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More economic pain for Turkey as Erdogan continues with his policies

Turkish Central Bank watches as Inflation rises

Turkey, which is in the middle of an economic crisis with surging inflation and falling lira—its currency, is expected to experience more pain in the coming weeks as Turkish President Recep Tayyip Erdogan remains adamant in continuing with a low interest rate regime. The country recorded the highest consumer price inflation based (CPI) inflation rate of 21.3 per cent in November. But people need to gear up for worse. According to Fitch Ratings, Turkey’s inflation rate could further rise to 25 per cent this month.

In a recent report, Hurriyet Daily News said that Erdogan has insisted that low interest rate regime would allow Turkey to “produce goods cheaper and sell those products to other countries and raise revenues in U.S. dollars like China has done.” He also told his officials in the meeting that Turkey has more advantages in terms of luring foreign investments.

“People will prosper, and their purchasing power will increase. The current account deficit will decline. We will become a nation where the interest rates are low and is focused on industry,” the news organisation quoted the president as saying.

Also read: Turkey's Central Bank is fast losing credibility following Erdogan's diktat

While most reports have suggested that the current crisis is primarily due to low interest rates, economists told India Narrative that there are several other reasons that have led to this problem.

“It is not so simple. It is not just low interest rate, which is definitely one of the main reasons but broadly the Turkish economy is rather weak now and many other factors are affecting it.. most importantly the political-economic considerations cannot be undermined,” DK Srivastava, chief policy adviser, EY India told India Narrative.

Turkey has recently been placed on the Financial Action Task Force’s (FATF) grey list along with other countries such as Pakistan, Zimbabwe, Syria and Burkina Faso. “Being on the FATF grey list affects the economy,” Srivastava said. Consider this:

Pakistan is estimated to have lost $38 billion in GDP between 2008 and 2019 due to the grey-list, an independent think tank of the country, Tabadlab said.

Wall Street Journal in an article published earlier this week said that “at the center of Turkey’s troubles are years of unorthodox economic policies” championed by Erdogan, who argues that higher interest rates stoke inflation and lower rates will cause inflation to ebb. “This is the opposite of what economies around the world have experienced through history,” it said.

Also read: Turkey to enhance relations with Gulf countries, says Erdogan

Anindya Banerjee, DVP, Currency Derivatives & Interest Rate Derivatives, Kotak Securities added that the “compromised” Central Bank in the country is also a key reason. Turkey’s Central Bank — Türkiye Cumhuriyet Merkez Bankası has been under the scanner for frequent changes at the top level. “Three central bank governors have been sacked by the government during the last two and a half years, prompting questions by opposition leaders and some of the country’s most important trade groups over the independence of the central bank,” Al Jazeera added.