On Monday, 14 August, US customs hikes of 20 and 50 per cent respectively on Turkish aluminium and steel went into effect, sending another tremor through the already panicking Turkish currency markets.
The Turkish lira, which has been experiencing a steady decline for some time, plunged dramatically since the 24 June elections that officially ushered in the “Turkish-type” presidential system giving Recep Tayyip Erdogan immense executive powers which he decided to exercise over once relatively autonomous institutions such as the Central Bank.
Meanwhile, he continues to speak of conspiracies against his country, deliberately blinding himself to years of practices and behaviours that brought his country to the current financial precipice.
According to independent voices, the real crux of the problem is not US pastor Andrew Brunson, currently confined to house arrest on charges of links to terrorist organisations.
While Brunson may have been an exacerbating factor, the real reasons have to do with the ruling Justice and Development Party’s domestic and foreign policies.
Observers paint a grim picture. In the past year and a half, from January 2016 to the end of June 2018, some 20,000 commercial establishments have gone bankrupt and commercial banks have closed down around 400 branches in the country, 133 of these in the past month.
As for the lira, since early 2017 it underwent a series of tumbles, losing 25 per cent of its value by the end of that year. It lost another 50 per cent of its value during the current year, 20 per cent of which occurred last Friday.
In other words, the Turkish lira lost 75 per cent of its value in 20 months. So severe is the crisis that a growing number of companies have already stopped paying their loans.
When will this alarming decline stop? Unfortunately, sources say, Turkish decision-makers are unable to answer the question because they cannot predict when the lira’s slide with respect to other currencies will end. “No one can predict the future of this country, not even for the next three months. Not even the Central Bank can do this,” said one commentator.
The Finance Ministry, with Erdogan’s son-in-law as its titular head, tried to inject a note of optimism.
It released a statement saying that the national banking system was equipped with a fiscal structure and budgetary resources solid enough to manage financial fluctuations effectively, and it anticipated that economic growth would range between 3-4 per cent in 2019 and that the current deficit would stabilise at four per cent.
However, this failed to silence the pessimists. It helped little that in the face of the crisis President Erdogan continued to opt for emotive rhetoric and fantastic claims that only further convinced analysts and investors that the Turkish economy is floundering and out of control.
It appears, in fact, that Erdogan’s economic ambitions soar as steeply as the lira plummets. Only days ago, he heralded “more economic miracles in the new Turkey”, subsequently trumpeted throughout all corners of the pro-government media.
He would carry out a thousand major projects in less than a hundred days, he said, adding that the government would allocate TL 46 billion towards this end.
Meanwhile, Finance Minister Berat Albayrak intends to put into effect an “action plan” that calls for measures of financial discipline, so as not to say austerity.
This naturally gives rise to the question as to how he will be able to reconcile the implementation of that plan with the launching of TL 46 billion worth of mega projects.
In another wild stroke of fancy, Erdogan convinced himself before public opinion that he had conceived the solution to the lira crisis.
He said that Turkey was prepared to deal in the local currencies of other countries that want to “free themselves from the grip of the dollar”.
Curiously, he addressed his appeal to European countries which are unlikely to jump at his offer given the mounting tensions and accumulating rancour between Ankara and European capitals as well.
Erdogan has more than hinted that he was casting around for alternatives and other allies.
In an implicit message to this effect, the office of the presidency reported that Erdogan had spoken with his Russian counterpart Vladimir Putin over the phone and that the two leaders discussed promoting closer trade relations between their two countries.
The press release indicated that Erdogan was looking at China, India and Japan as well.
However, independent economic experts hold that such alternatives are not practical. The Turkish economy is so organically linked to the Western European and North American system that it would take many years to disengage.
In the end, moreover, there is nothing to guarantee that the results would be positive. In fact, they say, the opposite would be the more likely outcome.
In tandem with investors’ expectations that the poorly managed Turkish lira is headed for a hard landing and that inflation will top 20 per cent, uncorroborated rumours began to circulate in the press, such as the one of the weekend that held that most Turkish banks were going to stop selling dollars over the internet or set an upper limit on hard currency withdrawals in order to avert losses.
Nevertheless, as bleak as the situation is at present, there are still ways to break the vicious cycle. But this requires a fundamental change in the government’s approach.
Above all, it will need to permit a true separation of powers between the legislature, executive and judiciary and it will have to ensure the actual independence of the Central Bank.
In addition, the tax system must be reformed to reduce reliance on indirect taxes and increase the weight of direct taxes so as to distribute the tax burden more equitably.
There will also have to be greater economic transparency and complete oversight on public spending and revenues.
Sadly, the recipe seems unachievable under the current autocracy and the absence of the rule of law. Under such conditions, the continued slide of the lira is inevitable.
What else lays ahead? Some observers believe that the finance minister, son-in-law, will be the first victim of the new “T-type” presidential system.
A hard landing will necessitate outside intervention in the form of the IMF. Ankara will have to meet a number of economic and political conditions, one of which will be the dismissal of officials responsible for the financial fall, as occurred in Greece, Italy and Spain.
*A version of this article appears in print in the 16 August 2018 edition of Al-Ahram Weekly under the headline: Turkey nears financial crash