Contemporary Episode
Turkey is one of nations affected by the world’s socioeconomic challenges, which range from the COVID-19 pandemic to the Russia-Ukraine war. Each of these has impacted the economy in one way or the other. The government in Turkey has also taken policies that have resulted in the Lira’s depreciation. The activities have led to soaring inflation in Turkey, which was 73.5% in May 2022, the highest figure in 24 years (Cooban & Sariyuce, 2022). Inflation has caused a spike in the pricing of essential supplies, which has harmed low-income people. These conditions compel the government to enact measures to safeguard Turkey’s poorest citizens. The paper examines inflation in Turkey and compares it to previous circumstances. The Russian-Ukraine war came at the worst state of the Turkish economy. The inflation rate in Turkey has hit a record high for the past twenty years because of socioeconomic challenges like the Russian-Ukraine war.
Turkey’s yearly inflation rate grew for the sixteenth month in September 2022 to 83.5%, up from below 20% in the same month in 2021 (Kubilay, 2022). The mark is the highest since July 1998, as the Lira kept falling to new lows, and banks proceeded to cut interest rates. Housing and utility costs increased by 84.7% versus 71.8% in August (Kubilay, 2022). Transportation expenses rose by 117.7% versus 116.9%, despite a prolonged rise in energy prices, and food and beverage prices increased by 93.1% versus 90.3% (Cooban & Sariyuce, 2022). It was in response to the limited supply of gas from Russia into Europe.
Predictions of future inflation impact economic actors’ decision-making, and then they confront the repercussions of actual inflation. Families will set their hopes near the inflation objectives if they have forward-looking aspirations and believe in a dependable monetary policy. Nevertheless, persistent deviations from the aim caused by weak monetary policy may raise inflation expectations. If these assumptions continue high for an extended period, inflation might rise in the medium run. As a result, it is believed that predicted inflation is a crucial driver of inflation expectations.
The Origin of Inflation in Turkey
Before the coronavirus epidemic and the Russian war, Turkey was experiencing moderate inflation as the government struggled with massive debt, and the Lira lost value. Turkish citizens held the president accountable for the country’s economic decline because of maintaining low-interest rates (Berument, 2018). The commencement of COVID-19 exacerbated Turkey’s economic predicament because of the interruption in the supply chain. The government has been pursuing varying economic policies that could be more consistent and challenging to investors.
Inflation in Turkey is heavily influenced by the Turkish president’s unorthodox methods and the world’s two biggest crises. The World Bank states that food and energy price growth disproportionately impact low-income households. About 53.6% of the Turkish people could satisfy their basic needs by May 2021 (Berument, 2018). High inflation rates and the Turkish Lira’s depreciation rapidly reduce the buying power of basic salaries, public-sector wages, and pensions. The notion that demand-driven consumer prices are a significant component of inflation emphasizes the necessity of structural changes and credible pledge mechanisms that restrict discretionary consumer spending policies.
Electricity rates are at an all-time high, while the cost of a kilogram of wheat has more than doubled in four months, jumping from 110 lire in January 2022 to 220 Lira in May 2022 (Kubilay, 2022). Farmers are struck by inflation as they try to keep up with substantial industrial businesses, with agricultural suppliers’ prices falling significantly behind the industrial producers, resulting in lower revenues (Kubilay, 2022). The economic consequences of Russia’s war with Ukraine and the Lira’s ongoing slide have driven inflation in 2022. In 2021, the Lira fell 44% versus the US dollar and a further 27% in 2022 (Kubilay, 2022). The Lira was selling flat against the dollar following the data but reached a new low of 18.4% in December 2021 (Kubilay, 2022). The worsening of the situation in Russia-Ukraine can only mean that the value of the Lira will keep falling.
Past Episode
During the last 30 years, the economy in Turkey has gone through relatively significant inflation mixed with failed deflationary initiatives. Even though yearly inflation attained over 100% in some years, it never reached the hyperinflation stages and gradually grew over time (Cooban & Sariyuce, 2022). The inflation rate was 20% in the ’70s, 40% in the ’80s, 65% in the early ’90s, and about 80% before the government initiated another disinflationary scheme in 1998 (Cooban & Sariyuce, 2022).
Cost-push forces are the third possible cause of inflationary pressures in a developing economy. In this regard, the foreign currency shocks of salaries to historical inflation and mark-up product pricing behavior, aiming for a steady rate of return for entrepreneurs associated with the Post-Keynesian thought process. These factors, which represent changes in the national price level, are significant predictors of inflation. Following the depreciation of the native currency, the actual exchange rate aiming rule would strongly reflect the price level changes.
Origin of earlier Inflation in Turkey
In the late 1980s, the primary parts of disinflationary measures were nominal stabilization and monetary tightness, with no meaningful attempt to cut the public sector lending need (Yilmaz, 2022). In order to ensure short-term capital inflows, this policy mix required a higher interest rate on household savings and a decreasing bond prices and increasing rate. The new disinflationary policy became particularly noticeable after 1989 (Yilmaz, 2022). However, the government needed to implement the fiscal steps, and disinflationary efforts were ineffective.
In Turkey, chronic hyperinflation is accompanied by unpredictable output growth. Year-to-year variations in consumer prices were collected quarterly from January 1970 to December 2002, as well as certain sub-period averages of these yearly inflation rates. Throughout 1970, Turkey witnessed many increases in inflation. The common causes for these increases in inflationary pressures include devaluations, crude price surprises, and balance-of-payments crises (Yilmaz, 2022). Other causes include public service imbalances, the Persian Gulf conflict in 1990-1991, domestic and international financial crises, and past earthquakes.
The economy underwent a significant situation in early 1994 due to the untenable nature of fiscal policies and the foreign deficit. On March 5, 1994, the government launched a new stabilization package, and the International Monetary Fund (IMF) Board accepted a stand-by agreement two months later (Cooban & Sariyuce, 2022). However, it quickly became evident that the administration was not fully committed to the April 5 initiative, and the holding agreement expired in 1995 (Cooban & Sariyuce, 2022). There needed to be a meaningful attempt to maintain economic stability or lower inflation over the next two years.
The banking sector became increasingly sensitive to interest rate risks and foreign exchange due to a mix of disinflationary initiatives and short-term borrowing-based deficit financing strategies. Higher interest commitments on household savings, decimal reduction rate, and public sector borrowing demand increased the Central Bank’s foreign currency reserves. It exposed the banking system to speculative attacks. The risk-taking conduct of privately held banks and their huge short futures in foreign currency prompted concerns about the long-term viability of an external balancing strategy predicated on short-term capital inflows.
Inflation Similarities
High and ongoing inflation has been a prominent feature of the Turkish economy for more than twenty years, and various attempts to reduce inflation since 1980 appear unsuccessful (Cooban & Sariyuce, 2022). Turkey has announced a budget deficit goal of 278 billion Liras for 2022, with an expenditure of 1.65 trillion Liras and receipts of 1.47 trillion Liras (Cooban & Sariyuce, 2022). Rising natural gas and oil costs are projected to strain state finances in 2022 since the country imports all of its energy virtually (De Cramer, 2022). Other factors include monetizing public service budget deficits, major infrastructure projects by multiple governments, like the Southeastern Anatolian Project, and increased military spending for geopolitical reasons.
Inflation Differences
Unlike the past, when inflation in Turkey revolved around government and consumer spending, it is now different. The past two years have been heightened by a global pandemic and the Russian-Ukraine war. Because of the interruption in the supply chain, the commencement of COVID-19 exacerbated Turkey’s economic predicament (Askew, 2022). The Russian war continues to undermine the global economy through severe trade disruptions and fuel and food price increases, all of which contribute to increasing inflation and consequent tightening of global financial conditions.
Inflation Persistence
The quick rise influenced the surge in global oil prices and the weakening of the Turkish Lira. These two pricing groupings were critical in driving up inflation. The Lira has declined due to excessive local demand and imports (De Cramer, 2022). As a result, economic confidence has nearly evaporated, and international and domestic investors have fled Turkey due to the Lira’s fast slide. The impact of the Russian-Ukraine war is high because over 700 companies of Turkish origin have slightly over $4.5 billion in investments in the Ukrainian market (De Cramer, 2022).
Inflation Forecast
Turkey’s annual inflation rate will fall to 72 % before 2022 as the government prioritizes low-interest rates to increase production and export trade (Wilks, 2022). The administration is setting up an economic agenda that prioritizes low-interest rates to stimulate output and exports and achieve a current account deficit. The Russian-Ukraine war is projected to finish, creating a favorable atmosphere for economic growth. Commodity prices soared to multi-year peak levels as a consequence of the hostilities, with investors anticipating tighter supply owing to Russian export restrictions. When the Turkish government was confronted with a choice between reacting to the urgent needs of the citizens and reforms required for lengthy sustainable growth, they chose the former. The result has been a steady downward trajectory politically and economically for the past twenty years to the current economic turmoil.
References
Askew, J. (2022). Soaring inflation and a collapsing currency: Why is Turkey’s economy in such a mess? Euronews. Web.
Berument, H. (2018). Public Sector Pricing Behavior and Inflation Risk Premium in Turkey. SSRN, [S.l.].
Cooban, A. & Sariyuce, I. (2022). Inflation soars to nearly 80% in Turkey as food prices double. Cnn. Web.
De Cramer, A. (2022). Russia-Ukraine war threatening Turkey’s economy. Asiatimes. Web.
Kubilay, M. (2022). The Ukraine war has upended Turkey’s plans to stabilize the economy. Mei. Web.
Wilks, A. (2022). Turkey’s Central Bank raises the inflation forecast yet again. Al-monitor. Web.
Yilmaz, U. (2022). Turkey Raises Inflation Estimates, Sees Record Trade Deficit. Bloomberg. Web.