Atilla Yesilada: The price of suppressing inflation has always been recession

Our economy has three giant problems, and  a  national priority that we can never give up. The task of Mehmet Şimşek and his team is to turn this square into a circle. What are the 3 big problems? Inflation, current account deficit and budget deficit. What is the priority that we can never give up? GROWTH.

Actually, we have only one problem; And that is Erdogan. If we could explain Economics 101 to him, the problems would be easily solved. What doesn’t he understand?

Everything beautiful in life has a price.

The price of suppressing inflation has always been recession.


That’s why Mehmet Şimşek keeps working hard to turn the square into a circle. Why can’t we grow and reduce inflation to single digits? We’ve done it before. In the first term of the AKP government, Turkey broke records in GDP growth and total input efficiency. The country experienced the fastest disinflation episode of the 21st century in any Developing Nation.

If the “old Erdoğan” were in charge, Ankara could do the same thing again. For example, the IMF will be called for a stand-by loan. As CBRT reserves balloons and the credibility of the economic policy increases, a large amount of hot money will pour into the system. Even Foreign Direct Capital flows may revisit a nation they abandoned a decade ago. These flows suppress exchange rate-induced inflation. The inflation and current account deficit problems are solved by tightening monetary and fiscal policy less.

If a large amount of money is already coming in from abroad, current account deficit financing can be achieved without causing turmoil in the exchange rate. However, simultaneously, growth must take on an export-led structure. In the first term of the AKP government, productivity increased so much that our exports skyrocketed, now they tread water.

If calling on the IMF creates a political or psychological crisis, then Ankara can resort to structural reforms. For example, the tax system is reformed to collect taxes from income, not from VAT and  Special Consumption Tax. Those who earn more pay more, and when the budget deficits are closed, domestic demand and the current account deficit are naturally reduced to a sustainable level.


Alternatively, or better, in tandem the administration can raise the retirement age with pension reform. The number of employees increases. The resources flowing from the budget to the social security system decrease. Since the increase in the number of employees will also expand the supply of goods and services, inflationary effects of domestic demand will cease.

None of these will happen in 2024. Erdoğan wants to use the budget as his personal wallet and reduce inflation. A perfect example of having his cake and eating it.  Example? If Turkey were switch to transparent public tenders, there will be serious savings in the budget. Nowadays, only 25% of state and local government tenders are competitive. But then, there will be no rent to distributed to supporters and relatives. The patronage regime will be seriously injured.

Second example? Erdogan can increase the minimum wage, public employee wages and pensions according to the target inflation mentioned in the MTP, not according to the accumulated inflation. Voi la! Inflation expectations are anchored, and domestic demand and the current account deficit narrow. But then AKP would lose the March local elections.

I explained what could not happen above. Now let’s see what actually happens. CBRT governor Gaye Erkan will strangle consumer credit to change the structure of growth. On the other hand, in order to accelerate exports and ensure supply flexibility, the CBRT will distribute 100 billion TL of low-interest loans to investment-export projects for 3 years to make sure growth is not hurt by lack of credit “to right destinations”.


If Simsek cannot change the economic structure, then domestic demand must be stifled to reduce inflation. Curbing consumer loans is the simplest but an insufficient method. Tighter monetary policy is necessary. OK, but how tight? At the end of the year, the CBRT policy rate will increase to 42.5%. Is  that not  enough? According to Erdal Sağlam, the source with the best news from Ankara, the economic management team sees 45-50% in deposits and slightly above 50% in loan interest as sufficient to cool down domestic demand.

This author humbly thinks economic management team  is overly optimistic. Even the CBRT has now admitted that the engine of inflation is distorted expectations. While all taxes and fees will increase by 58% at the beginning of 2024 as per law, everyone who earns her income from the state or lives on minimum wage will receive an increase of at least 45%, maybe 50%. Therefore,  pegging inflation expectations below 50% is a pipe dream.   Additionally, the longer headline inflation stays high, the stickier expectations become.

A much tighter monetary policy will be required to reduce inflation to the CBRT’s target of 36% by the end of the year. After the local elections, it is inevitable that the policy rate will rise to 50%, at best. Deposit interest will  not fall below 60% (simple, annual). Interest on loans starts around 70%.

If Ministry of Finance could put the brakes on fiscal spending a little, some of the burden  of tight monetary policy will be shared by the budgetary adjustment. But the budget is at least as “sticky” as inflation. Earthquake expenses cannot be postponed. Social security is bankrupt. Now every 2 employees have to feed one retiree. The sustainable ratio is one retiree for a minimum of 3 employees. This means that transfers to the social security system will continue exponentially. Add personal and interest expenses? Payments to myriad  Public Private Partnership schemes?

After Turkey gets through the local elections in 2024, we all will  taste the bitter medicine. If Erdogan manages to submit the constitution to a referendum towards the end of 2024 in order to be re-elected, the bitter medicine will be delayed. We will experience a “Fool’s Paradise” once again, which will last for 3-6 months. But, at the end of that road, there is surgery without anesthesia, not bitter medicine.


Atilla Yesilada


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.