Istanbul, Turkey – Turkey’s lira crisis is threatening to put Mehmet Sapci’s 86-year-old pharmaceutical company out of business.
With the onset of the coronavirus pandemic, his firm – Merkez Ilac – was able to leverage its production lines to pump out disinfectants that turned out to be crucial for stopping the spread of COVID-19. But now, he says he and other pharmaceutical manufacturers are seeing their profit margins disappear because the lira’s crash has raised the price of the imported raw materials they need to produce their products.
“Cancer medicines, diabetes medicines, surgical disinfectants – all medicines are being affected, because they are all connected in some way to imports,” Sapci told Al Jazeera. “And because imports are affected by the exchange rate, it’s a real problem for us right now to produce medicine. We risk being left with no medicines for the Turkish public.”
The Turkish lira has lost more than 45 percent of its value against the United States dollar this year. November witnessed an all-out crash, with the Turkish currency losing nearly 30 percent of its value against the dollar.
The currency’s freefall is triggering a cascade of problems for the nation’s factory sector, and industrial leaders are sounding the alarm.
‘It does not work that way’
The lira’s recent troubles were triggered after the country’s central bank cut interest rates to 15 percent on November 18. That rate cut was the third since September and came despite inflation running near 20 percent in October.
Price pressures continue to build. Annual consumer price inflation in Turkey hit 21.31 percent in November, government data showed on Friday. That is the highest level in three years and more than 4 times the central bank’s target rate.
Mainstream economics holds that lower interest rates lead to higher inflation because when money is cheaper to borrow, it loses its value relative to other currencies, and encourages consumers to spend more and businesses to produce more.
But Turkish President Recep Tayyip Erdogan disagrees. He insists that lower interest rates fight inflation. And despite the lira’s crash, he shows no signs of changing his position.
In a two-hour-long televised interview on state television on Tuesday night, Erdogan outlined how his government plans to fight what he called an “economic war of independence” that would pull it out of an interest-based economy. Raising interest rates, Erdogan said, was out of the question, because it would stifle industrial production in Turkey and make it harder to attract long-term foreign investment.
To boost local production, Turkey now plans to provide billions of liras in low-interest loans to small businesses, and opportunities for credits for those who hire new employees.
Reported shortages in consumer goods, Erdogan said, were due to “stockists” – a new term he has coined to refer to hoarders taking advantage of low prices. While in the short term markets may be volatile, Erdogan said the country was on the verge of breaking “the vicious cycle” of an interest-based economy and asked the public to hold on.
But foreign exchange markets, and many economists, disagree with Erdogan’s unorthodox views.
“The assumptions in this new ‘model,’ if we can call it that, are wrong,” said Harun Ozturkler, professor of econometrics at Kırıkkale University.
“They are assuming lowering interest rates would lead to high exchange rates, and the Turkish lira would devalue, depreciate, and then Turkish goods and services will become cheaper in terms of our trade partners’ currency,” he told Al Jazeera, adding that Erdogan is assuming that the subsequent boost to Turkish exports would eventually lead to the lira recovering its value.
“But that’s a strange relationship,” he said. “It does not work that way.”
Turkey’s economy, Ozturkler said, is already heavily dependent on materials from outside the country, which account for some 70 percent of all imports. With a wildly fluctuating Turkish lira exchange rate, producers in the country will slow down production because they can no longer plan costs and profit margins.
Foreign investors, meanwhile, are unlikely to flock to Turkey given the unpredictability of its financial institutions, Ozturkler said. Erdogan has sacked a succession of central bank chiefs in recent years, and on Thursday he replaced the country’s finance minister with a loyalist.
Turkish exports of goods and services were 25.6 percent higher in the third quarter compared to the same period a year ago, the government’s statistics office said this week. But Ozturkler said the boost was likely due to a reset to pre-pandemic levels of demand, and foreign buyers looking to emerging markets like Turkey for scarce supplies.
Erdogan’s insistence on a new low-interest rate economy has drawn sharp rebukes from the opposition in recent weeks. “There are those in the world who take the flat-earth theory seriously and discuss it, but no one takes Erdogan’s ‘flat economy’ thesis seriously,” Meral Aksener, head of the centre-right IYI Party, said on Wednesday.
There are those in the world who take the flat-earth theory seriously and discuss it, but no one takes Erdogan’s ‘flat economy’ thesis seriously.
Even conservative leaders in Turkey have taken issue with Erdogan’s war on interest rates, which the president says is justified by Islamic doctrines forbidding usury.
“In an economy running on interest, you cannot solve the problem by just saying you will lower the central bank interest rates, that from now on I am switching to an interest-free economy,” Temel Karamollaoglu, head of the conservative Saadet Party, told a Turkish news channel on November 18. He likened Erdogan’s economic plan to a doctor ordering an addict to go cold turkey. “I am not a fan of interest, but the whole system runs on it,” he said. “That’s why anyone who doesn’t have savings in foreign currency is paralysed; all industrialists, who need foreign currency, are paralysed.”
Industrialists raise the alarm
The fallout of the lira crash is already raining down on the country’s industrial sector.
Medicines in the country are running low, because they depend on imports that are too expensive to purchase, according to manufacturers and pharmacists.
I am not a fan of interest, but the whole system runs on it.
In a statement last month, the Turkish Pharmacists’ Association warned that supplies of 645 drugs were running dangerously low because the government-mandated price cap had not been adjusted to reflect the lira’s plunging value.
Turkish authorities currently require prices to be set according to an exchange rate that assumes 4.57 lira are equal to one euro ($1.13). But as of Thursday, the exchange rate was hovering around 15.45 lira to 1 euro.
Moreover, an exchange rate reality check is not in the cards until February of next year, when a new pricing scheme is scheduled to be set.
“The significant difference [in exchange rates] is one of the main reasons for the increase in the number of drugs that are not available on the market,” the association said. “The exchange rate difference causes many pharmaceutical companies not to supply drugs to our country, or local pharmaceutical companies producing drugs whose raw materials come from abroad cannot produce drugs.”
In response, Turkish authorities launched an investigation into pharmacies, accusing them of hoarding medicines, a charge the Turkish Pharmacists’ Association has denied.
The country’s petrochemical industry, which is also dependent on imported raw materials, has said it risks significant disruptions to its supply chain because of the lira’s troubles.
Murat Akyuz, a member of the board of the Istanbul Chemicals and Chemical Products Exporters’ Association, told a Turkish news channel on November 23 that some 80 percent of products manufactured in the country were dependent on imported raw materials – and that while costs of raw materials have increased globally, Turkey is being squeezed even harder because of lira weakness and uncertainty.
“Even if you adapt to the [price] increases, you do not have a chance to bring the containers on time,” Akyuz said. “Producers cannot produce on time due to the raw material they cannot get on time.”
Farmers, too, have been hit hard, with the cost of fertiliser going up too rapidly for them to purchase it. Official statistics say prices of fertiliser are up 72 percent compared to last year, but in markets it has been even worse, with prices doubling or tripling in a year, depending on the type of fertiliser.
Gübretaş, one of Turkey’s largest fertiliser producers, pulled out of a major government procurement contract last month citing volatility in raw material import costs. The firm now faces a six-month ban from public contracts.
Even Turkey’s consumer retailers have said the exchange rate problem is threatening to drive them out of business. A survey by Turkey’s United Brands Association, which represents 384 brands and 70,000 domestic stores, found that more than half of retailers reported more than a 50 percent drop in sales compared to last year, when weeks-long lockdowns had thrown a wrench into the Turkish economy.
“Despite being a global problem, we are worried about raw material costs, which are felt more in Turkey and continue to increase on the basis of foreign currency,” United Brands Association chief Sinan Oncel said in a statement.
“The retailer has been sacrificing profits for months and absorbing most of the costs,” Oncel said, “but we no longer have the margin to sacrifice, even if we wanted to.”