Turkey (Turkiye) is the economics version of a slow motion car crash

by Shaun Richards

Today has brought news on a situation we have been following for some time. In terms of economics it is an example of how a currency collapse causes a surge in inflation as first traded goods rise in price and then it spreads to other goods and services. So there is an initial impact as commodities rise in price and then a lagged one as past contracts end and areas that use commodities have to raise prices as well. Then you get this.

Consumer price index (CPI) increased by 78.62% annually and 4.95% monthly

A rise in general index was realized in CPI (2003=100) on the previous month by 4.95%, on December of the previous year by 42.35%, on same month of the previous year by 78.62% and on the twelve months moving averages basis by 44.54% in June 2022. ( Turkey Statistics )

Even for these times such numbers have the power to shock and they do fit the pattern I have described. The numbers started their real lift-off last November when the annual inflation rate was around 20%. So the Turkish population already thought they were suffering from high in inflation only for things to go all Bachman Turner Overdrive.

You ain’t seen nothin’ yet
B-b-b-baby, you just ain’t seen n-n-n-nothin’ yet
Here’s something, here’s something you’re never gonna fff-forget, baby
You know, you know, you know, you just ain’t seen nothin’ yet

If we look at the breakdown we see that sadly it is the most vital areas ( central bankers call them non-core) which have inflated the most.

The lowest annual increase was 23.74% in communication. Clothing and footwear with 26.99%, education with 27.76% and health with 39.34%, were the other main groups where low annual increases realized. On the other hand, transportation with 123.37%, food and non-alcoholic beverages with 93.93% and furnishings and household equipment with 81.14% were the main groups where high annual increases realized.

Having reviewed the official data it is now time to point out that there are reasonable grounds for thinking it is too low and by quite a bit.

ENAGrup Consumer Price Index (E-CPI) increased by 8.31% in June, 2022 E-CPI increased by 175.55% in the last 12 months.

That is one version and here is an alternative.

Istanbul Chamber of Commerce (ITO) announced Istanbul inflation for the month of June. Accordingly, while inflation in Istanbul increased by 4.03 percent on a monthly basis, it rose to 94.2 percent on an annual basis, reaching the highest level in 24 years. ( T24)

So we can move on with the view that inflation in Turkey is near 100%.

Turkish Lira

One way of looking at developments is provided by Can Okar.

Did you know that 38 people in AKP’s Turkey ended up in court for saying the lira would hit 10 against the dollar? They were charged with market manipulation. By the time the case got to trial, it was 15 Turkish lira to the dollar. The court had to let them go.

Another is that as CNBC reported on the 27th of June there was a form of capital controls applied by Turkey.

DUBAI, United Arab Emirates — Turkey’s currency, the lira, enjoyed a much-welcomed boost on Monday and the preceding Friday after the country’s banking regulator announced a ban on lira loans to companies holding what it deemed to be too much foreign currency.

By Monday morning in Istanbul, the lira had notched a roughly 8% gain in two days, trading at 16.01 to the greenback, up from Thursday’s close of 17.35.

Another way of responding to the present situation would be to raise interest-rates but of course that has been blocked by President Erdogan who made the CBRT reduce interest-rates as inflation surged leaving us here.

The Monetary Policy Committee (MPC) has decided to keep the policy rate (one-week repo auction rate) constant at 14 percent.

It is hard not to have a wry smile as we note this from the release.

The CBRT will continue to use all available instruments decisively within the framework of liraization strategy until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved in pursuit of the primary objective of price stability.

So depending on which inflation measure you trust they are somewhere between 75% and 170% above target.

Balance of Payments

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This is a push me pull me type of situation as we note the change in terms of trade via the Lira fall but also the rise in costs (inflation). Plus there are the lags in the ability of an economy to respond to a change in the terms of trade which in economy theory is called the J-Curve. How is it going?

According to the provisional data, produced with the cooperation of the Turkish Statistical Institute and the Ministry of Trade, in May 2022; exports were 18 billion 984 million dollars with a 15.3% increase and imports were 29 billion 588 million dollars with a 43.5% increase compared with May 2021.

In fact that has been the overall pattern for the year so far.

In January-May 2022 period, exports were 102 billion 469 million dollars with a 20.4% increase and imports were 145 billion 675 million dollars with a 40.8% increase compared with January-May 2021.

It is always dangerous to put too much emphasis on one month’s trade figures but if anything they show an even weaker picture as export growth is slower and import growth faster.

A lot of the problem here is that Turkey imports large amounts of energy.

Foreign trade deficit, excluding energy products and non-monetary gold, was 3 billion 750 million dollars in May 2022.

Also the official solution is going to be a problem as costs rise.

In May 2022, according to economic activities, the ratios of manufacturing industries products, agriculture, forestry and fishing, mining and quarrying in total exports were 94.7%, 2.9%, 1.9%, respectively.

Economic confidence

After the above you will not be surprised to read this.

Economic confidence in Turkey declined to the lowest level in 13 months after inflation surged and the lira slid against major currencies.

Confidence worsened to 93.6 points this month from 96.7 points in May, the Turkish Statistical Institute said on Wednesday. Any reading below 100 points reflects pessimism about the outlook. ( Ahval)

Nor that this pulled the numbers lower.

A fall in consumer confidence during the month had the biggest impact on overall sentiment, the figures showed. Confidence among consumers worsened to 63.4 points in June from 67.6 points in May.


This is an example of a control economy and President Erdogan is becoming an increasingly extreme version of this. To some extent he can get away with it inside Turkey but the problem is that Turkey needs goods and services from other countries. Thus he has been unable to stop the Lira declining to its present level of 16.8 versus the US Dollar. Whilst this is not its worse level ( 18.3) the problem is that the big picture is of a fall of 93% over the past year. This begets the inflation issue and the cost of living crisis.

Another way of looking at it is to note that the ten-year yield is at 19.4% is much higher than the official 14% rate making it clear that investors are not willing to believe in it. This has a particular edge because around the turn of the year Turkey started to offer savings products with protection against Lira falls which means that if it falls further the taxpayer is on the hook. Should we approach such levels we can expect panic to take over.

Next let me bring in an old fashioned measure which was called the Misery Index.

As the unemployment rate estimated 11.3% with 0.1 percentage point increase compared to the previous month; it was estimated 9.7% for men and 14.5% for women.

If we take the official figures it is 90% in Turkey



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