Turkish businessmen warn against Erdogan's economic model

Last Thursday, the Central Bank of Turkey (CBRT) announced, for the fourth consecutive month, a new interest rate cut, further raising concerns about the country's fiscal policy. With this one percentage point cut, the monetary authority brings rates to 14%, once again causing the value of the Turkish lira to fall to historic lows. 

However, Ottoman President Recep Tayyip Erdogan is determined to press ahead with his strategy, arguing that the implementation of these measures will encourage lending and boost exports. To this end, he has not hesitated to intervene systematically in monetary policy, and in less than three years he has led to the dismissal of three CBRT governors and two finance ministers who were opposed to his approach. 

In this scenario, the Turkish Industry and Business Association (TÜSIAD) - which represents more than 80% of the country's exporting companies - has addressed Erdogan in a communiqué to warn him about "the risks of a significant depreciation of the lira, acceleration of inflation, pressure on investments, growth, employment and impoverishment of our country". The Turkish economy is already facing price rises of more than 21% year-on-year, and experts, for their part, do not rule out the possibility that inflation could reach 30% in the coming months. 

One of the main causes of the inflationary spiral has been the devaluation of the lira by more than 50% of its value since last year. The combination of a low interest rate and a weak currency tends to increase the price of imported goods. Thus, in order to preserve their purchasing power, citizens have been forced to convert their local currency savings into dollars or gold. 

"The policy decisions that have been implemented have not only created new difficulties for the business world, but also for our citizens," said TÜSIAD in its communiqué, in which it also called for a review of the country's financial policy. In the words of the businessmen, it is necessary to "assess the damage to the economy and return to the economic principles established in the framework of a free market economy", as the current situation is "an atmosphere of mistrust and instability".

For his part, Recep Tayyip Erdogan responded to these demands on Monday by using religious interpretations of the teachings of the Koran to justify that he will not raise interest rates. "As a Muslim, I will do what our religion commands me to do" and, "God willing, inflation will decrease as soon as possible", he said, arguing that Islam forbids usury and lending money at interest. Unsurprisingly, these statements led to an unprecedented drop in the value of the Turkish currency; one dollar was roughly equivalent to 18 liras. In addition, these comments led to the suspension of stock market trading for the second time since last Friday. 

"You cannot run a modern economy, integrated into the world economy, on this basis. Even Saudi Arabia doesn't really attempt Shariah-compliant macroeconomic management," said economist Timothy Ash of BlueBay Asset Management in a statement carried by AFP.

Nevertheless, in a bid to quell discontent and bolster support for his party - the Justice and Development Party (KPA) - Erdogan has announced a 50 per cent increase in the minimum wage to 4,250 liras (about 240 euros) by 2022. "With this increase, I think we have demonstrated our determination not to allow workers to be crushed by the weight of rising prices," he said of the wage hike. 

Nevertheless, the volatility of the Turkish lira was again in evidence on Tuesday when, following the announcement of measures to protect savings in the Ottoman currency, the exchange rate regained all the value it had lost during the month of December. The proposed mechanism, of which hardly any details are known, would insure local savings against market fluctuations, with the Turkish state covering losses when the lira's depreciation exceeds interest rates at banks. 

"From now on, none of our citizens will need to change their lira deposits into foreign currencies because of concerns about exchange rate fluctuations," Erdogan said, on a day when the Ottoman currency recovered its value from Monday's record low.