“Since late 2021, the Turkish economy has been shattering conventional economic expectations. With deeply negative real interest rates, high inflation, a large and persistent current account deficit, an external debt stock exceeding 50 percent of GDP, and a central bank with net foreign exchange reserves estimated around -$50 billion, the economy has seemed permanently poised for crisis.
Just this past year, Turkey’s Central Bank raised interest rates from a low of 8.5 percent in June to as high as 42.5 percent in December. The sudden increase represented a dramatic reversal of course from previous policy. Throughout much of 2022, negative real interest rates had generated a flight away from the Turkish lira, resulting in rapid depreciation of the currency. Given the high level of imported inputs in production, the loss in the value of the Turkish lira meant increased production costs, which were quickly passed onto prices. Inflation spiraled out of control and by August 2022 hit 80 percent.
Despite the central bank’s policy tightening, Turkish inflation is still running above 60 percent. This is at a time when the unemployment rate is close to 10 percent, with more than half of employed workers earning roughly the minimum wage—itself brought below the poverty line as inflation has rapidly eroded purchasing power.
Behind the latest crisis, however, lie two decades of policy that have left Turkey with an increasingly narrow policy space, its economy depending on foreign capital inflows and imported inputs.1 The result has been a mountain of fragilities, including a large and persistent current account deficit and a high external debt stock.”
– Professor Orhangazi
Read the full article at Phenomenal World.
