Turks head to the polls on Sunday to elect a new president, as risks mount for Turkiye’s economy, mired in a currency crisis and growing debt.
Regardless of who wins this fierce election, whether incumbent President Recep Tayyip Erdogan or key opposition leader Kemal Kilicdaroglu, Turkiye’s economy will endure another period of instability.
The main opposition alliance vows to free the economy and financial markets from state constraints and restore independence to the central bank, which, if the opposition wins, will raise interest rates aggressively to reduce inflation. Kemal Kilicdaroglu presented an ambitious economic program in which he pledged to attract about $175 billion in investment and rein in inflation and unemployment.
Read: Turkey’s inflation eases for the sixth consecutive month
The ruling Justice and Development Party (AKP) says it will continue to implement its program of cutting interest rates and increasing growth, despite inflation reaching 44 percent and the country’s foreign currency reserves depleted, after years of efforts stabilizing the lira.
The Turkish lira has lost more than 75 percent of its value against the dollar. From a level of 4.48 liras in June 2018, the dollar exchange rate has jumped to about 19.5 liras at present.
Turkiye’s central bank took several precautionary measures on Wednesday aimed at protecting the lira after the election, intensifying restrictions on Turkish banks. Turkiye’s central bank decided to limit the sale of dollars to companies that do not urgently need to pay their dues, in exchange for giving priority to lira depositors within the KKM savings scheme, which is currently worth $100 billion.
The system was launched in 2021 when the Turkish lira experienced a crisis, and inflation rose to a 24-year high.
The CBE issued other banking rules to raise the percentage of bank deposits in lira to 65 percent during the first half of this year, and if it is less than 60 percent, banks must deposit a larger part of foreign currency deposits with the Central Bank, and buy an additional 7 percent of government bonds in local currency. If it exceeds that percentage, banks will be exempted from holding some government bonds in local currency.
According to Bloomberg, traders and companies are preparing for a significant weakening of the lira against the dollar, regardless of the outcome at the ballot box. They are working to insulate their balances from local currency turmoil days before the election.
The cost of living
The cost-of-living crisis facing Turks is an obstacle to Erdogan’s re-election. The unconventional economic program he adopted during the past period, based on continued interest rate cuts despite high inflation, has eroded the purchasing power of low- and middle-income people who were considered great supporters of Erdogan, thus eroding his popularity to face the biggest challenges of the twenty years in power.
Erdogan announced on Wednesday that he would increase the wages of government workers in the country by 45 percent, starting next July, raising the lowest salary for government workers to 15,000 Turkish liras (about $768).
In February, Turkiye’s central bank cut interest rates by 50 basis points from 9 percent to 8.5 percent.
The trade deficit rose 43.9 percent year-on-year to $8.85 billion in April.
Earthquake
The major earthquake that struck Turkeye, inflicting heavy economic losses, was strongly present in election campaigns among the contenders.
The United Nations has estimated that the damage caused by the earthquake will exceed $100 billion, and the reconstruction process will increase demand for many products and services, which in turn will lead to higher inflation than it already is.
There is no doubt that the bright electoral promises put forward by both competitors place the Turkish voter in front of difficult choices, the first of which is to improve his life in the next stage.
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