Erdoğan’s pre-election spending spree boosts Turkey’s economy

Turkey’s growth accelerated in early 2023 as the ultra-loose economic policies president Recep Tayyip Erdoğan put in place ahead of this month’s pivotal election offset a hit from February’s devastating earthquake. 

Gross domestic product rose 4 per cent in the first quarter of 2023 compared with the same period in 2022, the Turkish Statistical Institute said on Wednesday. This was up from 3.5 per cent in the final three months of 2022 and better than economists’ forecasts.

The strong growth rate highlights how Erdoğan, who was re-elected on Sunday to a new five-year term, has adopted fiscal and monetary policies focused on boosting Turkey’s $900bn economy despite soaring inflation. 

The president embarked on a spending binge ahead of the presidential and parliamentary election, increasing wages of public sector workers and retirees and giving away a free month of gas. Turkey is also spending billions of dollars to reconstruct the southern and eastern areas that were hit hard by February’s earthquake, which killed more than 50,000 people and levelled thousands of buildings.

This fiscal expansion is expected to add fuel to the inflation crisis, and some economists see a risk that consumer price growth begins rising again after falling from last year’s high of more than 85 per cent. JPMorgan this week warned of “upside risks” to its forecast that Turkey’s government budget deficit would hit 4.5 per cent of GDP this year, from 0.9 per cent in 2022.

Monetary policymakers have also sought to boost economic growth after Erdoğan called for reductions in borrowing costs. The central bank’s main interest rate is set at 8.5 per cent following several cuts over the past two years, despite inflation that registered above 40 per cent in April. This means that “real”, or inflation-adjusted interest rates are deeply negative, which has led to rising trade imbalances in Turkey’s economy and weighed on the lira. 

“Monetary policy will remain easy [following Sunday’s election] despite high levels of inflation . . . and the focus on stimulating the economy will trump financial stability,” said Gabriele Foà, portfolio manager at Algebris Investments. “Ongoing imbalances reached extreme levels and are likely to increase further in absence of policy change.”

Turkey’s lira remained under heavy pressure on Wednesday, falling for the eighth day in a row to trade at 20.7 against the US dollar. The currency has fallen about 3.4 per cent since the end of last week.

Still, many economists say the lira is still over-valued given the country’s high inflation and negative real interest rates, something that has irked exporters who say it is making their products and services uncompetitive.

In a sign of the imbalances that have spooked investors, expenditures on imports of goods and services jumped 14.4 per cent in the first quarter of 2023 on a year over year basis, while exports fell 0.3 per cent, Wednesday’s GDP data showed.

The trade gap has been a significant driver of Turkey’s yawning current account deficit, which was nearly $4.5bn in March. The deficit has been largely financed this year with Turkey’s foreign currency reserves, which have fallen by about $24bn in 2023.

Goldman Sachs said this week that it expected Erdogan’s government would have to tighten policy with the election out of the way, something that could damp growth.

“Given Turkey’s declining reserves with a current account deficit that reached over 6 per cent of gross domestic product in the first quarter and the consequent pressures on the lira, we expect policy to tighten in the second half leading to a slowdown in growth,” the US bank said.