How the Turkish lira entered free fall under President Erdogan : The Indicator from Planet Money Turkey's strong-arm President Erdogan is at war with interest rates, which he's called the mother and father of all evil. But inflation is out of control and the Turkish lira keeps losing value. How did Turkey get here, and what's the plan to turn things around?For sponsor-free episodes of The Indicator from Planet Money, subscribe to Planet Money+ via Apple Podcasts or at


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And I'm Wailin Wong. Here in the U.S., we've been watching the Federal Reserve raise interest rates to bring down inflation. Every month for the last year or so, it's been this wonky guessing game of, like, is the Fed going to bump rates from 4.25% to 4.5%, 4.5 to 4.75?

MA: Right. It's these careful incremental increases. And if you think back to this time last year, inflation in the U.S. was running at 9%. Today, it's below 5%.

WONG: So inflation has cooled off. And basically, this scenario is what any traditional economics textbook would say about how monetary policy gets done. When inflation gets hot, a country's central bank cools it off by raising interest rates.

MA: But halfway around the world, in Turkey, a completely different situation has been playing out. Inflation is around 40%. Interest rates are at 8.5%, which is way higher than what we have in the U.S., but still significantly below what economists say is needed to bring down prices.

WONG: What makes Turkey unique is that the country's central bank hasn't been hiking interest rates; it's cut them.

MA: And the person behind this highly unconventional economic policy is none other than the president, Recep Tayyip Erdogan, who was just reelected to a third term. So during Erdogan's tenure, not only has inflation shot up, but the Turkish lira has also sunk to record lows against the U.S. dollar.

WONG: Today on the show, we look at how the economic turmoil unfolding in Turkey illustrates what can happen when a powerful politician gets to dictate monetary policy.

Recep Tayyip Erdogan has been a dominant force in Turkish politics for 20 years - first as prime minister, then as president. And back in 2018, he started asserting more control over economic policy. That meant putting some pretty unusual ideas into practice. Selva Bahar Baziki is an economist at Bloomberg Economics, based in Ankara, Turkey's capital.

SELVA BAHAR BAZIKI: The country has been following a framework that is shaped around the president's view that higher interest rates actually push up inflation.

MA: High interest rates pushing up inflation - I mean, this is the total opposite of what mainstream economists preach. The conventional view is that higher interest rates bring inflation down, not up. And this is because raising the cost of borrowing across the economy dampens demand and cools down inflation.

WONG: But Erdogan hates interest rates. He once called them the mother and father of all evil.

MA: Wow. OK. Why not throw in the uncle and the aunt?

WONG: Yeah, just the whole extended family.

MA: Yeah.

WONG: Well, contrary to orthodox economics, Erdogan really believes that raising rates makes inflation worse, and he's not an economist. But Selva says the president's rationale is that when businesses face higher borrowing costs, they have to raise their prices in response.

BAZIKI: So if we want to get ahead of inflation, then taking down the borrowing costs would mean lower production costs and therefore lower prices for the final good.

WONG: Selva says Erdogan didn't just believe that low rates would keep prices low. He also thought that they would boost investment in Turkish exports.

BAZIKI: Unfortunately, we've just seen the opposite taking place.

MA: Low rates and cheap credit do stimulate economic activity. But Selva says Erdogan did not consider how low interest rates would also affect demand by motivating people to buy more stuff. And that, among other things, pushed prices higher. The country saw inflation climbing into the low double digits.

WONG: So the central bank responded in the traditional way, by raising interest rates. But then, in 2018, Erdogan started muscling in. He said the central bank would have to answer to him.

MA: And, of course, interest rates were too high for Erdogan's liking, so he fired the central bank governor at the time and then two more after that. Then, under pressure from Erdogan, the central bank started cutting rates - all the way from 24% to below 9%.

WONG: The president's stance on economic policy and central bank independence spooked foreign investors, and they left. They no longer wanted to hold Turkish stocks and bonds or the local currency. So the lira, which had already been weakening for years, started falling to new lows against the U.S. dollar. And inflation continued to rage.

MA: Essentials like rent, food and fuel have become unaffordable for a lot of people. Selva says for those who are able to buy, they're front-loading their purchases. They don't want to wait, for instance, to buy a new cellphone because they expect prices to go even higher in the future. She sees these trends reflected in the numbers for household spending and credit card balances.

BAZIKI: A lot of the groceries and that kind of, like, day-to-day expenses are usually paid with credit cards. And the balance of that has been growing at a really fast pace.

MA: The high inflation has also eaten away at people's incomes and savings. And so Selva says households look for ways to preserve their savings.

BAZIKI: And in Turkey, this has traditionally been ditching the lira in favor of foreign currency or gold savings. Now, it's quite common to have a bank account that you can just open, even on an app, that carries money in a foreign currency.

WONG: Foreign currencies like U.S. dollars, euros and the British pound. Saving money and gold, including in the form of jewelry and coins, is also popular - basically anything but lira. And this aversion to the local currency means it keeps losing value.

MA: Now, the government has stepped in to try and stop the lira's depreciation. But because Erdogan doesn't want higher interest rates, it had to attempt other ways.

WONG: One measure it's tried is having the central bank buy up the local currency in foreign exchange markets, basically trying to replace demand for the lira that's disappeared. And according to Selva's estimates, the central bank has spent over $170 billion on this effort since the end of 2021.

MA: But of course, here is the problem - a central bank can't single-handedly prop up demand for a currency forever. And in Turkey, the bank has burned through its foreign currency reserves.

WONG: Meanwhile, the government hasn't persuaded those skittish foreign investors that they should come back to Turkey. Sebnem Kalemli-Ozcan is an economist at the University of Maryland.

SEBNEM KALEMLI-OZCAN: The problem - why the foreign investors - you know, dumping your lira is because you have no credibility because you are not providing any sense or any credibility to foreign investors in terms of your posts. That is the root cause.

MA: There's another Band-Aid the government has tried putting on the lira depreciation problem. In late 2021, it introduced special lira savings accounts. These accounts would lock up people's money for a period of months, and the government guaranteed a certain rate of return.

WONG: Basically, they told savers, even if the lira loses value during this time, we will make you whole at the end of it. The idea was to encourage both individuals and businesses to save their money in lira instead of in dollars or in gold.

MA: People did convert their money into these special lira savings accounts, but because the lira kept dropping in value against the dollar, the government has had to fork over billions of dollars to make depositors whole. And if that keeps going, the government could be in deep financial doo-doo (ph).

WONG: When Sebnem looks at the central bank burning through reserves to buy the lira and the government burning through its own resources to compensate depositors, she sees a patchwork of policies that will ultimately fail.

KALEMLI-OZCAN: Imagine, like, you are in a boat. Your boat keeps getting water and you are trying to patch the holes. But, you know, you will sink at the end, you know? So unless you take the boat to the factory and redo the entire bottom, you can't just patch these holes, right?

MA: Sebnem says that is basically what the Turkish government has been doing so far, is just the macroeconomic equivalent of patching holes in the boat. And Sebnem says if it really wants to stop the boat from sinking, it needs to do what it has been avoiding doing all along, which is letting the central bank raise interest rates. If it does that, it would help tame inflation and might even encourage people, including foreign investors, to start putting their money back in the lira. And all of this would help stabilize a pretty important player in the global economy.

WONG: Over the weekend, Erdogan announced his new cabinet, including the person who will be in charge of the economy. This new treasury and finance minister, Mehmet Simsek, is an economist who's worked on Wall Street. And on Sunday, he said the country has to return to a rational basis for its economic policy.

MA: We'll see if Erdogan agrees. The central bank does appear to be making changes. It's stepped back from propping up the lira, which, on Wednesday, hit another record low.


WONG: This show was produced by Brittany Cronin with engineering by Katherine Silva. It was fact-checked by Sierra Juarez. Viet Le is our senior producer, and Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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