Turkey’s inflation crisis continues a year after economic recovery

Half an hour before noon on a sunny morning in Istanbul, dozens of people queued at a restaurant bearing the logo of a heart floating in a bowl.

A blackboard announced the menu: tomato soup and green bean and meat stew, with a pastry. He kent lokantasıa kind of restaurant subsidized by the city, was packed moments after opening its doors at 12:00 p.m.

“This place is not just for the unemployed or the homeless. . . elsewhere I would have to pay 200 TL ($6.25) for a meal that costs 40 TL here,” said Hasan, a 53-year-old delivery driver who eats there every day.

Hüseyin, a 67-year-old retiree, said he would have difficulties if it were not for the kent lokantası: “I can’t afford to buy fresh fruit or meat. “The prices change every time I go to the market,” he said.

14 Istanbul kent lokantası Each serves around 1,000 meals at a price of 40 TL each day, said Erdal Celal Aksoy, deputy general secretary of the city. The municipality subsidizes the cost of food by two-thirds, he said. The restaurants were introduced in 2022 amid a long-running inflation crisis, when inflation peaked above 85 percent. But two years later, demand is still so strong that Istanbul plans to open another two dozen stores.

The popularity of kent lokantası underlines how President Recep Tayyip Erdoğan’s government has struggled to control runaway inflation a year after it launched sweeping economic reform.

Turkey’s central bank has raised its main interest rate to 50 percent from 8.5 percent since economic reform, led by Finance Minister Mehmet Şimşek, began last June. The maximum monthly interest rate on credit cards, a popular way of borrowing for cash-strapped consumers, has tripled since last June to 4.25 percent.

The government also raised taxes and said it would not raise the minimum wage again this year, following a 49 percent increase in January. Last week he pledged to cut public spending on everything from foreign cars for the government fleet to the construction of new government buildings.

Erdoğan’s program has received praise from investors. But he has yet to pay dividends for Turks, who face inflation of almost 70 percent, rising borrowing costs and a reduction in stimulus measures that in recent years blunted the impact of rising prices.

“It’s bitter medicine,” said Selva Demiralp, a former U.S. Federal Reserve economist now at Koç University in Istanbul. Pensioners and people with low incomes “are the ones who will pay the most in the fight against inflation,” she added.

Şimşek’s goal is to quell a long-running inflation crisis caused by Erdoğan’s previous policies, which centered on a failed bet that low interest rates would cure rather than cause high inflation.

Erdoğan promised earlier this month that there would be “no turning back” on the new plan, noting that the government would not provide “temporary relief” as it had done in the past, including huge donations ahead of his re-election in May 2023. .

Turkey’s new program is slowly rebuilding confidence among international fund managers, who have invested nearly $10 billion in Turkish stocks and lira-denominated government debt over the past year, central bank data show. S&P Global Ratings and Fitch Ratings have upgraded Turkey’s rating this year, while high rates are cooling credit growth.

However, the situation in grocery stores and shopping centers still does not reflect this improvement. A butcher in the working-class Fatih district of Istanbul sells ground beef for 640 lira per kilo, about double what it cost a year ago. “Our customers have been reduced to a minimum. Those who come buy half a kilo or 250 grams, when before they bought a kilo, just to give their children a little protein,” explains the merchant Ekrem.

Haga Foggo, founder of Deep Poverty Network, a research group, said Turkey was at risk of a “poverty spiral” as the hunger threshold, estimated by unions last month at 17,725 lira a month for a family, of four, it rose above the minimum wage. of approximately 17,000 TL in April. “The working poor. . . “We cannot meet the basic needs of nutrition, housing, health and transportation,” he said.

Line chart showing 12-month inflation expectations in Türkiye

Many consumers remain doubtful that the new economic measures will succeed, having seen the central bank miss its inflation target every year since 2011. Voters rebelled against the prolonged inflation crisis in local elections in March, which gave it to Erdoğan’s ruling Justice and Development party its biggest defeat since its founding two decades ago.

“Inflation expectations are persistent due to the erosion of credibility in recent years. “Financial markets seem to partly believe the disinflation story, but it is more challenging when it comes to expectations of households and small businesses,” said Hakan Kara, a professor at Bilkent University who was previously chief economist at the Turkish central bank. .

Turkey’s central bank said earlier this month it expected the annual inflation rate to fall to 38 percent by the end of the year after peaking at around 75 percent this month. But a central bank study shows that consumers anticipate the rate will hit 80 percent within a year. More than 90 percent of consumers in a separate Koç University survey said now was a good time to buy durable products, a sign they believed prices would continue to rise.

Chart showing inflation forecasts from Türkiye's central bank

Those expectations are a key challenge for the central bank in controlling price growth because they drive demand forward, contributing to the spiral of ever-higher prices, economists say.

Demiralp said that “the current level of tightening is not enough,” both in terms of monetary and fiscal policy, for the central bank to achieve its goal. The central bank’s forecasts in early May suggested the economic growth rate at the end of the year would be about 2.1 percent, much faster than estimates released in February.

“Growth has to slow much further to bring inflation to the desired level,” Kara said, adding: “The main question is whether the authorities will be patient enough to bear the political consequences of this bitter stabilization process.”

Leave a Comment