Economic Alarm for Turkey After European Parliament Resolution

Following the events of the attempted coup and the imposition of extraordinary security and political conditions in Turkey, the government has engaged in continuous and arbitrary arrests, dismissals, and the expulsion of over 11,000 employees. Due to the violation of civil and social rights, the disregard for minority rights, the arrest of over 170 journalists, the shutdown of media outlets, and the detention of social activists, particularly representatives of the Kurdish People's Democratic Party, the European Parliament has finally passed a resolution to halt Turkey's EU accession negotiations in response to previous reactions and protests. The recent resolution has once again subjected Turkey's economy to a new, serious, and unexpected shock. With the Turkish lira depreciating by 24% against the dollar and euro over the past few months, Prime Minister Binali Yildirim previously stated on November 19, 2016, that: "Turkey has faced many problems over the past year. Of course, there are some global issues currently that have negatively affected us as well. I recommend not to suddenly pull the brake lever upon observing the current economic conditions, as we will certainly topple in such circumstances." Economic experts and managers of financial institutions in Turkey consider such statements from Prime Minister Binali Yildirim as an official alarm bell. As the lira's value against the dollar and euro has decreased by 24% in recent months, Yildirim reiterated his concerns about the economic situation. Ms. Janssen Basharan Simz, chairwoman of the Turkish Business Association (TUSIAD), clearly warned of the likelihood of a continuous decline in Turkey's currency against foreign currencies during a conference organized by the Turkish Confederation of Innovators and Entrepreneurs (TÜRKONFED) in Izmir, stating: "The available data indicates that economic development has significantly slowed down. The unemployment rate has reached a level not seen before in the country. In the past two weeks, the national currency has experienced a staggering decline against foreign currencies. This has led to increased inflation and negative impacts on long-term interest rates. All of this indicates a crisis and deeply concerns us as industrialists." It is noteworthy that the onset of extraordinary political conditions in the country and the dispute among politicians over constitutional changes and the political administration system have been significant factors in Turkey's economic instability. Additionally, comments from Janet Yellen, the Chair of the U.S. Federal Reserve, regarding interest rate increases have caused the lira's value against the euro and dollar to unexpectedly decline. The dollar's value surpassed 3.40 lira in the week ending November 19, while the euro reached over 3.62. Following the news of the European Parliament's decision to halt Turkey's EU accession negotiations and Austria's arms embargo against Turkey, the lira's value rose above 3.47. It should be noted that Turkey's economy is directly linked to its political system. In clearer terms, Turkey's economy is based on its politics. Any political earthquake leads to severe economic aftershocks, and in the current situation where Turkey faces internal and external problems, it will experience unintended consequences more than ever. Although Prime Minister Binali Yildirim was forced to acknowledge the country's economic crisis during a ceremony at Okan University in Istanbul, attributing the situation to the country's political instability, he urged investors and industrialists not to panic and to continue their investments and production. However, with the European community's definitive stance, it has been clearly stated that the country's economy will suffer losses and negative impacts as a result. These statements come at a time when experts believe that the dollar's rate has been increasing irrationally every day, and such an unexpected increase will negatively affect all economic, production, and financial structures. For every 10% increase in the exchange rate in Turkey, inflation rises by 1.5%. As inflation affects market demand, it will inevitably have negative effects on production levels, leading to economic development facing decline and recession. It is essential to note that Turkey's economy is directly linked to its political system. In clearer terms, Turkey's economy is based on its politics. Any political earthquake leads to severe economic aftershocks, and in the current situation where Turkey faces internal and external problems, it will experience unintended consequences more than ever. Ahmad Boran Tosiāli, an economic analyst, stated in his article in Star News that with the increase in foreign exchange rates, we will witness a decline in production and market recession. This will increase the debts of manufacturing and even service companies, as many industries and even production workshops and the service sector operate on long-term bank loans. Therefore, without a sales market and consumers for their products, they will face suspension in debt repayments, which will gradually impact the bankruptcy or closure of industrial and manufacturing entities. According to data published by the Central Bank of the Republic of Turkey, the foreign currency deficit in August of this year was $210 billion and 418 million. However, in the past two months, this amount has risen to $310 billion and 938 million. Meanwhile, the Central Bank's reserves amount to $100 billion and 418 million. Given the current situation, if the exchange rate continues to rise daily, companies indebted to banks will incur unintended losses while using foreign loans, reducing their cash and inventory potential. The increase in exchange rates will also adversely affect raw materials, raising the production costs of manufactured products. Therefore, if the government cannot control the rise in currency, severe inflation should be expected in Turkey. It is worth mentioning that Turkey's manufacturing industries are largely based on assembly or reliant on imported raw materials or custom production. If the exchange rate increases in the coming days, a significant portion of the manufacturing industries in household appliances, audio-visual equipment, computers, and even automobiles will face recession. For instance, the chain stores Teknosa, affiliated with the large Sabancı Group, have closed 76 of their stores across the country in the past two months, announcing that if the current economic conditions persist, the number of stores to be closed by the end of the year could reach 300. Meanwhile, the representatives of companies like LG, Alarko, and Osash Holding have reported negative impacts from the current economic situation, as these companies, whose investments are based on foreign currency, have experienced a revenue decline of over 2.26% compared to the same period last year. It is evident that the depreciation of the lira against foreign currencies will alter national income accounts. If we optimistically assume that the lira's value does not continue to decline, and that Turkey's economic growth remains at 3.2%, the gross national income per capita will be $9,085 per year. This means that in the current situation, over the past two months, people's income has decreased by $158 per month. It is no surprise that Kemal Kılıçdaroğlu, the leader of the Republican People's Party, reacted to the EU's decision by stating: "The Republic of Turkey has consistently oriented itself toward modern Europe and its civilization since its establishment. We are a nation that has unconditionally defended the principles of secularism, democracy, and the supremacy of social rights. A single individual or the words spoken by that individual should not lead the European community to sanction 80 million people in the country. This behavior punishes the nation." It is noteworthy that the government had considered the dollar's value to be reasonably increased and gradually set at 2.95 between 2016 and 2019. However, in just the second half of 2016, the dollar rate has exceeded 3.47. Such conditions will cause Turkey's economy to become $12 billion poorer.