Turkey anti-inflation steps don’t go far enough, experts warn

Although Turkish inflation slowed in September, it is still raging out of control with the government avoiding difficult decisions that could help tackle it, experts said.

Turkey has experienced spiraling inflation the past two years, peaking at an annual rate of 85.5 percent in October 2022 and 75.45 percent in May.

The government claims it slowed to 49.4 percent in September.

But the figures are disputed by the ENAG group of independent economists who estimate that year-on-year inflation stood at 88.6 percent in September.

Finance Minister Mehmet Simsek has said Ankara was hoping to bring inflation down to 17.6 percent by the end of 2025 and to “single digits” by 2026.

And President Recep Tayyip Erdogan recently hailed Turkey’s success in “starting the process of permanent disinflation.”

“The hard times are behind us,” he said.

But economists interviewed by AFP said the surge in consumer prices in Turkey had become “chronic” and is being exacerbated by some government policies.

“The current drop is simply due to a base effect. The price rises over the course of a month is still high, at 2.97 percent across Turkey and 3.9 percent in Istanbul.

“You can’t call this a success story,” said Mehmet Sisman, economics professor at Istanbul’s Marmara University.

‘Budgetary black holes’

Spurning conventional economic practice of raising interest rates to curb inflation, Erdogan has long defended a policy of lowering rates, citing Islamic precepts that ban usury. That has sent the lira sliding, further fueling inflation.

But after his reelection in May 2023, he gave Turkey’s Central Bank free rein to raise its main interest rate from 8.5 to 50 percent between June 2023 and March 2024.

The central bank’s rate remained unchanged in September for the sixth consecutive month.

“The fight against inflation revolves around the priorities of the financial sector. As a result, it is done indirectly and generates uncertainty,” explained Erinc Yeldan, economics professor at Kadir Has University in Istanbul.

But raising interest rates alone is not enough to steady inflation without addressing massive budget deficits, according to Yakup Kucukkale, an economics professor at Karadeniz Technical University.

He pointed to Turkey’s record budget deficit of 129.6 billion lira (3.45 billion euros).

“Simsek says this is due to expenditure linked to the reconstruction in regions hit by the February 2023 earthquake,” he said of the disaster that killed more than 53,000 people.

“But the real black hole is due to the costly public-private partnership contracts,” he said, referring to infrastructure contracts which critics say are often awarded to firms close to Erdogan’s government.

Such contracts cover construction and management of everything from motorways and bridges to hospitals and airports, and are often accompanied by generous guarantees such as state compensation in the event they are underused.

“We should question these contracts, which are a burden on the budget because this compensation is indexed to the dollar or the euro,” said Kucukkale.

Anti-inflation measures also tend to impact low-income households at a time when the minimum wage hasn’t been raised since January, he said.

“But these people already have little purchasing power. To lower demand, such measures must target higher-income groups, but there is hardly anything affecting them,” he said.

Reinforcing inequality

“Austerity measures”, such as cancelling cleaning services in public schools, hit the most disadvantaged and reinforce inequalities, Yeldan said, indicating it would be preferable to introduce a “tax on wealth, financial transactions and property income.”

But Erdogan’s AKP ruling party relies on the support of “pro-government companies” who have won infrastructure contracts, he said.

According to a study by Koc University, households are expecting annual inflation to reach 94 percent by the end of the year, well above the central bank’s forecasts.

“Price rises experienced by the middle and lower classes are all the more distressing because it involves essential products and services like food, housing and education, where inflation remains very high,” Sisman said.

Uncertainty about the future is also contributing to the ongoing price rises as retailers try to anticipate future costs, observers say.

“Inflation is now structural and persistent in Turkey. Without structural reforms, we will be stuck in a vicious circle as we were in the 1990s,” said Yeldan.