(Some Lessons for Viksit Bharat)

ON 29 October 1923, the Republic of Turkey was proclaimed after the treaty of Lausanne. 100 years after Atatürk's establishment of the modern Turkish state, the present prime minister Recep Tayyip Erdogan, inspite of official denials, seeks the restoration of the status of the Ottoman Empire. Militarily, Turkey has grown by leaps and bounds. However, the prolonged spell of inflation seeks to undermine his dreams.

Whilst the nation is a key player in the Red Sea, has enabled Azerbaijan to beat Armenia and is spreading its wings in the global militaries, yet Turkey's battle with inflation has emerged as a defining economic challenge for the past three years.

Turkey's year-on-year inflation report for December 2023 showed inflation at 64.8%, the highest since November 2022 and a step up from the previous month's 62%. However, this was below analyst estimates of 65.1%. Core inflation, the rate of change in prices for a basket of goods that excludes volatile items like food and energy also hit 70.6%, the highest since 2004, up from 69.9% in the previous month.

Transportation prices rose 77% in December, up from 70% in November, housing and utilities prices, rose to 40.4% from 37.55% the previous month. Furthermore, restaurant, hotels and cafe prices also inched up slightly to 93.2% from 92.9% in November, whereas culture and recreation prices jumped to 61.3% up from 56.9%.

Food prices touched 3-month highs at 72%, from November's 67.2%. As per official statistics, consumer prices rose 4.5% in February from January, bringing the annual growth rate to 67 per cent. The central bank predicts inflation will rise towards 80 per cent by the summer - close to its recent peak of 85.5 per cent in 2022 - before easing to 36 per cent by year end.

The roots of current inflationary pressures lie in 2021. In pursuit of bolstering exports and economic growth, President Erdogan decided that the medicine for skyrocketing inflation and a crashing currency was lower and lower interest rates. Exerting influence on the Central Bank, he ensured a series of interest rate cuts. Such a loose Monetary policy of the central bank, focussing more on export competitiveness and growth, rather than on bringing inflation back under control ignited a surge in inflation. Turkish Statistical Institute data reflects a dramatic rise: inflation climbed from 15.4% in June 2018 to a staggering 85.5% in October 2022.

Beginning in 2013, the Turkish lira to dollar exchange rate began a slow decline. Much like the policies of many countries including India, the lira had been artificially suppressed in its international rate. Once the economy began its decline and the government slowly allowed the lira to find its true value, the rate decline happened. In 2018, $1 was equal to 4.5 lira. On 25th March 2024 the value was 32.25 lira!

The depreciation of the Lira triggered a vicious cycle. As per OEC, the primary imports of Turkey are Gold ($19B), Refined Petroleum ($17B), Scrap Iron ($8.77B), Cars ($8.75B), and Petroleum Gas ($8.4B) (2022). Turkish imports including essential commodities like fuel and food, became significantly more expensive. This translated into domestic price hikes, further eroding purchasing power. Independent analysts at ENAG estimated the actual inflation rate to be considerably higher than official figures, reaching a concerning 176% in November 2022.

The expected surge in exports has happened. In fact, in 2021 Exports increased 33% year-on-year to a record high of $225 billion as per Nikkei Asia. However, the real figure to note is the trade gap. This difference between imports and exports has widened over years. In 2021 the trade balance was -$1.8B as per macrotrends and this increased to -$105B as per Nasdaq.

The repercussions of unchecked inflation are severe. Household wealth evaporates, investment dries up, and poverty increases. Social unrest becomes a real possibility as basic necessities become increasingly out of reach. Rising food prices, driven by import costs, have led to significant food insecurity. A 2023 World Bank report suggests that millions of Turks are struggling to afford basic necessities, with some resorting to skipping meals.

As per the Washington post, the signs of Turkey's disastrous economy are all around. Long lines outside discounted bread kiosks, soaring prices of medicine, milk and toilet paper and angry outbursts on the streets indicate the suffering of the people.

"Unemployment, high living costs, price increases, and bills are breaking our backs," the Confederation of Progressive Trade Unions said.

Inflation typically widens the gap between rich and poor. Wealthier individuals have more resources to weather price hikes, while low-income families suffer disproportionately. This can lead to social unrest and a breakdown in social cohesion. As economic hardships mount, social stress and discontent rise. There is a potential for social unrest, especially if the government is perceived as failing to address the crisis effectively.

This policy has also given rise to a rapid "brain drain", with several semi-skilled and skilled workers looking for better opportunities elsewhere in Europe, potentially devastating for Turkey's economic future.

Knowing that Turkey maybe close to a tipping point, the Central Bank finally implemented a course correction in late 2022, raising interest rates from. The new governor of the central bank, Hafize Gaye Erkan took office in June 2023. Since then, interest rates have shot up to 42.5% from 8.5%. Additionally, a more stable Lira provided some initial relief. By mid-2023, inflation had dipped below 40%. However, this reprieve proved temporary. As of February 2024, inflation has surged back to 67%, highlighting the fragility of the situation. Recently, the central bank further increased interest rates to 50%!

Turkey stands at a critical juncture. Embracing economic orthodoxy with a truly independent Central Bank and structural reforms offers the only hope of navigating out of this inflationary vortex. The alternative is a future characterized by economic stagnation and hardship for millions of Turkish citizens.

In times of economic hardship, populist narratives and scapegoating tactics often gain traction. This could further polarize society and distract from addressing the root causes of the problem.

Shortly before the data for February was released, Finance Minister Mehmet Simsek told local broadcaster BloombergHT that inflation would remain high in the coming months due to base effects and the delayed impact of rate hikes, but would fall in the next 12 months.

"Inflation was high in January due to temporary effects, there could be some continuation of that in February," Simsek said. "However as of March, inflation will be back on trend. It will become in line with our disinflation path."

That hasn't happened.

Combating Turkey's inflationary crisis requires a multi-pronged approach. Monetary policy alone will not suffice. A combination of interest rate hikes, sound fiscal policy, structural reforms, and social safety nets are crucial. Engaging with international institutions can provide valuable expertise and resources. The road ahead will be challenging. The Turkish government must be willing to embrace economic orthodoxy and prioritize long-term stability over short-term political considerations. Only through a sustained commitment to responsible economic management can Turkey emerge from this inflationary quagmire and create a brighter economic future for its citizens.

If left unaddressed, prolonged high inflation can cripple the Turkish economy. Businesses become hesitant to invest, leading to stagnant growth and job losses. International investors may become wary of a volatile market, further hindering growth prospects.

If Prime Minister Recep Tayyip Erdogan wants to re-establish the great Ottoman empire, founded by Osman Gazi (1299-1324), the road shall have to pass through fiscal consolidation, addressing supply chain issues and a professional level of economic management. For now, the Bayraktar drones or the fifth generation KAAN fighter aircraft may not be enough.

(Disclaimer: Views expressed are the author's own).

(Parneet Sachdev, IRS is the Chairman of Real Estate Regulatory Authority and a leading author.)