The Turkish government’s monetary expansion policies, used as a quick fix to prevent major economic contractions, have resulted in an extraordinary consumer and corporate debt that poses further dilemmas for Ankara down the road.
Over the past year, the loan volume grew 40% as Ankara facilitated access to credit in a bid to contain the economic downturn caused by the coronavirus pandemic, which hit atop economic turmoil since 2018. The loan bonanza did stimulate the economy, but how lasting that impact will be remains open to question — not to mention its serious side effects that have already forced Ankara to change course.
Governments across the world have used expansionary monetary policies to cushion the economic fallout of the pandemic. Such measures have usually come in tandem with expansionary fiscal policies, including direct cash transfers. In Turkey, the government’s primary response was to facilitate access to credit. The minimal direct assistance has totaled less than 1% of the country’s gross domestic product (GDP), including some 8 billion Turkish liras ($1.1 billion) in so-called “social shield” aid from the central government budget and about 36 billion liras ($4.7 billion) in payments from the Unemployment Insurance Fund.
The government hoped that cheap and abundant credit would relieve cash-strapped consumers, allow companies to keep afloat and roll over debt, and thus contain economic contraction.
Loan expansion had already been underway since 2019 when the ruling Justice and Development Party (AKP) suffered big losses in local elections amid voter frustration with growing economic woes since the currency turmoil in mid-2018. The slump of the lira, which came shortly after Turkey transitioned to an executive presidency system, had forced interest rate hikes that curbed the loan demand. Ignoring the accompanying risks, the government pushed for the lowering of rates to expand the loan volume. This resulted in a relative economic recovery in the last quarter of 2019 and the first two months of 2020.
In March, however, the COVID-19 pandemic reached Turkey, causing the economy to shrink by nearly 10% in the second quarter. The unemployment rate surged to 40%, according to alternative calculation methods deemed more realistic than the official one, which has turned up decreases in the jobless rate during the pandemic. The government moved to reopen the economy in June and pushed for fresh rate cuts to facilitate further credit access. A boom in home and car sales was the most visible outcome of the ensuing borrowing frenzy.
As a result, Turkey’s loan volume stands at nearly 3.7 trillion liras ($487 billion) today, a 40% increase from 2.6 trillion liras at the end of 2019, according to official figures. Consumer prices have risen 12% in the same period, meaning that the surge remains enormous in real terms as…
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