EXPLAINER: Are Turkey’s efforts to fix the economy working?


ANKARA, Turkey (AP) — Turkey’s government and central bank have taken unconventional steps in recent weeks to prop up a beleaguered economy crippled by skyrocketing consumer prices, instead of ending a much-criticized plan to cut interest rates.

President Recep Tayyip Erdogan’s insistence on cutting rates — the opposite of what economists say to do to curb soaring inflation — has weakened the country’s currency and driven prices even higher, making it tough for people to buy basics like food.

Here’s a look at the impact of Erdogan’s economic policies and their long-term risks:

WHAT’S GOING ON?

Erdogan, who has grown increasingly authoritarian and long declared himself an enemy of high borrowing costs, has pressured the central bank into continually cutting interest rates even though inflation surged by 36% last month.

In comparison, inflation in the 19 countries using the euro made a record 5% jump from a year earlier, and the U.S. tallied a nearly 40-year high of 7%.

Conventional economic thinking calls for increased borrowing costs to tame inflation, like other countries have done, but Erdogan maintains it’s the opposite.

He has fired three central bank governors since 2019 over differences on interest rates, arguing lowering them will increase exports and lead to more growth and jobs. He also has cited Islamic teachings that regard usury as a sin.

Erdogan’s unorthodox policy has foreign investors fleeing Turkey, while locals have been trying to protect their savings from high prices and a depreciating currency by converting them into foreign money or gold. The Turkish lira hit successive record lows in November and December and lost about 45% of its value against the U.S. dollar last year.

With prices soaring, even basic goods are out of reach for many Turks. Opposition parties, meanwhile, are disputing the official inflation number; an independent inflation research group says the real figure is a stunning 82%.

“Anyone who goes out shopping knows that the 36% inflation is fictitious,” said Ali Babacan, a former deputy prime minister under Erdogan who was regarded as the “economy czar.”

“The people are paying a high cost (for Erdogan’s policies) in the form of hardship and poverty,” added Babacan, who has since formed his own party.

WHAT IS ERDOGAN DOING TO FIX THE SITUATION?

Faced with a rapidly crashing currency but determined not to raise interest rates, Erdogan announced a program last month meant to encourage people to convert foreign currency into lira and keep their savings in Turkish money.

Under the “exchange rate-protected deposit” system, the government guarantees it will cover losses should the interest they receive when the account matures be less than what they would have earned by keeping the savings in foreign currency.

The lira, which had dropped to an all-time low of 18 against the dollar, rallied after the announcement to around 11.

Since then, the government extended the program to corporate accounts. The central bank said exporters would be required to exchange 25% of their foreign currency revenue into liras. And the government increased contributions to private pension plans.

It…



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