The lira has been free falling, pushing up prices for consumers, and threatening a bigger economic crisis. The emergency interest rate hike which was instituted at 15.5% which is a 3% increase from 13.5%. The previous plan of Erdogan to keep interest rates lower to aid younger households and people entering the workforce may be on the back burner as the interest rate is expected to hike to 19.5% by the end of June. Though inflation is still only sitting at 11% the sudden plunge in the Lira's value has caused prices to continue increasing drastically. One positive aspect of this is that president Erdogan is seeming to back down from his threat to interfere with monetary policy as it caused the investors to flee. Turkey has 5% of their GDP financed by foreign investors on short-term loans which means that an economic disaster could be underway if Turkey shakes the confidence of there foreign investors. There is also fear of a lowering of "safety-net" policies and that "make-work" project will decrease as Erdogan tried to slow inflation.
The Turkish government has decided to build a new airport which will lead up to a five percent increase in GDP and will increase employment. This will be done as part of a PPP program (Public-Private Partnership), so the initial cost to the Turkish people is zero as all costs are assumed by private investors. The Turkish government expects that this new airport will have 200 million people use and pass through it every year once it is fully constructed; this will lead to higher GDP not only from the people who will be making purchases within the airport, but also the new employees. The Turkish government is responsible to pay a concession fee for the benefit of this project, and after 25 years the airport will be fully owned by the Turkish government. The current estimate for the employment increase will be roughly 200,000 people who will be constructing and working within this airport. They will also increase employment by constructing a high-speed rail between the airport and the city centre. This project should help Turkey's economy through the current period of stagflation will be hard to escape.
Turkey's central bank has raised interest rates to 16.5% from 13.5% to try to halt inflation and attract investors. Erdogan has stated that he wants to lower interest rates to lower inflation; this is a fringe economic view that has never worked in a fully developed economy which is scaring investors away from Turkey. There is also fear that Turkey is following Argentina into a massive inflationary period causing currency devaluation. This current interest rate hike is theorized to not be enough to stop the currency devaluation and rapid inflation. It is possible that Turkey may also fix this by spending most or all of their foreign currency reserves to help fight the Lira's plummeting value. Economists are unsure if Turkey will be like Thailand in the late 90's (unable to defend its currency), but they are hopeful that Turkey will be able to stop the depreciation.
As investors worry about the independence of the central bank they also have to worry about the lack of return on investment. Currently, the inflation rate is higher than the interest rate meaning those offering loans will theoretically be losing purchasing power. The loss in purchasing power will cause the supply of loanable funds to decrease. The decrease in the supply will raise real interest rates however very few investors want to take out loans while interest rates are high. The dollar has also appreciated %18 percent this year compared to the Lira which means that though Turkey has cheaper good they also have a currency which is still not in demand because of the lack of consumer confidence. Turkey will need to get out of stagflation and hopefully do this without decreasing economic growth.
The Turkish Lira has been falling compared to the US dollar and many other currencies as inflation within Turkey rises. Turkey's economy faces many concerns, however, one of its largest is its current account balance which holds -5% of GDP. The major concern is that Turkey will also have the government meddling with the central bank which is very bad for political freedom. There are also now more foreign investors pulling out of Turkey as the interest rates are not keeping up with inflation. The central bank is also speculated to want to increase the interest rates and take the hit to GDP to stop stagflation however Erdogan does not want this and is campaigning against it. Turkey's economy is in desperate need of finding a way to battle inflation and decrease their imports as their credit rating is a BBB- which is poor for a developed economy.
Stagflation is a very difficult economic time and is very had to get out of once it is entered. This stagflation is caused by cost-push inflation and is similar to the inflation experienced by America in the 1980s; Turkey is following the seemingly incorrect steps which worsened America's recession by increasing interest rates to decrease interest-sensitive spending and investment. This was stated in the article to not be helpful as though it will decrease inflation it will also massively decrease economic growth which is opposite to one of the main pillars of economics. The economy is also fluctuating because of lowered consumer confidence as the Turkish snap elections are set to take place to either consolidate or topple Erdogan, who has been the leader of Turkey for 15 years. Raising the interest rates would likely stifle economic growth and would raise unemployment and lead to an economic downturn.