How can Turkey tackle its financial crisis?

In typical fashion, US President Donald Trump made a hasty and surprising decision this month by imposing sanctions on two Turkish ministers. 

The move - based on Trump’s belief that the two ministers were responsible for the detention of US pastor Andrew Brunson, who faces terrorism-related charges in Turkey - has caused the Turkish lira to fall sharply against the dollar. 

In a bid to contain the crisis, Ankara dispatched a delegation headed by the deputy Turkish foreign minister to Washington, but negotiations were fruitless. Making matters worse, Trump vowed to double steel and aluminum tariffs on Turkey, pushing the lira down even further. Since last week, the lira has lost a quarter of its value.

Global repercussions

Turkey has close financial ties with the European Union and is considered to be a rising economic power. Exacerbation of its economic crisis will not only affect Turkey, but also reverberate globally; effects are already visible on European stock markets and the value of the euro.

It is not yet clear whether statements in support of Turkey by European leaders such as German Chancellor Angela Merkel, along with measures undertaken by Turkey’s central bank, will stop the lira’s hemorrhage. What is certain is that the Turkish economic crisis is multifaceted, and on the US side, a resolution is not likely anytime soon. 

As Washington has rarely shown sufficient consideration for Turkish national interests, their bilateral alliance is far from stable

The lira’s value has been dropping since even before Turkey’s 2016 failed coup attempt, fuelled by a number of factors, including the sizeable amount of private-sector borrowing since the 2008 economic crisis and increased public spending in recent years. In June, Turkey’s inflation rate exceeded 15 percent, marking a 14-year high. The US-Turkey crisis has only worsened the situation.

While this crisis is ostensibly over the Brunson affair and Trump’s desire to appease his Christian fundamentalist base, this is actually just one of several files involved in the escalating bilateral dispute - and perhaps not even the most important.

Broader US-Turkey conflict

Turkey views US sponsorship of the armed fighters of the Kurdish Democratic Union Party (PYD) in Syria as a major threat to Turkish national security. Meanwhile, the US has been trying, with no success so far, to stop Turkey from acquiring the Russian S-400 missile defence system. Then came Turkey’s announcement that it would not abide by US sanctions against Iran. 

While the US-Turkey deal over Manbij was a positive development in bilateral relations, it does not erase the broader conflict between Ankara and Washington in Syria. 

Despite the deep-rooted ties between Turkey and the US, dating back to even before Turkey joined NATO in 1952, relations between the two countries have been marked by a series of crises over the past seven decades. In 1964, there was US President Lyndon Johnson’s letter warning Turkey over its approach to the Cyprus question. A decade later, the US stopped arms exports to Turkey amid the Cyprus military intervention. 

More recently, the Turkish parliament voted against allowing the US to use Turkish territories in the 2003 Iraq invasion. The Bush administration consequently pursued a policy that excluded Turkey from Iraqi affairs. 

As Washington has rarely shown sufficient consideration for Turkish national interests, their bilateral alliance is far from stable. Even if Ankara and Washington find a way out of the Brunson entanglement, other complex disagreements will continue to haunt relations. But this does not necessarily herald a total rupture: The two countries still need each other.

Strong foundations

How, then, can Turkey confront the challenges posed by the current economic crisis? 

The foundations of the Turkish economy remain strong and resilient. State debt compared to GDP, at 28 percent, is still much lower than the debt indices of most European countries. A key problem lies in private-sector debt, which could bring down some Turkish firms. 

On the other hand, Turkey has financial reserves in excess of $120bn. And taking into consideration the positive impacts of the decline in the value of the lira on manufacturing and services, one may expect the Turkish economy to attract a bigger tide of tourists and a rise in exports. 

None of this, however, will have a significant impact without other swift fiscal measures, including reducing government spending, restricting inflation and sacrificing high growth rates for several years. Ankara also needs to figure out how to protect itself from the turbulent shifts in its relationship with the US. 

- Basheer Nafi is a historian of Islam and the Middle East.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Eye.

Photo: A teller holds Turkish lira banknotes at a currency exchange office in Istanbul on 13 August 2018 (AFP)