these policies, we know very well what we are doing, why we do it, how we do it, what risks we face and what we will achieve in the end,” he said at the end of his speech.
National Defense University’s Taspinar said that the opposition has been emboldened by the currency crisis and that Erdogan was facing an unprecedented political challenge. But opposition leaders are also hindered, as the economic restructuring needed to control the currency would probably lead to a recession.
“They can’t really promise much at this point other than we have hit rock bottom and that this cannot get any worse,” he said. “Unfortunately, it can get worse.”