The Turkish lira (TL) has hit the skids. It began by losing its value against the dollar gradually – 7.4 in January 2021 – but over the past two months its condition has rapidly deteriorated or wildly fluctuated, reaching an all-time low of 18.36 on 20 December.

After the Turkish markets closed that day, President Recep Tayyip Erdogan announced that while he will not veer from his decision to reduce interest rates, he will introduce a new financial vehicle to protect people against losses from foreign currency hikes, aptly called the “Foreign Exchange-Protected Turkish Lira Deposit.”

This week, Turkish Finance Minister Nureddin Nebati announced that a total of 84.05 billion TL has been deposited in this program. He stopped short, however, of explaining whether that money was converted from dollars into TL, or whether depositors only moved their TL into this program to benefit from the promised protection.

Turkey’s monetary authority also announced a new regulation to buttress the country’s fast-dwindling reserves by ordering exporters to sell a quarter of their foreign currency reserves to the Central Bank.

Economic analysts argue that this approach flies in the face of conventional wisdom about how an economy is run.

They are now demanding that Erdogan’s ruling party stops experimenting with the country’s economy and starts fighting inflation by boosting interest rates. They warn that Turkey is edging toward chronic high inflation that will undercut people’s ability to cope with price hikes and create all sorts of trouble.

Official data reveals that Turkey’s annual inflation rate has hit its highest level since 2002, when the ruling Justice and Development Party came to power. The party’s meteoric rise had represented people’s rejection of politicians creating economic crisis after crisis.

Economists also point to Turkey’s place in Corruption Perception Index which is worsening each year.

If Erdogan prioritizes economic honesty, many wonder why people then face the threat of imprisonment if they speak out about corruption.

When the dollar inexplicably dived overnight to 11.09 on 21 December – the day after Erdogan’s announcement – Turks wondered who was benefiting, as monetary transactions for ordinary citizens, including online banking, came to an abrupt halt.

A ‘troublesome’ fight with the economy and institutions

Refet Gurkaynak, a prominent economics lecturer at Ankara’s Bilkent University, tweeted pointedly in reaction to Erdogan’s statement. “It was not called an interest rate hike, but it’s an epic rate hike,” he wrote. “If the Central Bank continues to give money with 14 percent, this will not work either. They have entered into a fight with the basics of economy and have put the whole country at risk.”

“This whole approach toward the interest rate is troublesome,” said Neslihan Tombul, a lecturer at Koc University in Istanbul. “A country like ours that is dependent on foreign credits, exports, and so on, should not be fixated on interest rates. This casts a shadow over the Central Bank’s independence. It depreciates its institutional norms.”

Yet Erdogan keeps firing Central Bank governors who do not agree with his interest rate cuts. Replacing Governor Naci Agbal with Sahap Kavcioglu was the third such move in less than two years.

Kavcıoğlu said then that the interest of the Turkish lira would be higher than inflation and assured that there would be a real positive return on Turkish lira deposits.

The right-wing IYI party, whose support in the polls is growing, accused Erdogan of “bankrupting” the country.

The party’s Vice President of Banking and Finance Can Pamir notes that while Turkey’s inflation soared from 16 percent to 21 percent within the last six months, the Central Bank decreased its interest rate from 19 percent to 15 percent within the last three months – creating a significant negative real interest for the Turkish lira.

“This left Turkish lira holders at the risk of not being able to preserve their wealth against inflation,” Pamir warned.

“Hence locals who wished to protect their savings from inflation began converting their liras to US dollars at an intensifying acceleration within the last two months and the foreign currency denominated deposits reached a life-time high of 65 percent. This increased the demand for foreign currency coming from local residents and hiked the USD/TRY exchange rate,” he continued.

“Consequently, the hike in the USD/TRY rate further fueled inflation as Turkey’s economy is highly dependent on foreign currency denominated costs –  like oil and energy.”

So this chain reaction created an ossification and perhaps a vicious cycle in the dollarization and currency rate increases, as people do not accept a return under inflation and use foreign currency as a shield,” explained Pamir.

Emotional rhetoric versus concrete action

On 22 December, Erdogan spoke as though he had fixed the currency problem:

“I am calling out to incompetent politicians from here. I am calling to enthusiasts disguised as journalists. I am calling to coup plotters. I am calling to those who are after making money without putting in effort,” he said. “You will not be able to waste Turkey’s gains. You will not be able to bring Turkey back to its bad old days. You will not exploit the sweat of this nation. You will not be able to prevent Turkey from reaching its 2023 targets. You will either accept the will of the nation, win together with the nation, or lose. The Turkish nation will win, and you will lose.”

Win or lose, the Turkish lira was at 8.88 against the dollar on 1 October. The country’s industrialists are having difficulty keeping up with this unstable market. And even though Erdogan may present this sharp decline as a success story, the TL against the dollar is at 11.63 as of 6 January. Moreover, the Turkish Central Bank’s net foreign exchange reserves has shrunk by 9 billion of which 8 billion is estimated to be sold to stem a currency crash.

“The high fluctuation in the currency rates makes the cost and revenue calculation almost impossible for any business – whether exporter or not,” said Pamir. “So businesses are unsure of their costs and revenues, are stopping new sales, contracts or deals, which is bringing many of the industries to a halt.”

“Roughly only the 25 percent of Turkish companies are exporters,” Pamir added. “The rest are either importing or producing and selling domestically. Those companies cannot be converted to exporters overnight and there is no way to achieve the ‘desired results’ by ignoring 75 percent of the economy.”

Erdogan seems to be making two contradictory arguments. On one hand, he argues that economies around the world are suffering as well, and that Turkey is being targeted before its centennial.

On Twitter, Erdogan advisor Ayhan Ogan wrote: “Generally accepted rules of economics and political science regard the west as the center while considering the rest of the world as the other. It is based on imperial goals and the paradigm of exploitation. We tore it up; we are making history with the national economy and national policy. We are building a new world.”

Hasan Ünal, a professor of international relations in Maltepe University, Istanbul, objects to this approach at its essence.

“Just as the present government made a mess of the country’s foreign policy, it’s now playing with its finances in a similar way,” he said. “Wherever there’s inflation, central banks automatically raise interest rates to curb it. Turkey stands out as the primary example of doing the opposite, and we are going to see where this experiment with the economy and finances will get the country.”

Whether or not it is a ‘new world,’ scientifically proven means and ways should guide financial policy.

“The correlation between the rule of law, political governance and the economy is well demonstrated by the current crisis,” says Bahadir Kaleagasi, president of the Paris Bhosphorus Institute.

“Turkey has lost its macroeconomic lure not because of a deep public debt or chronic budget crisis, but because of its institutions. There is obviously urgent need for a constitutional reform, which will guarantee separation of powers, impartiality and independence of the judiciary, individual freedoms, as well as the independence of the Central Bank.”

This whole economic mess may not be the end of Erdogan era as long as Turkey’s main opposition continues to underperform.

Ozer Sencar, chairman of Metropoll, a strategic and social research firm, says in their last public survey 71.9 percent of people said their economic status has gotten worse and that 38.8 percent of them had cast their votes for Erdogan’s ruling party.

Only 6 percent of the people believed their standard of living is getting better. The gap is huge.

In addition, Sencar said, their research found 79.3 percent of the people believed that the economy is badly managed, demonstrating wide consensus over this issue.

The key thing, Sencar noted, is that Erdogan’s base does not blame him for this shortsightedness, and they believe only Erdogan can pull them out of this mess.

If and when there is an election, opposition parties must convince voters that they can lead the country into a better future.

People have been living for a long time with calamity and chaos, but they will not make a change unless the opposition can deliver.