Turkey’s Economic Troubles Intensify as Currency Resumes Slide

On Wednesday, the lira slid for the sixth day in a row, hitting 17 lira a dollar for the first time since last year’s crisis, further eroding the buying power of Turkish consumers and companies. The rising cost of food, medical care, energy and other essentials has pushed millions of Turkish citizens closer to poverty and sapped support for Mr. Erdogan’s government.

The lira’s weakness and Turkey’s precarious financial situation provides an unsettled backdrop for Mr. Erdogan. He has become a key player in the Ukraine war, hosting talks over grain shipments and cease fires, providing Ukraine with drones, and blocking Sweden and Finland from joining NATO.

But at home, he faces his most intense economic challenge since he came to power on the heels of another economic crisis two decades ago. 

Turkey’s inflation in May rose to nearly 75%, the country’s statistics agency said on Friday. The rate is currently the highest of any nation in the G-20 and the sixth highest in the world, behind countries such as Syria, which is still in the midst of a civil war, and Venezuela, a failing state.

Independent economists say the inflation rate is likely far higher. ENAGroup, a project organized by economists and accountants, says Turkey’s true inflation rate is closer to 160%. Turkey’s government has moved to crack down on the ability of independent economists to publish inflation figures and make comments officials view as harmful to Turkey’s currency. Last year, the government statistics agency sued ENAGroup over its inflation calculations. 

The Turkish president has called for lower interest rates believing that they will help expand the economy and eventually calm inflation, contrary to the teachings of mainstream economics. He forced the central bank to cut rates four consecutive times in late 2021.

That led the lira to collapse. Turkey stabilized the currency for a time through a combination of makeshift measures.  Prime among them was a program at the end of last year that promised to pay back the difference in the currency’s fall against the dollar if residents kept their savings in lira at the bank.

“These are measures that buy time. These are not measures that solve economic problems,” said Erik Meyersson, a senior economist at Swedish bank Handelsbanken. 

But with inflation soaring, the slide in the lira has picked back up in recent weeks. It has lost more than 20% of its value since the start of the year.

The central bank has tried to lean against the fall by spending the dwindling dollars at its disposal to intervene in currency markets to prop up the lira. Central-bank data reviewed by The Wall Street Journal show that the bank likely sold $24 billion in foreign currency from January to March of this year. 

That has depleted Turkey’s already dwindling coffers. Economists estimate that the central bank has $60 billion more in foreign-currency liabilities than assets, meaning it has net-negative reserves. It has borrowed dollars heavily from Turkey’s commercial banks, raising concerns about a shortage of dollars in the banking system.

The central bank has resisted calls from economists and the business community to raise interest rates as a way to attract money back into the lira. Mr. Erdogan recently called for the bank to cut rates again. The bank meets later this month. 

The recent crisis has unraveled living standards for Turkey’s vast middle class which expanded during the earlier years of Mr. Erdogan’s two decades in power. Mr. Erdogan and his party face an election that is scheduled for next year but could be held early if the government decides, analysts say.

“We watch the money in our pockets lose value from one day to the next. We see the money we earn melt away in value each day,” said Ozan Taner Asma, 24, a personal trainer in Istanbul. “My only dream now, as [for] almost all my friends, is to go and live abroad but I need money for that as well.”

Mr. Erdogan has rejected the outcry from ordinary Turkish people about their shrinking purchasing power.

He said during a speech on May 27, “Some people come up and say  ‘We are hungry.’ Come on, don’t be so unscrupulous. Nobody is hungry!”

Despite the roaring inflation, Turkey’s economy has strengths, with low government debt, consumer faith in the banking sector and industries including manufacturing, agriculture, and tourism that generate foreign currency. 

The government is increasingly leaning on those sectors to generate foreign currency for the central bank. The bank in April raised the percentage of foreign currency revenues that exporters must sell to the central bank to 40%. Economists warn that the rule change could force exporters to move their operations outside of Turkey to keep more of their income. Turkish officials are hoping a strong tourist season will bring in foreign currency. 

“Given the negative level of net reserves, the million-dollar question is how long they can maintain these policies,” said Selva Demiralp a professor of economics at Koc University in Istanbul and a former economist at the Federal Reserve Board.

— Elvan Kivilcim contributed to this article.

Write to Jared Malsin at [email protected] and Caitlin Ostroff at [email protected]