Turkey’s already struggling economy has been hit by earthquakes, leading to a major crisis in the country, resembling the situation faced by the Ottoman Empire during and before the Great War or World War I. Then one of the most powerful empires in the world, the Ottoman Empire collapsed due to financial mismanagement and natural calamities, such as floods, corruption and huge debts forcing it to default on loans. Meanwhile, in the present day, apart from President Recep Tayyip Erdogan’s unpopular policy of cutting interest rates despite skyrocketing inflation, repeated earthquakes in Turkey have wrecked the nation’s creaking economy even further. The cost of earthquakes in eastern Turkey is estimated to be approximately $84 billion, which is around 10% of the country’s GDP, according to reports.
Impact of President Recep Tayyip Erdoğan’s unconventional policies
Cutting interest rates despite sky-high inflation
In October last year, inflation surged to 85% in Turkey, and now due to the earthquake it is expected to remain above 40% for the next few months. Normally central banks raise interest rates to counter inflation, but Erdogan did the opposite. He kept cutting the rates despite sky-high inflation as he considers interest the ‘mother and father of all evil’. In Islam interest on loans is treated as usury and labelled forbidden. Many officials of Turkey’s central bank have been fired by the President because they failed to lower interest rates.
Devaluation of Turkish Lira
As a consequence of runaway inflation, the lira has fallen over 1% this year after dropping 30% a year before, becoming one of the worst-performing currencies in emerging markets. Printing too much money is never a good idea and the lira’s supply has been increasing rapidly as compared to relatively harder currencies like the US dollar. According to World Bank data, Turkey’s broad money supply rose by about three and a half times between 2014 and 2020 while the broad money supply in the US rose by around 50% during the same period causing the value of the Turkish lira to drop against the dollar. According to reports, Erdogan believes that if the lira loses value against the dollar, Turkey’s exports will simply become cheaper and foreign consumers will want to buy even more. But as the country is majorly dependent on imports, they get costlier as the value of the lira decreases. The country’s forex reserves have depleted rapidly and the account deficit has ballooned in recent years.
Human rights violations put Turkey’s full-fledged EU membership bid on hold
Human rights violations have put Turkey’s desire to become a full-fledged EU member country from a trading partner to hold. The issue arose in 2016, which made foreign financial institutions think twice before lending money, and tourists think twice before planning a holiday. Tourism contributes significantly to Turkey’s economy. Turkey has been a candidate country to join the European Union since 1999. Accession negotiations started in 2005, but have not advanced recently.
Turkey remains on FATF grey list
Turkey continues to remain on the Financial Action and Task Force’s (FATF) grey list. If a country is placed on the grey list it means that it gets difficult to receive aid from the International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and the European Union. On Turkey, the FATF said “since October 2021, when the nation made a high-level political commitment to work with the FATF to strengthen the effectiveness of its Anti Money Laundering (AML)/Counter-Terrorist Financing (CFT) regime, it has taken further steps towards improving its AML/CFT regime, including by issuing regulations regarding politically exposed persons and guidance to the private sector on detecting terrorist financing, as well as increasing the FIU’s proactive dissemination of financial intelligence. The FATF continues to monitor that Türkiye’s oversight of the NPO sector is in line with the risk-based approach as set out in the FATF Standards.”