Turkey’s high inflation problem hasn't gone away
Middle East Eye
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By Ragip Soylu - MEE Turkey Bureau Chief
Turkey’s inflation crisis continues to weigh heavily on the economy, despite 18 months of orthodox policies implemented by Economy Minister Mehmet Simsek.
Year-end annual inflation is projected to exceed 45 percent - several points higher than official estimates. And, earlier this month, the Turkish Central Bank signalled that it might gradually begin cutting interest rates in December, which currently stands at 50 percent.
The decision has divided Turkish economists.
While one camp argues that it’s too early to reduce rates and that such a move should be delayed until early next year to further stabilise inflation, others believe that a small cut - such as a one percent reduction - would carry little risk, given the current downward trend in inflation.
The Central Bank is staffed by well-respected economists such as Cevdet Akcay and Governor Fatih Karahan, but it’s impossible to evaluate any monetary policy decision without considering the political context. ?
Sources familiar with internal discussions in Ankara have suggested that Turkish President Recep Tayyip Erdogan was led to believe that a rate cut would begin in the last months of 2024.
In fact, Erdogan publicly stated this timeline in June, which briefly caused panic in the markets, who perceived it as a political intervention into the rate decision.
This has led some observers to argue that the decision to cut rates next month may be influenced by Erdogan.
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Slow progress
Tensions surrounding the country’s monetary policy were evident in October, when the pro-government newspaper Yeni Safak published a series of articles criticising the Central Bank’s high interest rates, claiming they were harming industrial production. Notably, such reporting has disappeared in November.
Economists interviewed by Middle East Eye have cited public expenditure as the primary reason for slow progress in combating inflation.
In October alone, public spending rose by 81 percent, while the treasury’s cash budget deficit jumped by a staggering 103 percent, reaching $4.3bn.
This deficit is largely attributed to increased pension costs and the government’s lavish expenditures, including unnecessary travel budgets and bloated employment levels in the state bureaucracy.
Erdogan’s 2023 early retirement scheme, which added four million people to state pension rolls, cost the government $16bn this year alone.
While Simsek has implemented a hiring freeze in the public sector and suspended large public investments - except in earthquake-affected areas - spending by high-level bureaucrats and the presidency remains excessive.
For instance, Erdogan’s international summit visits often involve transporting hundreds of people across several planes to foreign capitals, symbolising wasteful government spending. ?
The government aims to reduce inflation to around 20 percent next year. However, the public - particularly businesses - expect inflation to hover around 47 percent by this time next year, casting doubt on the government’s ability to convince households and corporations of its economic agenda’s effectiveness.
Simsek and his team may need to implement further measures to cut public expenditures and target high-income segments of society with new taxes in order to bring inflation down.
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