Turkey's strongman, President Recep Tayyip Erdogan is crisscrossing the globe to muster the support of the electorate in the forthcoming presidential and general elections on June 24. Three million Turkish citizens live abroad and vote in Turkey's elections, and they actually have begun voting on June 7 at customs gates and foreign missions in 68 countries. While he is very popular at home for building airports, hospitals, bridges, and schools, there have been discussions of a second round of voting in July if he can't muster 50 percent of the votes on June 24.
During a recent visit to Europe, we took two short breaks in Istanbul. Turkey is a popular tourist destination for Bangladeshis such as me who savour the unique mix of East and West, particularly in Istanbul. Tourism to Turkey is on the rise from all segments of the globe, and the recent drop in the Turkish lira's exchange rate has made it a favourite vacation spot for frugal travellers. Foreign arrivals surged over 27 percent in 2017 to 32.4 million and Tourism Minister Numan Kurtulmus indicated that Turkey expects at least 38 million tourists in 2018. And one is never disappointed whether you spend a day in Istanbul or take a week-long trip to Izmir, Ankara, and the other historical sites.
Turkey's economy has withstood many challenges in recent years, including the aborted coup attempt in 2016, the refugee influx from neighbouring Syria, and the effects of the never-ending conflict in Syria and Iraq. Its economy grew at 11.1 percent year-on-year in the third quarter of 2017, in sharp contrast to the same period in 2016 when the GDP sustained a 0.8 percent drop in the wake of the failed coup. Most of the credit for this comeback goes to President Erdogan, who has recently concentrated power and is the longest-serving leader in the country's modern history surpassing the fifteen-year reign of Kemal Ataturk.
However, Turkey still faces some uncertain days ahead. The snap presidential and parliamentary elections on June 24, a year ahead of schedule, is an attempt by President Erdogan to strengthen his hands as he deals with various issues. While he does not face any serious opposition, the economy is going through rough waters. The lira has dropped sharply against all major currencies, and its exchange rate plummeted from 4 to USD 1 in January to 4.92 and edged closer to the “psychological level of 5 to the dollar”. This amounts to 17 percent drop since the beginning of the year. The hardest hit are Turkish companies, especially small ones, which have accumulated a foreign-currency debt worth a total of USD 211bn.
Turkey's image as a democracy also suffered after President Erdogan introduced various draconian measures following the 2016 coup and installed himself as the president in 2014 after ruling since 2003 as the prime minister. The Organization of Security and Cooperation in Europe (OSCE) which is responsible for monitoring European elections will send a huge delegation during the election given allegations of stuffed ballot boxes in previous elections. In a sharp rebuke, The Wall Street Journal on May 22 lumped Turkey together with Cuba, China, Russia, Iran, and Venezuela as “authoritarian”.
President Erdogan is engaged in a very interesting duel with his own central bank, the Central Bank of the Republic of Turkey, as he tries to keep his commitment to keep interest rates low. He called himself an “enemy of interest rates” and blames all of Turkey's woes on high interest rates. He thus joined the ranks of political leaders who recently decided to defy the laws of economics. Even if he wins the election, his other goals are running into strong headwinds. Interest rates have risen and the inflation rate is high. GDP growth last year was good, but his advisors are wary of this year's GDP growth prospects.
President Erdogan's determination to keep interest rates low and his frequent clashes with central bankers and his own financial advisers is a source of concern for investors. He has threatened to seize control of the central bank after the forthcoming elections and vowed to keep its policies in tow, basically depriving it of its independence. According to him, interest rates cause inflation, “not tomatoes, not pepper”. Last month, he repeated this stance.
Turkey has four major issues: a persistent budget deficit, a huge trade deficit, double-digit inflation, and President Erdogan's aversion to use of interest rate as a tool of monetary policy. Turkey imports more than it exports and Turkey's current-account deficit, 6 percent of GDP, is the highest among the five countries that Thomson Reuters calls “Fragile Five”: Turkey, South Africa, India, Indonesia and Brazil.
As I spent a day in the bazars of Istanbul, I heard fewer grumblings from shop owners than I expected. However, the lira's decline is hurting small companies which have a debt of USD 211 bn, denominated in dollars and euros. And the Iran sanctions may bring more bad news. Iran is Turkey's biggest supplier of crude oil and the second biggest supplier of natural gas after Russia. “The impending sanctions are sure to deal a blow to the Turkish economy”, said Aziz Konukman, a professor of economics at Gazi University in Ankara, by increasing its price of oil imports and decreasing its exports to Iran. There is also a credit crunch affecting small and medium-size businesses, too, said Atilla Yesilada, an investment analyst. “It has been the last three years, the currency depreciation continues and people are suffering.”
At a campaign rally, Muharrem Ince, a physics professor who is the leading presidential challenger, called on Erdogan to cease interfering with the Central Bank and to stop listening to advisers who were feeding him false information. He advised the president to reassure the nation that public fiscal discipline was a priority, rather than funding his mega-construction projects, and to quash rumours of currency controls.
Many western observers now hope that after the elections President Erdogan will let go of his focus on central bank policies, and allow it to use interest rate as a tool of monetary policy to control inflation and to stabilise the lira.
Dr Abdullah Shibli is an economist, and Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA. His new book Economic Crosscurrents will be published later this year.