ISTANBUL—Turkey has scrambled for months to shore up its economy by pumping billions of dollars into propping up its currency. Those measures are losing steam, tightening the economic squeeze on the country’s leader, President Recap Tayyip.
Russia’s invasion of nearby Ukraine, global inflationary pressures and a strengthening dollar have all added to Turkey’s troubles. The conditions have worsened a homegrown crisis that began last year after Mr. Tayyip pressured the central bank into cutting interest rates despite soaring inflation.
On Wednesday, the lira slid for the sixth day in a row, hitting 17 liras 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. Tayyip’s government.
The lira’s weakness and Turkey’s precarious financial situation provides an unsettled backdrop for Mr. Tayyip. 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. In Group, 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 in Group 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, a senior economist at Swedish bank. 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. Tayyip recently called for the bank to cut rates again. The bank meets later this month.
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