Two Dates to Watch as Turkey’s Economy Goes into Stagflation Meltdown

Ömer Taşpınar

Vastly exceeding the most pessimistic forecasts, inflation in Turkey hit 25 percent in September, a 15-year high. With inflation sharply rising and growth grinding to a halt, Turkey now is in “stagflation” territory. The simultaneous occurrence of inflation and recession is the worst combination for any nation. It is obvious that Turkey’s economic performance will get much worse before any hope of improvement. In the meantime, those looking for some light at the end of the tunnel should follow rapidly approaching (possible) turning points in Turkey’s relations with the United States.

The unexpectedly high inflation shows that the central bank acted too late in its attempt to maintain price stability – it raised borrowing costs by a massive 6 percentage point last month. Its credibility is at the nadir. This is not surprising since the president, Recep Tayyip Erdogan, continues to do his level best to discredit the institution.

He also blames the US for declaring a trade war against his country. But such anti-American jingoism came back to haunt him earlier this week when he had to cancel plans for Turkey to work with McKinsey & Company, the American consultancy.

Erdogan’s own finance minister, Berat Albayrak, who is also his son-in-law, had announced the agreement with McKinsey last month, in an attempt to entice back foreign investors. Given Erdogan’s reluctance to solicit the support of the International Monetary Fund, the plan to work with McKinsey was an alternative means of sending a message to international markets that Turkey was open for business and safe to invest in. But the plan came under attack by the opposition, who ridiculed Erdogan’s inconsistency in working with a symbol of American capitalism while holding the US responsible for the economic crisis. Over last weekend, then, Erdogan displayed a rare sign of weakness as he U-turned and shelved the agreement with McKinsey.

With its economic health deteriorating, Turkey rightly should seek ways to improve its relations with both the US and the European Union. European nations are the main investors in Turkey and the US holds the key to the IMF, whose support Ankara will eventually need.

So, Erdogan’s visit to Berlin earlier this month was a step in the right direction to end Turkey’s growing isolation in the West. Although the visit produced no tangible economic or political results, the symbolism of being hosted by the most powerful economy in Europe – despite recent tensions in bilateral diplomatic ties – was itself significant for Erdogan. It showed Turkey’s continuing geostrategic relevance. Yet, instead of capitalizing on the feel-good factor from this visit by announcing crucial reforms, Erdogan could not resist the temptation to play to the populist gallery and declare that Turkey would eventually have to decide whether it still wants to pursue EU membership in a national referendum. So much for that, then.

While developments on the European front are not encouraging, there are rapidly approaching dates that could prove critical turning points in relations with Washington. The most important date is October 12, when a Turkish court will decide the fate of American pastor Andrew Brunson. Brunson has spent most of the last two years in prison. He is accused – without evidence – of having connections with Kurdish separatists and the religious network of Fethullah Gulen. The Turkish government believes Gulen was the mastermind of the 2016 failed coup.

Trade sanctions imposed by the Trump administration in August were designed to put pressure for Brunson’s release, and have worsened the meltdown of the Turkish lira. Erdogan used to have good relations with Trump before this debacle and he seems to have badly miscalculated how much importance Trump and his vice president, Mike Pence, attach to the Brunson issue. Washington knows that Erdogan controls the judiciary and that Brunson can easily be put on an airplane and sent back if Erdogan decides so. It is therefore up to Erdogan if he wants to mend fences with Trump.

Another critical date is October 15. That is the deadline for Turkey to establish a demilitarized zone in Idlib in northern Syria, promised in a last-minute agreement with Russia. It is certainly in the US interest to avoid a humanitarian disaster in Idlib, where anti-Assad rebels hold their only remaining enclave. On the other hand, it remains unclear whether Turkey will be able to deliver. In case Ankara fails, the ensuing problems in Turkish-Russian relations would push Turkey toward its traditional Western allies.

As if all these developments were not complicated enough, there is also now the bizarre and potentially tragic disappearance of a dissident Saudi Arabian journalist in the Saudi consulate in Istanbul. Turkish authorities leaked the unofficial result of their investigation that claims that Jamal Khashoggi was assassinated in the legation. The Saudis deny this. For now, Washington is inclined to take the Turkish accusations with a grain of salt for two obvious reasons: tensions in Turkish-Saudi relations due to Ankara’s support of Qatar, and Turkey’s own tainted record when it comes to jailing journalists.

Only time will show if Turkey is right, but for now the country is far from being the gold standard of credibility. Erdogan has only himself to blame for the tarnished brand of his nation, and if the stars don’t align just right, the blame also for the continuing pummeling the economy will endure.

Ömer Taşpınar is a senior fellow at the Brookings Institution and a professor of national-security strategy at the National Defense University in Washington.