A Hiccup in Turkey’s Prolonged Credit Fueled Economic Transition: A Comparative Analysis of Before and After the August Rout

Abstract

Mustafa Kemal’s well-organized resistance army was victorious in the Turkish War of Independence, which expelled the occupying armies; subsequently, Mustafa Kemal abolished the Ottoman Empire in 1922 by overthrowing Sultan Mehmet VI Vahdettin and established the Turkish Republic in 1923. No doubt, there is absolutely no other event or development is more important than this in the young history of the Turkish Republic. Economically, the 2001 Turkish economic crisis was the greatest shock since 1923, which cost the government in excess of $50 billion and led to the signing of three standby agreements (over $ 40 billion) with the IMF. Turkey's near meltdown economy, a casualty of repeated speculative attacks on Turkish lira in August 2018 and the subsequent unfolding events, had contracted 5% or so in 2018 compared with that of 2017, and it is forecast to contract further in 2019 after a decade-long credit-fueled boom. It is feared that the farfetched implications of the August rout of 2018 could toss Turkey back in high inflationary mode; however, Turkish government authorities have dismissed the recent severe economic trouble and blamed the crisis on dysfunctional and hostile policies of non-economic basis. Regardless, in the immediate aftermath of the August shock, Turkish lira plummeted 42% of its value against dollar (i.e. from 5.09 on August 2 to 7.24 on August 13) and inflation (CPI) soared to 26% which prompted the Turkish central bank (TCMB) to hike the fund rate by 625 basis points to 24%. Although the Turkish lira has appreciated substantially against dollar since August 2018 (from 7.24 on August 13 to 5.61 on August 2, 2019), Turkey’s unemployment rate surged to 14.7 in February 2019, which is the highest level in a decade. Turkey’s depressed economic situation is in desperate need of foreign capital flows used by the financial authorities to service the debt obligations, but Turkey’s external barrowing have become substantially limited in recent years. With massive foreign debt stock (about $400 billion which is over 50% of its 2018 GDP), Turkey must find ways to attract capital inflows in the form of FDIs and FPIs.