Turkey’s experiments with unconventional monetary policy – in which it is pursuing economic growth even at the expense of price stability – continue regardless of difficulties, including hyper-inflation, on the people and economy.
The country’s central bank on Thursday cut interest rates by 150 bps to 10.5 per cent, even as Turkey’s official inflation rate exceeded 83 per cent in September.
This is the third cut in so many months. This runs in contrast to a global cycle of monetary tightening in which the central banks of various countries are raising borrowing costs to reduce inflation.
Turkey’s real interest rate is now minus 72 per cent, perhaps the lowest in the world. Its central bank has indicated it may halt monetary easing after another round of rate cuts, but there is no word yet on what it plans to do about the economy’s severe inflation problem.
Monetary policy is being politicized everywhere but even more so in Turkey. President Recep Tayyip Erdoan, who has little patience for established economic policy approaches, by his own admission religiously leans toward cheap loans. During his two decades in power, the influx of cheap money into the economy has helped him win elections in the past. Last December, he debunked Islamic beliefs that forbid receiving or charging interest by Muslims in support of his economic ideology. According to his economic theory, lowering borrowing costs would lower inflation and strengthen the Turkish lira which has been a plumbing record low (down more than 25% against the dollar since the beginning of this year, after a dramatic drop). lost 44% in 2021. to a record low last December after a series of interest rate cuts by the central bank).
Following this unorthodox approach, and wooing a constituency of small business owners ahead of next June’s parliamentary and presidential elections, he has vowed to borrow less than 10 percent, promising that, ” Interest rates will keep coming up with every passing day, week and month,” as he prepares for the toughest election of his political career. By reducing the cost of borrowing, it claims to increase GDP growth, job creation, investment and maintain good sentiment among voters.
He is also pushing for larger spending programs and is widely expected to implement massive fiscal stimulus for voters, all of which will drive inflation forward.
Erdoan’s policies make him the world’s first practical modern monetary theorist, to borrow the words of former US Treasury Secretary Lawrence Summers. Modern monetary theory, or MMT, is a heterogeneous economic school that argues that governments can spend freely without increasing inflation. But if it were possible then there would be no need for tax. Governments could simply print money for all their spending needs. Turkey’s inflation record is indeed proof that there can be no free lunch, and that the promise of MMT is a mirage.
The price the country is paying for Erdogan’s foreign experiments is a currency crisis, runaway inflation at levels not seen since 1998, slow growth and an embroiled central bank with little independence.
Rating agency S&P is not buying any of the country’s “anomalous” economics and is concerned that “loose monetary and fiscal policy settings, and low net foreign exchange reserve levels” make the lira vulnerable and pose risks to financial stability. Huh. and the health of public finances. It has downgraded the rating on Turkey’s sovereign debt.
Turkey’s average annual GDP growth between 2002 and 2021 was less than 6%. Erdogan’s highly stimulating fiscal and monetary policies helped Turkey grow very strongly during the pandemic. But the global energy crisis – Turkey relies on imports for most of its energy needs – and other problems of making its own, are now slowing the economy. GDP growth in the second quarter of this year was 7.6 percent.
Rumors, including international media of repute, suggest that money fleeing Russia to evade Western sanctions is finding its way into Turkey’s foreign exchange reserves. The evidence cited in support of this is official discrepancies in the balance of payments accounts. The fact remains that after the Argentine peso, the lira is the second-worst performing emerging currency of 2022. With $182 billion in external debt payments over the next 12 months, a currency collapse would put further pressure on an already big one. current account deficit.
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