Turkey: Prices Skyrocket, Lira falls, But Economy Holds On

According to Turkish Bureau of Statistics (TÜİK), the annual inflation rate in May reached 39.59 percent. The Turkish lira continues to lose ground in the confrontation with the dollar: the Turkish currency for the first time fell below 23 lira per dollar.

Prices in Turkey continue to rise even after the presidential elections, where Recep Tayyip Erdogan again won in the second round on May 28. In May, the cost of living was about 40% year on year, which is an unthinkable figure for Italy or any other Western economy.

According to the latest analysis of Turkish bureau of statistics, the highest growth in one year (May 2022 – May 2023) was recorded in the catering and hotel business (+70%). Approximately the same growth was registered in Turkish medical care.

Meanwhile, Turkey Independent Inflation Analysis Group (EnaGrup) categorically refuted the government data by publishing its own analysis, according to which the annual inflation rate was not 40% but 109.01%, while in just one month of May, consumer price grew by 7.35%” (+0.04% for TÜİK Bureau).

Inflation is accompanied by the unemployment rate that has fluctuated around 10 percent in recent months.

Nonetheless, the Turkish economy appears to be quite capable of withstanding these blows. After the victory, President Erdogan promised to reconsider Ankara’s economic and financial policies. His unorthodox low interest rate monetary policy and the resulting currency crisis in Turkey pushed inflation to a peak of 85.5% in October 2022.

The Turkish lira exchange rate fell to a new historical low compared to the dollar, whose quotes on the Forex market on June 7, 2023 increased by another 8%, rising to 23.2743 lira per dollar.

Over the past year, the lira has fallen by more than 30 percent. As the Bloomberg agency writes today, “government creditors have temporarily suspended the sale of dollars in order to at least slightly hold the lira.” For Turkish and international analysts, “this may be a signal that the economic and financial team of the new Turkish government is abandoning the criticized policy of costly foreign exchange interventions to support the lira’s exchange rate.”

At the same time, President Recep Tayyip Erdogan’s decision to appoint Mehmet Simsek, a former Merrill Lynch strategist, as finance minister and head of the treasury “raised hopes for a return to a more orthodox economic policy that would reduce government interference in market activities.”

Italian Interests in Turkey: €25 Billion Business

Italy traditionally considers Turkey “one of its strategic partners” in Southeast Europe. According to Italian embassy in Ankara, “trade and economic relations between Italy and Turkey are at an excellent level, as confirmed by the fact that Italy is always among the main partners of the country.” Turkey is Italy’s leading trading partner in the Mediterranean with a stable and balanced trade that presently regularly averages over $20-25 billion per year.

According to data published by ITA-ICE agency in Istanbul, in 2022, Italy’s foreign trade with Turkey increased by 14.8% compared to the previous year, making Italy 5th largest trading partner with a total trade of $26.4 billion. Thus, in the EU, Italy is in second place, behind Germany ($45.2 billion in goods and services) and France. In 2022, Italian exports reached $14.1 billion, an increase of 21.8% compared to 2021, which makes the country 6th among the main suppliers of Turkey, behind Russia, China, Germany, Switzerland, which overtook USA that is in 5th place.

Italy, on the other hand, remains Turkey’s stable 5th buyer behind Germany, Switzerland, the USA, Iraq, and the United Kingdom with $12.3 billion in goods and services, up 7.7% from 2021. After the first half of 2022, when sales and purchases were evenly distributed between the two countries, nearly perfectly balanced, Turkey had a negative balance of $1.7 billion as of December 31, 2022 (an increase compared to 2021).

Italian exports in 2022 were driven by the sale of fuels and petroleum products (+109.4% compared to the same period of the previous year), precious metals and stones (+191.7%), and, to a lesser extent, our exports of iron and steel (+47.2%). Only the export of pharmaceutical products decreased (-9.7%). Our main exports in the concerned period remain traditional “machinery and mechanical equipment” that for the first time exceeded the $3 billion mark. The number one item of Italian imports from Turkey remains “cars, tractors, and spare parts” worth more than 2 billion euros.