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Erdogan in Autumn Lira Shock

By Siamak Kakaei, Researcher in Turkish Issues

Translated by : Zahra Akbari

The Turkish Justice and Development Party (AKP) celebrated its 19th anniversary on November 3rd. A celebration in which the autumn song of its first historic victory in 2002 cannot be seen.

Recep Tayyip Erdogan, a leader who has climbed all the ladders of power in the last two decades with the help of party comrades who are no longer with him, is now on the winter side of the coat-wearing party. In those days when Justice and Development Party suddenly appeared in the people’s vote uprising, few thought that young, Islamist technocrats would try a new and relatively stable model of politics and governance. But they soon began an unprecedented period of prosperity and development and strengthened Turkey's regional position in two decades of rule by reorganizing Turkey's runaway economy.

But now, as Turkey enters the third decade of the power of Justice and Development Party, it is experiencing social and political discontent. The source of these dissatisfactions intersects exactly with the strong point of the party, the "economy". These days, the living conditions of the majority of the Turkish people are in a state of extreme turmoil of currency swing. But is the situation in Turkey in a precarious and uncontrollable situation, as the rival AK Party parties claim, for which the only solution is Erdogan's resignation? Or should the opposition, according to Erdogan, forget about holding early elections?

Another question is why Turkey is facing an unprecedented financial and currency crisis, and where this crisis will end, and what effect it will have on the social base of Justice and Development? In the last four years, the Turkish lira has lost three times its value, and in just a single month, people's purchasing power has fallen by about 40 percent.

The answer to this question and the related speculations must first be based on the Criterion of economic analysis and statistical data. The International Monetary Fund (IMF) in its periodic reports over the past two years points to the global economic crisis caused by the Covid-19 pandemic, which has exacerbated fluctuations in global currency markets. In this process, the rate of currency fluctuations, global economic downturns, uncertainty and difficult financial conditions, especially in developing countries, have been attributed to the Covid-19 situation. In a way that the risk of investing in emerging markets such as Turkey, Argentina, Brazil and some developing countries has increased. In Turkey, the government's economic policies, especially the plan to reduce bank interest rates, have affected the foreign exchange market and rapidly devalued the lira. But despite criticism of the monetary policy, Recep Tayyip Erdogan has said: he will not allow people to be oppressed because of high interest rates, and that the government's only goal is to preserve the living and the future of the Turkish people.

The Turkish president's financial and economic plans to curb the crisis in the foreign exchange market have drawn widespread criticism. In recent months, the governor of the Central Bank of Turkey and two senior members of the bank's board have been fired for failing to comply with Erdogan's monetary policies to lower Interest Rates. Critics say the Turkish central bank has lost its independence as a result of the president's intervention. Finally, it was Shahab Kavcioglu, the new head of the Central Bank of Turkey, who was forced to reduce bank interest rates three times to 15 percent by implementing new monetary policies. Contrary to Erdogan's predictions, however, not only has inflation not fallen, but it has also spiraled out of control of financial and monetary agents, with the lira equalizing against the euro and the dollar. The President of Turkey is one of the strongest supporters of the reduction of bank interest rates and considers it "the mother of all misfortunes". But Suraya Sardangchetti, the former head of the Central Bank of Turkey, criticized Recep Tayyip Erdogan's view some time ago, saying that according to this theory, 'inflation is a variable dependent on interest rates.' But inflation has very little effect on interest rates. The Turkish economy does not understand the relationship between inflation and growth, and in the case of declining interest rates, it is difficult for banks to provide loans and facilities at 15 percent.

Former Turkish Economy Minister Dr. Çelebi, on the other hand, does not see a 15 percent curtailment in bank interest rates as the only reason for the Turkish lira to depreciate. Because there is a severe crisis in the world market and the inflation crisis in Turkey is not unaffected by the international inflation crisis. From this point of view, what has put Turkey on the path of financial crisis is the unfair distribution of national income, the mismanagement of the crisis, and the cessation of foreign investment.

Examining the raise of dissatisfaction with the Turkish financial crisis, there are other factors and reasons in which the role of the political and geopolitical aspects is emphasized. Since Erdogan's policy of conflict and militarization in recent years has posed serious regional and international challenges to Turkey. Turkey's adventures in invading Syria and occupying parts of the country and continuing military operations in northern Iraq have been costly. In addition, Turkey's strategic cooperation with Russia and the purchase of the S-400 missile system have led to serious tensions between the West and Ankara, and US sanctions have been imposed on Turkey. It is also difficult to grow foreign investment without considering the political situation; the situation in Turkey has deteriorated in recent years. Between 2000 and 2015, Turkey had made strong ties with the rich countries of the Persian Gulf, and their investments in Turkey were significant. However, following the escalation of Turkey's political tensions with Saudi Arabia and the UAE, the downward trend and the fleet of Arab capital from Turkey intensified. According to economists, this has reduced Turkey's foreign exchange reserves. Last year, the Central Bank of Turkey was forced to use a large part of its foreign exchange reserves to prevent the lira from depreciating further, causing the market to become more fragile. Turkey's gross foreign exchange reserves in 2015 were estimated at about $ 110 billion, which is said to have decreased to $ 47 billion in 2020. At the same time, the deficit in foreign trade and the current account of Turkey due to the high share of imports is also significant. Economically, declining tourism revenues from $ 36 billion to $ 20 billion and increasing Turkey's foreign debt to $ 450 billion have added to the government's financial dilemma.

Given these circumstances, the opposition parties of Justice and Development, namely the People's Republic, the Good and Democratic People's Party, along with others such as Davutoglu and Ali Babacan, have sharply criticized the government's economic policies. They have called on Erdogan to hold early elections. The request is not new and has been presented in various forms since the change of the Turkish political system from a parliament to a presidency.

But if the lira continues to depreciate and the opposition mobilizes its forces for street protests, the possibility of popular uprisings will not be far off, and lira's autumn shock may shatter Erdogan's dreams of celebrating the 100th anniversary of the Turkish Republic. However, Erdogan's political experience over the past two decades has shown that Erdogan's justice, development, and authoritarianism do not simply fall retreat in front of the will of the people and the opposition. But even in the face of declining protests and the return of relative stability to the Turkish foreign exchange market, it is predictable that the AK Party has entered a difficult political period and that Turkey's upcoming elections will be affected by popular events ranging from Gezi Park dissatisfactions to currency-livelihood protests, since the opposition parties will not miss such an opportunity. But does the rain-soaked man of Justice and Development have another chance to open another umbrella?

Editorial of Iranian Journal of International Relations

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