Currency collapse drives inflation to high in Turkey

Posted on Jan 3, 2022, 12:20 PMUpdated Jan 3, 2022, 2:01 PM

In Turkey, prices are flying from record to record. In December, over one year, inflation reached 36.08%, unheard of since September 2002. This rise in prices, in a country very dependent on imports, especially for raw materials and energy, is more than seven times greater than the government’s initial target.

This situation is explained by the vertiginous fall of nearly 45% of the Turkish lira against the dollar over one year. The local currency, which had regained ground in mid-December after the announcement of emergency measures by President Recep Tayyip Erdogan, fell again. This Monday, at the end of the morning, a dollar was exchanged against 13.38 Turkish liras. For comparison, a dollar was worth 7.40 pounds in early January 2021, then 8.30 pounds in early September and 9.60 pounds in early November.

The faint hope plan

The Turkish president resolved to act when the dollar hit 18.36 pounds on December 20. He announced in particular the coverage of losses of individuals on currencies and support for companies to help them cope with volatility problems. Massive sales of dollar reserves had also helped the pound recover.

But the respite was short-lived. The loss of market confidence, caused by the chaotic economic management of the country, is too great. Recep Tayyip Erdogan again rules out any tightening of monetary policy, believing, contrary to conventional economic theories, that high interest rates favor inflation.

Loss of credibility

Under pressure, the Turkish Central Bank has systematically lowered its interest rates in recent months. Its lack of independence, illustrated by the dismissal of three governors since 2019, has only damaged its credibility a little more. At the same time, the Head of State has replaced his Minister of Finance three times since 2018, the last of which, on December 2, in the midst of a debacle.

Despite these economic difficulties, President Erdogan remains adamant. At 18 months of the next presidential election, the subject has nevertheless become hot in the country. The opposition seized on it, accusing the National Statistics Office (Tüik) of knowingly and widely underestimating the rise in prices.

86% increase in the price of chicken

In the meantime, for the population, the situation is becoming difficult to sustain. According to official figures, food prices increased 43.8% year on year. Chicken meal and meat have seen their prices increase by 86% in one year, sunflower oil by 76% and bread by 54%.

In this context, the increase in the minimum wage on January 1 from 2,825.90 to 4,253.40 pounds (approximately 275 euros), goes unnoticed. “I fear that all wage increases have melted in two months,” regrets Gizem Öztok Altinsaç, chief economist of the Turkish employers’ organization Tüsiad.

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