The Turkish lira sank to an all-time low against the dollar last week. The lira shed 30 per cent of its value in November alone, having lost nearly half its value since the start of the year. Inflation in the country is out of control — reaching over 21 per cent last month.
Traditional economics tells you to raise interest rates to counter inflation. Higher rates make borrowing more expensive and saving more attractive — in theory reducing the amount of spending on goods and services. Indeed the Bank of England, facing inflation at just over 4 per cent, is hinting that it will raise them in the new year.
The Turkish central bank, meanwhile, is busy cutting interest rates — by 4 per cent since the start of September. Turkey’s war on fundamental economics is led by the fundamentalist President Recep Tayyip Erdogan. He has vowed to ‘protect’ Turkey from admittedly high interest rates, now at 15 per cent, saying that ‘God willing, we will not return to this path’.
Erdogan’s animosity towards interest rates comes from financial principles rooted in Islam. He frequently cites Islamic proscriptions and dubs interest the ‘mother and father of all evil’. Interest on loans is treated as riba (usury), itself labelled haram (forbidden). Multiple Quranic verses urge believers ‘not to consume interest’ reserving ‘painful punishments’ for those who do.
The $2.2 trillion global Islamic finance industry claims to follow Islamic scriptures in its economic practices but essentially works on conventional banking principles with ‘sharia-compliant’ loopholes. Take for example ‘Islamic bonds’. These bonds are touted as halal (sharia-permitted) since the financial certificates are issued by organisations that do not invest in products that may use anything deemed un-Islamic, such as alcohol or gambling, in turn ensuring that the interest offered to the investor is not haram. Similarly, since Islamic sharia forbids speculative trading, assets are often just shown on paper, replacing speculation with fabrication.
Erdogan too has rallied for Islamic bonds to finance larger investments in Turkey, urging Muslim-majority countries to combine their economies based on Islamic principles while shunning the ‘interest-based system of the West’.
The Turkish President clearly doesn’t realise that these Islamic economic principles were devised for a 7th century economy. Erdogan may similarly be unaware of how Islamic finance is inherently riskier, not only because it has to adhere to contrasting and restrictive economic principles, but also because they often require state facilitation, which can be difficult to achieve in emerging economies. He appears willing to grind his economy down to oblivion in his quest for an unattainable zero interest rate.
Erdogan’s egotistical assault on Turkish markets has long been criticised by economists, including the three central bank governors he has sacked over the past two years. The current governor might be next out of the revolving door for saying that further rate cuts might not be possible. Meanwhile, the opposition has compared Erdogan's economics to flat-earth theory.
Those bearing the brunt of Erdogan’s economic proclivities are Turkey’s poorest. While the plummeting lira impacts the import-dominated economy as a whole, the worst hit are small businesses and farmers — reliant on increasingly expensive raw materials to produce their goods. Many farmers have already been affected by recent droughts, abandoning their lands and defaulting on their loans. The Agriculture Commission has accused Erdogan of ‘eliminating’ small-scale farming and rendering hundreds of thousands unemployed.
The lines in front of Turkish grocery stores and petrol stations have gradually transformed into protests, with many demanding Erdogan’s resignation. With the 2023 election on the horizon, the Turkish masses are realising that their survival depends on the President changing his mind — or changing their increasingly unhinged President.