As inflation crashed Turkey’s economy over the past year and shredded the value of its lira currency, president Recep Erdogan insisted the country was pioneering a “new economic model” in which rock-bottom interest rates and a near-worthless currency would create an economic boom driven by exports.

As Turkey’s inflation rate climbed, rising above 85 percent in September, Erdogan successfully pressured the country’s central bank to cut interest rates again and again, finally bringing its key rate to 10.5 percent in October.

Conventional economic wisdom holds that low interest rates cause inflation and higher rates cure it, the opposite of Erdogan’s policy.

In contrast, Erdogan has declared himself “the enemy of high interest rates” and has promised to continue reducing them, as we reported in “Turkey’s Economy Weakens Further Under Erdogan’s Policy” (14 Jun 2022). 

But Turkey’s current account deficit fell to $400 million in November, whacking more than 70 percent off the gap recorded in October.

Was Erdogan right all along?

Much of the cash influx has come from tourists able to travel again after COVID-era lockdowns have been lifted and looking for new experiences.

Because Turkey’s currency is worth so little, dollars, euros, and other sound currencies buy much more there, luring foreign visitors.

Their spending builds up the country’s foreign currency reserves with which to pay for imports of food, fuel, and other necessities.

At the same time, commodity prices have dropped sharply, costing Turkey much less when it buys goods abroad.

A key weakness of Turkey’s economy is the need to import oil and related products, the prices of which have skyrocketed earlier this year.

Turks also took to importing gold to shield themselves against the lira’s crumbling value.

Now, with the spate of good news, Erdogan predicted last week that Turkey’s inflation rate, above 80 percent in October, will plummet to 20 percent next year when he again runs for the presidency.

Turkey would appear to be overcoming the last of a financial crisis that began in 2018, when foreign investors refused to renew loans to Turkish banks. Corporations then scrambled to borrow dollars to keep paying for imports.

Since then, companies have balanced their books, banks have begun lending again, and earlier this year, savers took advantage of the government’s guarantee that it would make up any currency-related losses to savings accounts denominated in lira—a possible indication of renewed confidence in the native currency.

“Fund managers rightly point out that this”—the appearance of sound national finances—“is a mirage,” The Wall Street Journal noted.

The reason: Turkey is still borrowing dollars, just from different countries. In this case, China, Qatar, South Korea, and the United Arab Emirates have come to the rescue. Turkey is also negotiating a deal in which Saudi Arabia will deposit $5 billion in Turkey’s central bank.

However, “with global inflation easing, it could be that 2023 lifts all boats,” the WSJ said, “even Turkey’s.” 

TREND FORECAST: No, Erdogan was not right all along. Turkey has not solved its problem but only postponed an inevitable collapse with a boost from tourists and lenders outside the usual channels.

As we have noted in several other articles, ahead of next June’s presidential election Erdogan is increasingly desperate to rescue his popularity, which is sinking as fast as the lira.

He and his bankers will craft new short-term measures that will loot the central bank’s reserves to put crutches under the lira.

As he becomes more desperate, domestic protests will increase. This will give Erdogan a pretext to find “terrorists” and “foreign troublemakers” among his critics, cracking down even more on personal freedoms and increasing the chances of a rigged election in his favor next year.

Ultimately, Erdogan may seek to distract his nation with military action. As Gerald Celente often says, “When all else fails, they take you to war.”

We have documented Turkey’s economic kamikaze mission in a series of articles, including:

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