Turkey is one of many countries that the consecutive crises the world is facing, from the COVID-19 pandemic to the Russian invasion of Ukraine, have affected. Each crisis has its consequences on Turkey’s economy. The Turkish government has also taken actions that have led to the devaluation of the lira, which has contributed to rising inflation rates in Turkey. In fact, Turkey’s inflation rate for the month of May 2022 reached 73.5%, the highest rate in 24 years. Similar to other countries, inflation in Turkey sparked an increase in the prices of basic resources, leading to a significant impact on the impoverished. These circumstances force the government to implement reforms to protect Turkey’s most vulnerable people.
Causes of the Inflation in Turkey
Even before the coronavirus outbreak and the war in Europe, inflation in Turkey was slowly taking place as the state grappled with significant debt amid the Turkish lira progressively losing its value. The citizens of Turkey consider the Turkish president responsible for the degradation of the nation’s economic situation, given that he insists on keeping interest rates low, according to the New York Times.
The onset of COVID-19 led to further degradation of the economic situation in Turkey due to the disruption in the supply chain. However, Turkey successfully managed this crisis and stood among the few countries noting a positive growth rate for the year 2020.
On the other hand, the recent war between Russia and Ukraine had a serious impact on the Turkish economy. Turkey has important economic ties with both countries and sees its economy affected not only by the increase in the price of energy products but also by the impact this crisis has on agricultural trade, tourism and construction projects in which Turkey is involved.
Poverty and Inflation
The unconventional strategies that the Turkish president adopted, in addition to the two major crises the world now faces, strongly impact inflation in Turkey. Unfortunately, the rise in the prices of food and energy affects low-income households most, according to the World Bank.
A poll indicates that in May 2021, just 53.6% of the Turkish population could meet their basic needs. High inflation and the devaluation of the Turkish lira are “fast eroding the purchasing power of the minimum wage, public-sector salaries and pensions.” In fact, prices are skyrocketing. Electricity bills are reaching unprecedented cost levels and the price of a kilogram of flour has doubled in less than four months, dramatically rising from 110 lira in January 2022 to 220 lira in April 2022, The Guardian reported. Inflation also harshly impacts farmers as they struggle to keep up with large industrial corporations, “with the prices of agricultural producers falling well behind those of industrial producers,” leading to decreased revenues.
The methods of the Turkish President Erdoğan, in the form of lowering interest rates, have not been effective in reducing inflation in Turkey. In fact, economic experts consider Erdoğan’s strategy economically unorthodox.
Nevertheless, to ease the economic situation for citizens, in February 2022, the Turkish government decided to address rising inflation by reducing the value-added tax (VAT) on basic food items from 8% to 1%. In March 2022, the government reduced the VAT on a number of other essential products too. In agriculture, the government reduced VAT “on all kinds of certified seed, seedling and sapling deliveries” to 1%. The government also reduced the VAT on certain hygiene products from 18% to 8%.
In addition, in 2021, the government provided the most impoverished with energy bill subsidies to the value of $12.2 billion. The government is thus aiming to support 50% of the price of natural gas and 25% of the price of electricity. In December 2021, the government also rose the minimum wage by 50% to help struggling citizens enduring the impacts of high inflation rates.
With a government following unusual economic policies and global crises affecting the proper functioning of the economy, inflation in Turkey continues increasing, exacerbating situations of poverty. Despite all that, Turkey has a strong economy capable of exporting large quantities of diverse products, which helped the nation surpass many challenges in the past. With the gradual lifting of COVID-19 restrictions, the country can fully reopen its doors to tourists, which will also give the nation an economic boost during this crisis.
– Youssef Yazbek