For the winner in Turkey, one prize is an economy on the brink of crisis
Inflation in Turkey remains stubborn at 44 percent. Consumers have watched their paychecks buy less and less food as the months go by. And now government generosity and efforts to prop up the currency threaten economic growth and could push the country into recession.
It is a tough challenge for whoever wins the second round for the presidency on Sunday. And it is particularly complicated if President Recep Tayyip Erdogan remains in power as his policies, including some aimed at securing his re-election, have exacerbated the problems.
“The relatively strong economy of recent quarters has been the product of unsustainable policies, so contraction or recession is very likely to come,” said Brad W. Setser, a global trade and finance expert at the Council on Foreign Relations.
“Working Turks will feel poorer if the lira depreciates,” he said of the local currency. “People will find it harder to get a job and harder to get a salary that covers living expenses.”
The economic turmoil in Turkey, one of the world’s 20 largest economies, could reverberate internationally due to the country’s wide network of global trade links. It is also likely to dominate the immediate agenda of the candidate who wins the second round of the election on May 28.
During Mr. Erdogan’s first 10 years in power, he oversaw the dramatic economic growth that transformed Turkish cities and lifted millions of people out of poverty. But some of those gains have eroded in recent years. The national currency has lost 80 percent of its value against the dollar since 2018, and year-on-year inflation that exceeded 80 percent last year and was 44 percent last month has left many people feeling poorer .
While economic orthodoxy usually calls for interest rates to be raised to fight inflation, Erdogan has pushed to do the opposite by cutting them repeatedly, which economists say has exacerbated the problem.
During his election campaign, Mr Erdogan showed no intention of changing his policies, redoubled his belief that low interest rates would help the economy grow by providing cheap credit to increase Turkish production and exports.
“We will work relentlessly until we make Turkey one of the 10 largest economies in the world,” he said at an election rally this month. “If there is a reality in Turkey today that will not allow its pensioners, workers and civil servants to be crushed by inflation, we have succeeded by standing back to back with you.”
At other meetings, he pledged to continue cutting interest rates and curbing inflation.
“You will see that as interest rates fall, inflation also falls,” he told supporters in Istanbul in April.
In the run-up to the election, with the cost of living crisis on the minds of many voters, Erdogan launched a series of costly policies to mitigate the immediate effects of inflation on voters. He repeatedly raised the minimum wage, raised civil servant salaries and changed regulations to allow millions of Turks to receive early government retirement. All those commitments have to be fulfilled by whoever wins the election, which means the government has to spend more in the future.
The economic stress is exacerbated by the massive damage caused by the powerful earthquakes that devastated large parts of southern Turkey in February. In March, a government estimate estimated damage at $103 billion, or about 9 percent of this year’s gross domestic product.
At the same time, the government has intervened heavily to curb the depreciation of the Turkish lira, mainly by selling foreign exchange reserves. For a week in early May, reserves fell $7.6 billion to $60.8 billion, according to central bank data, the largest such decline in more than two decades.
To address that, Mr. Erdogan signed agreements with countries like Qatar, Russia and Saudi Arabia that would help bolster reserves in Turkey’s central bank. Saudi Arabia announced a $5 billion down payment in March and Russia agreed to defer at least part of Turkey’s payment for natural gas imports until after the election.
The terms of most of these agreements have not been made public, but economists said they were part of a short-term strategy by Erdogan aimed more at winning the election than ensuring the country’s long-term financial health.
Should Erdogan win, as many analysts expect, few expect him to change course drastically.
“I don’t think the current government has a plan to solve this because they don’t admit that these problems are due to policy mistakes,” said Selva Demiralp, an economics professor at Koc University in Istanbul. “I see no way out for the current government.”
Mr Erdogan came out on top in the first round of elections on May 14 with 49.2 percent of the vote, but did not get the majority needed to win outright. The main opposition candidate, Kemal Kilicdaroglu, won 45 percent and a third candidate, Sinan Ogan, won 5.2 percent. mr. Erdoğan and Mr. Kilicdaroglu will compete in the second round.
Most analysts give Mr Erdogan the lead because of his strong showing in the first round and the likelihood that he will inherit significant votes from Mr Ogan, who formally endorsed Mr Erdogan on Monday. Mr Erdogan’s political party and its allies also maintained their majority in parliament, allowing Mr Erdogan to argue that voters should choose him to avoid a divided government.
If Erdogan sticks to the status quo, economists expect the currency to fall further, the government to impose restrictions on foreign currency withdrawals, and the state to run short of foreign currency to pay its bills.
In its campaign, the political opposition pledged to pursue more orthodox economic policies, including raising interest rates to curb inflation and restoring central bank independence, which is widely believed to be overseen by Mr. Erdoğan himself.
But if he becomes president, Mr Kilicdaroglu will inherit a financial situation that requires immediate attention, economic advisers from opposition parties have said.
In addition to honoring the extra expenses Mr. Erdogan has added in recent months, a new government should respect his financial arrangements with other countries, the terms of which are often not clear.
“What are the political conditions? What are the financial conditions?” said Kerim Rota, who is responsible for economic policy for the Gelecek Party, a member of the opposition coalition. “Unfortunately, none of those numbers are reflected in Turkish statistics.”
If it comes to power, the opposition will need both short- and medium-term plans to strengthen public finances and restore investor confidence, he said. But the majority in parliament, led by Erdogan’s party and its allies, would limit its ability to maneuver.
“We need a very credible medium-term program, but the question is if the majority of parliament is on the side of the AKP, how can you manage a five-year program?” he said, using a different name for Mr. Erdogan’s party.
Gulsin Harman reporting contributed.