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Abu Dhabi, UAEWednesday 19 December 2018

Turkish lira woes have implications for country's elections

Voters will go to the polls in a deteriorating economic climate as Erdogan continues war on interest rates

Turkish President Tayyip Erdogan speaks during an Iftar dinner in Ankara. Murat Kula / Presidential Palace / Reuters
Turkish President Tayyip Erdogan speaks during an Iftar dinner in Ankara. Murat Kula / Presidential Palace / Reuters

As the world emerged from a crippling financial crisis after 2008, easy credit inundated emerging market economies, including Turkey, which disregarded necessary structural reforms. Turkey’s retail and construction sectors exploded as hundreds of shopping malls sprung up, while millions of Turks borrowed for the first time. Turkish President Recep Tayyip Erdogan subsequently gained plaudits for overseeing the fastest growth in the G20.

But fast-forward to 2018 and the Turkish economy is today buckling under a huge current account deficit and double-digit inflation. In the past month, the Turkish lira’s value has fallen 17 per cent. Despite a small rebound on Wednesday, when the central bank raised interest rates, fears of a full blown currency crisis linger on.

Other growing economies have struggled in recent months thanks to a strengthening US dollar, but chronic uncertainty has made the Turkish lira the weakest emerging market currency. Political turmoil following 2016’s failed coup, the imposition of a state of emergency, a series of terror attacks and the gruesome ongoing war across the border in Syria have spooked investors.

So too has Mr Erdogan’s clumsy attacks on the country’s monetary policymakers. Over time investors have become concerned about the Turkish leader's growing influence over the central bank, ingraining his unorthodox view that higher interest rates cause inflation. Indeed, during a visit to London this month, Mr Erdogan vowed to take control of monetary policy should he emerge victorious in next month’s elections.

Add to that the threat of US sanctions related to Turkey’s courting of Russia and Iran, and Turkey could be stumbling towards a recession in which its people will suffer most.

It is widely accepted that little good comes when a central bank’s independence is violated.

The economic malaise has far-reaching implications, not least for the integrity of Turkish democracy. In April, Mr Erdogan brought forward the date of presidential and parliamentary elections from November to June in what many viewed as an attempt to cement his power before an expected economic downturn.

A win would allow him to eliminate the post of prime minister, weaken parliament and concentrate his power, marking the final stage in the largest constitutional transformation since the Turkish republic was founded in 1923.

Given the lengths Mr Erdogan has taken to cement his power – including the jailing of political opponents, civil servants, professors and journalists – the prospect of the Turkish electorate going to the polls amid a rapid economic decline raises fears for fairness.

Mr Erdogan does maintain strong support across Turkey, particularly in rural areas. But the decision to hand him considerable extra power should come from a fair and democratic process.

Meanwhile, for the emerging economies of the future, Turkey's economic troubles are a cautionary tale.