Turkish Economic Crisis

Turkish Economic Crisis

Introduction

            Turkey’s economy is still adjusting since the 2018 economic crisis. Turkey’s being the 7^th largest growing economy in Europe as of 2017 is fast growing. The country has a population of 81.4 million people, according to the World Bank (2019). In 2018, the country’s economy changed due to a financial crisis. The financial and economic crisis was mainly as a result of foreign debt and excessive current account deficit. The Turkish Lira lost more than 35% of its value against the US Dollar each day, and it leads to inflation and increased cost of living. The textile industries, which are the leading in Turkey together with the banks, went down, and they are still struggling to contain the fallout. The Turkish financial and economic crisis affected most businesses both globally and nationally despite the monetary and fiscal policies put in place and challenges still in the country. However, we cannot ignore the fact that the country is trying to come back to its former state.

Discussion

            Turkey’s economy was hurt by the 2018 economic crisis, which followed a lot of unseen things: unemployment, inflation, and closing of businesses. The economy suffered its currency crisis, which tailed a recession in 2018. According to Akcay and Guengen (2019), the Turkish Lira lost 35% of its value against the US Dollar, which depreciated in the first eight months. There was a sharp interest rate hiked in September the same year, which was a wakeup call for banks in the country. The increase in interest rates leads to the bankruptcy of businesses and following closure in the short run. The unemployed rates reached unseen record levels since the 2008 financial crisis. While all this was taking place, the inflation rates were at 15.6%, which increased the cost of every commodity. The Turkish Baker Federation announced an increase in the cost of bread by 15% (Al Jazeera, 2018)

The Turkish economy situation was more intense and needed more than the policymakers to put monetary, fiscal measures.

Some factors caused the Turkish Lira crisis to occur. The main of the causes was the economic crisis caused by the US President Donald Trump, who doubled the tariffs of metals for Turkey. Varon and Arbaa explain that the Turkish economy excessive current account deficit, large amount of private foreign currency debt, and the interest rate policy taken by the president caused the financial and economic crisis (2019). Turkey had been running a substantial current account deficit since 2016 when it was $33.1 billion. The account deficit increased such that by January 2018, the amount was $7.1 billion US Dollars, which by the end to 2018. The current account deficit had increased but $42 Billion US Dollars, which was the most massive account deficit in the world. Since Turkey has a low saving rate, the only solution to solve that, according to them, was borrowing. They relied on capital inflow from the private sector and banks, thus increasing the debt. Consequently, these lead to the closure of business due to high borrowing, and it affected the consumer, who could not borrow money since the interest rates were high. The high borrowed rate and accumulated debt mean that turkey will take time to recover from the crisis since they have to pay back the debts.

The increased debts and the turn the economy had caused the policymaker to make quick and irrational decision to solve the situation. The Turkish president, Tayyip Erdogan, preferred to keep the interest rates low even though inflation had increased. Erdogan prevented the Central Bank from making the necessary interest adjustments that could make the economy recover (Arbaa & Varon, 2019). According to the president, the increase in the interest rate was going to put the international pressure. Therefore, he opted to sell their dollar and euros to raise their national crisis. By not increasing the interest rates, it means that people could borrow from the banks, the little they had as well as cooperation. Therefore these decisions lead to an increased crisis for the Turkish economy. The debts borrowed continue to accumulate, and this meant not recovering as soon as possible.

The world economy, as well as the national economy, felt the impact of the crisis. The unemployment rate had declined, and it also affected the trading countries since it meant no impostor exports for them. The Russian economy, for example, suffered a lot since 13% of Turkey imports were for Russians. Therefore, at that moment, it meant that the Russian didn’t have imports. It leads to economic shock for them, too, since it leads to 0.6% of Russian economic growth (Mamaladze and Abuselidze, 2019). The global international market generally felt the impact since Turkey is a leading exporting country of textile, metal, and transportation equipment. The national market was also affected since the crisis lead to unemployment as well as lowering the standards of living. According to the World Bank, unemployment in 2018 increased by 4% in twelve months in 2018 (2019). It means that a lot of people were losing jobs due to the closure of companies. The case has not yet resolved since, in 2019, December, the unemployment rate had increased to 4.3 million people, which is equivalent to 13.7% of unemployed people. The country is, however, still facing some of these challenges since there were not short terms measures that could correct the economy. The unemployment rate is still on increase as well as the GDP.

The Turkey government is still trying to correct the financial and economic crisis of 2018by implementing some policies. The central bank is one of the policymakers of the country, put into place monetary and fiscal policies to solve the situation. The monetary policy involves changing the interest rates and the flow of money in the economy. In contrast, the fiscal policy consists of a change in tax rates and government expenditure, therefore influencing the aggregate demand (Arbaa & Varon, 2019). The central bank put into pace monetary policies by increasing the interest rates despite the warning by the president. The increase in interests leads to banks raising their interest rates for investors and consumer loans as well as mortgage loans. They increased the interest rate to 19.79 annually, and this educated the borrowing rates and increased the rates at which investors were paying back their debts (Arbaa & Varon, 2019). It was not favorable for the consumers, although it narrowed the gap between the loans and the deposits; therefore, working in favor of the economy. The finance minister, Albayrak also came up with a program that was going to solve the current financial situation; the program aimed to increase the exports and productivity, therefore, increasing employment opportunities. They planned to reduce government spending by $10 billion and suspend projects that were untendered. This fiscal policy they put in place would lead to long term economic growth and short term decline in the growth of the economy ( Akcay & Guengen, 2019).

 

Conclusion

            Due to the 2018 economic crisis of turkey, there was a change in the economic growth of the country, and any aspects of the country’s economy crashed. The government, however, implemented some monetary and fiscal policy to correct the situation that had been caused by increased borrowing rates, lowering of interest as well as influence from the US. The policies put in place that is rising interest rates and increasing government expenditure are still into place and the impact yet evident since they are long term goals to correct the situation. The national economy, as well as the globe, has also felt the effects of the crisis since it lowered the import and export rates in the country and also affected the consumer’s behavior. To sum it up, the turkey economy crisis may recover if they follow the policies set, although; it will take a longer time to recover.

 

 

 

 

References

Abuselidze, G., & Mamaladze, L. (2019). U.S-Turkey crisis and its impact on the economy of the Black Sea Region. E3S Web of Conferences, 135, 03077. https://doi.org/10.1051/e3sconf/201913503077

Akcay, U., & Gungen, A. (2019). The making of Turkey’s 2018-2019 economic crisis. Institute for International Political Economy Berlin, 1-23. https://www.researchgate.net/publication/333951280_The_Making_of_Turkey’s_2018-2019_Economic_Crisis/link/5d0e7edea6fdcc24629de55a/download

Al Jazeera. (2018, August 14). Turkey’s lira crisis: Six things you need to know. Breaking News, World News, and Video from Al Jazeera. Retrieved March 14, 2020, from https://www.aljazeera.com/news/2018/08/turkey-lira-crisis-180814132601100.html

Arbaa, O., & Varon, E. (2019). Turkish currency crisis – spillover effects on European banks. Borsa Istanbul Review, 19(4), 372-378. https://doi.org/10.1016/j.bir.2019.07.003

World Bank. (2019, November). Turkey’s economic monitor. World Bank Group – International Development, Poverty, & Sustainability. Retrieved March 14, 2020, from https://www.worldbank.org/en/country/turkey/publication/economic-monitorv