While Germany’s current inflation rate of five percent is already raising concerns domestically, that same rate in Turkey is currently sitting at close to 20 percent. The present state of the Turkish currency, the lira, is even worse: while its exchange rate to the US dollar was less than 1:2 ten years ago, it is now 1:13; one year ago it was 1:8.5. This is the second time that Turkey has seen the lira plunge dramatically since 2018.
Axel Gehring is a political scientist and advisor for foreign, peace, and security policy at the Rosa Luxemburg Foundation’s Institute for Critical Social Analysis.
Translated by Gegensatz Translation Collective.
The currency crash that occurred three years ago was triggered by US President Donald Trump’s announcement in response to the house arrest of a US pastor in Turkey that he would double the tariffs on steel and aluminium imports from Turkey, causing the lira to abruptly plummet by 20 percent. The currency has since been unable to entirely recover, and instead has continued to fall. On 23 November 2021, the lira’s exchange rate plummeted once again following President Recep Tayyip Erdoğan’s implementation of a controversial lowering of the key interest rate from 16 to 15 percent. Erdoğan had recently strengthened and expanded his influence over the Central Bank of the Republic of Turkey (CBRT), firing several consecutive chairs of the bank who had refused to follow his strategy of lowering interest rates.
Yet at the end of the day, the excessive autocratic intervention into financial policy is only part of the story. The deeper causes of Turkey’s dramatic currency depreciation are rooted in the country’s economic policy over the past two decades: the model of economic growth has reached its limit, and the options for monetary policy are also dwindling as a result.
Neoliberalism à la AKP
Since it assumed power in 2003, the AKP government (Justice and Development Party) has essentially pursued the very same economic policy as preceding governments. At the beginning of its term of office, it had adopted a “structural adjustment” policy from its predecessor, which had been negotiated with the International Monetary Fund (IMF) and was carried out until the outbreak of the global economic crisis in 2007.
This meant that the AKP policy, which was accompanied by a sweeping wave of privatization, was initially very successful: a balanced budget and “depoliticized” institutions — such as an independent central bank — generated a degree of international confidence in Turkey as a site for investment, while a high interest rate attracted foreign capital and stabilized the exchange rate of the lira. However, the economic growth was fuelled by consumer spending and the construction industry; modernization and an expansion of Turkish industry barely materialized. As a result, Turkey was forced to continue to import in greater quantities than it produced. As growth increased, so too did the deficits in the balance of trade, which then had to be offset by capital imports.
The outcome was an increasing number of privatizations and countless public-private partnership projects — such as the third Bosporus Bridge, which generated a financial deficit. Because the AKP was not able to offer an alternative to its extremely “investor-friendly” policy, it felt compelled to enforce it through repressive means even before the country began to attract negative press on a global scale. Since then, the issues associated with the public-private partnership projects have been mounting. Even before the advent of the coronavirus pandemic, for example, the new airport in Istanbul, which was designed to host 150 million passengers every year, had not been warmly welcomed. Beyond this, the construction work being conducted on a canal to the west of Istanbul is also suffering as a result of the project’s dubious economic prospects.
Ever since the global economic crisis of 2007–2009, the influx of investment into Turkey has ceased to be a given. For its part, the Turkish government now no longer considered orthodox neoliberalism to constitute a basis for sustained economic growth and — in some cases in direct contradiction to the will of the big holding companies — decided against signing a new agreement with the IMF. It feared that continuing IMF programmes under the new conditions would lead to deflation and therefore relied on large-scale projects to generate investment opportunities for private capital. The government responded to stagnating demand and declining profits by lowering interest rates. Starting at the beginning of the 2010s at the latest, the government consciously accepted a decrease in the exchange rate of the lira in order to achieve this.
Erdoğan’s new model of economic policy consisted of an expansionary neoliberal policy predicated on low interest rates; it was quite literally set in stone in the form of numerous infrastructure projects. In a sense, the AKP thereby created a right-wing alternative to IMF neoliberalism. Because it supplemented this with a clientelistic social policy, the AKP’s policy did not immediately result in a deterioration of living conditions for all citizens, but it did significantly contribute to a sense of social polarization and the culturalization of economic conflicts.
Erdoğan, who in the meantime had ceased to be prime minister and had instead become president in the course of state restructuring, postured as a charismatic leader. By taking ever more political power into his own hands, he was also able to overrule the orthodox-neoliberal bureaucracy. In this way, populist right-wing anti-bureaucratism was able to develop a strongly despotic momentum, a major consequence of which was the surge in inflation. Wage workers found they could do little to counter this rising tide of repressive anti-union policies implemented by the government, and were barely able to push through any kind of real wage increases.
Structural Causes of the Crisis
The Turkish currency and economic crisis can be attributed to two fundamental problems: firstly, there have long been signs of market saturation in key sectors such as the construction industry — that is, a lack of market demand for some products and services, which then leads to so-called “excess capacity”. Secondly, the import-dependent structure of the Turkish economy has led to high trade deficits. Especially in periods of growth, the balance of payments deficit increases disproportionately.
In profitable markets, trade deficits are barely felt because they attract foreign investment, which offsets the deficits. However, within the context of the problem of market saturation, this mechanism has been visibly floundering since the late 2000s. The AKP responded with a highly politicized, expansionist neoliberal policy. In so doing, it was able to tide over the profitability problem for a relatively long period of time — albeit at the cost of high levels of inflation and an exchange rate that had been in decline for years.
The exchange rate also became an Achilles’ heel due to the fact that, by 2018, Turkey’s net private debt had risen to more than 200 billion US dollars and the country’s gross debt to more than 460 billion. This had been a consequence of the expansion of the financial sector since the 2000s. During these years of economic expansion and stable exchange rates, not only businesses had borrowed in foreign currencies, but so too had a growing number of Turks. With the collapse of the exchange rate in the 2010s, their credit costs increased immensely. This has also curbed further lending in foreign currency since 2018, since it is perceived as being particularly risky.
Nevertheless, the tendency towards a “dollarization” of the Turkish currency has hardly slowed. Business transactions are increasingly conducted in dollars, and a little more than half of all deposits are made in dollars in order to safeguard against the depreciation of the lira. The most significant brake on dollarization thus remains the limited and inequitable access to the US dollar, which in turn exacerbates social polarization between the classes. Export earnings, high revenues from tourism, and remittances from relatives living overseas are important sources of foreign currency. The first two initially dipped steeply within the context of the coronavirus pandemic, only to rebound in a much more volatile manner.
This did not prevent President Erdoğan from claiming in a recent tweet that, due to the wide circulation of the dollar, the current crisis of the Turkish lira was having a much less profound effect on the population than the crises of previous years. This statement is bizarre, but it is likely that there is actually speculation occurring within the Turkish leadership as to how resilient dollarization (and euro-ization) renders the country’s population against external shocks — because there are only a limited number of instruments of monetary policy available, each of which entails considerable risks and potential side effects.
An Economic Double Bind
But how exactly has the long-standing lira crisis actually been handled? By following the monetarist paradigm and hiking interest rates in the face of acute currency crises, the central bank recently tried to enable the Turkish economy to service its foreign currency loans, attract foreign currency into the country, and improve Turkey’s overall credit rating. This suits the interests of those companies that are directly involved in the global circulation of capital and commodities.
However, high interest rates also translate to increased financing costs for companies that primarily operate within the Turkish market, and ultimately curb the domestic economy. There is therefore a considerable amount of political pressure on the central bank to ensure that interest rates remain as low as possible. The president in particular exerts his influence in pursuit of a policy of low interest rates — the presidential constitution authorizes him to directly intervene in staff appointments to the central bank. He has frequently exercised this right in recent years; the central bank’s monetary policy decisions read like a diary of his personnel-related interventions.
For years, the central bank has attempted to stabilize the exchange rate of the lira with currency swaps and currency sales, in an attempt to minimize this oscillation between the two poles of monetary policy. While currency swaps only bolster the exchange rate in the short term, the foreign exchange reserves have for the most part been exhausted, and the central bank has therefore been unable to implement any countermeasures as of late.
It is now becoming increasingly evident that a delayed economic depression underlies the financial crisis; foreign investment is no longer pouring into the country as steadily as it did in the 2000s, not least due to inflation. This is another reason why it is becoming increasingly difficult to stabilize the lira — a vicious circle.
In stark contrast to 2018, the recent crash of the lira led to impromptu rallies being held in a number of cities, with attendees demanding the resignation of the government, as was the case during the Gezi Park protests that took place in Istanbul in 2013. However, a broader social mobilization has yet to take place. The fact that the protests, which are supported by smaller socialist parties — such as the Workers’ Party of Turkey (TİP), the TÖP, and the Socialist Refoundation Party (SYKP) — and students, are even taking place at all is remarkable, considering the country’s repressive domestic political climate.
It is likely that the AKP currently fears that it will be punished at the next opportunity for the development of this crisis. That alone brings into question whether the party will respond by calling early elections. But the parliamentary opposition is also likely to find it difficult to formulate and implement an alternative government policy in the face of opposition from the ruling classes.
While the Nationalist Movement Party (MHP), as an ally of the AKP, bares partial responsibility for the current situation, the neoliberal splinter groups of both parties (İYİ, Gelecek, and DEVA) can hardly be expected to abandon the neoliberal paradigm. However, it is not only the AKP’s economic policy that finds itself in a deep state of crisis, but also the neoliberal model itself. Turkey is caught in a quandary: whichever course it opts to take — be it high or low interest rates — it will inevitably face grave economic and social upheavals.
The most promising road out of the current dilemma would be a qualitative restructuring of the economy. The majority of political players are secretly aware of this, but have thus far lacked the strength to confront the ruling classes, who are unlikely to be willing to bear the transformation costs associated with a restructuring of this kind.
The opposition, including the left-wing Peoples’ Democratic Party (HDP), is also mired in this dilemma. Their struggle against the rising tide of authoritarianism within the government (often carried out alone) has consumed a considerable amount of resources in recent years — especially conceptual resources. Now the HDP is also paying for the fact it too lacks any sort of real economic policy alternative. This problem is particularly concerning because the crisis — which is subjecting broad swathes of the country’s population to a process of existential impoverishment and destitution — has become the Achilles’ heel of the Erdoğan regime. So the potential for further protests is definitely there; but whether or not they will actually transpire largely depends on whether it is possible for more space to be made within opposition politics for the social question.
The protests, which have thus far only been sporadic, also attest to the effectiveness of the AKP’s strategy of repression. Despite all the dissatisfaction with its policies, the government has repeatedly managed to prevent the formation of an opposition that might be capable of articulating itself. And should the protests proliferate, the party has a “tried and tested” method that it could employ to quell them: the continued militarization of the Kurdish question.