Turkey's anti-inflationary measures don't go far enough, experts warn

Even though Turkish inflation slowed in September, it remains out of control, with the government avoiding tough decisions that could help tackle it, experts told Agence France-Presse.

Turkey has seen runaway inflation over the past two years, peaking at an annual rate of 85.5% in October 2022 and 75.45% in May.

The government says this rate slowed to 49.4 percent in September.

But these figures are disputed by the independent economists group ENAG, which estimates that year-on-year inflation rose to 88.6 percent in September.

Finance Minister Mehmet Imek said Ankara hoped to bring inflation down to 17.6% by the end of 2025 and to “single digits” by 2026.

And President Recep Tayyip Erdoan recently praised Turkey's success in “launching the process of permanent disinflation.”

“The difficult times are behind us,” he said.

But economists interviewed by AFP believe that the surge in consumer prices in Turkey has become “chronic” and is exacerbated by certain government policies.

“The current decline is simply due to a base effect. The month-on-month price increase remains high, at 2.97 percent across Turkey and 3.9 percent in Istanbul.

“You can't call it an achievement,” said Mehmet Sisman, an economics professor at Marmara University in Istanbul.

“Budgetary black holes”

Rejecting the conventional economic practice of raising interest rates to curb inflation, Erdoan has long championed a policy of lowering rates, citing Islamic precepts that forbid usury. This caused the lira to fall, further fueling inflation.

But after his re-election in May 2023, he gave carte blanche to the Turkish central bank to raise its main interest rate from 8.5 to 50% between June 2023 and March 2024.

The central bank rate remained unchanged in September for the sixth consecutive month.

“The fight against inflation revolves around the priorities of the financial sector. As a result, this is done indirectly and generates uncertainty,” explains Erin Yeldan, professor of economics at Kadir Has University in Istanbul.

But raising interest rates alone is not enough to stabilize inflation without tackling huge budget deficits, according to Yakup Kkkale, an economics professor at Karadeniz Technical University.

He highlighted Turkey's record budget deficit of 129.6 billion liras (3.45 billion euros).

“Imek says this is due to expenses related to reconstruction in the regions affected by the earthquakes of February 2023,” he explained of the disaster which left more than 53,000 dead.

“But the real black hole is costly public-private partnership contracts,” he said, referring to infrastructure contracts that critics say are often awarded to companies close to Erdoan's government .

Such contracts cover the construction and management of everything from highways and bridges to hospitals and airports and often come with generous guarantees such as state compensation for underutilization.

“We must question these contracts, which weigh on the budget because these compensations are indexed to the dollar or the euro,” said Kucukkale.

Anti-inflationary measures also tend to impact low-income households, at a time when the minimum wage has not been increased since January, he explained.

“But these people already have little purchasing power. To bring down demand, such measures must target higher income groups, but nothing affects them,” he said.

Reinforcing inequalities

“Austerity measures”, such as cutting cleaning services in public schools, hit the most disadvantaged and reinforce inequality, Yeldan said, indicating that it would be better to introduce a “tax on wealth, financial transactions and property income.

But Erdoan's AKP party is counting on the support of “pro-government companies” that have won infrastructure contracts, he explained.

According to a study by the University of Ko, households expect annual inflation to reach 94 percent by the end of the year, well above the central bank's forecast.

“The price increases experienced by the middle and lower classes are all the more worrying as they concern essential products and services such as food, housing and education, where inflation remains very high,” said Iman.

Uncertainty about the future is also contributing to continued price increases, observers say, as retailers try to anticipate future costs.

“Inflation is now structural and persistent in Türkiye. Without structural reforms, we will be stuck in a vicious cycle like in the 1990s,” Yeldan said.