Inflation Hits 41 Year Low as Economy Grows 6.4%

Posted on 04 January 2011

Turkish inflation fell to 6.4% in 2010, a 41 year low. While the fact that 2010 total GDP growth matched that figure is brilliant, it is most likely that history will reflect on the inflation as the most important achievement in Turkey‘s economic development.

History will remember the 2001 financial crisis as a turning point for Turkey. Pre-2001 Turkey was one of Europe’s most financially volatile countries, with soaring inflation and unemployment, as well as corruption and military meddling making the country’s boom bust cycle particularly pronounced and violent.

Then they elected the AK Party (you can tell I’m a fan). Before taking power as Turkish Prime Minister, AK Party leader Recep Tayyip Erdogan was Mayor of Istanbul.

During his time in this role he successfully paid down most of the municipality’s 2 billion dollar debt. Erdogan has managed Turkey in much the same way, paying down public debt from 74% of GDP in 2002 to 39% in 2009, and debt to the IMF from $23.5 billion in 2002 to $7 billion in 2009 and, according to Erdogan to $6 billion in October 2010.

Having dragged down inflation and public debt, the Turkish government had bags of leeway to bring down interest rates in response to the recession, and without fear of destabilising the economy. Because of this and with inflation still higher than most developed markets, there is much less risk that rates will be raised quickly, in fact the Central Bank recently brought down rates even further.

With low inflation, the final part of the recipe of Turkish success that saw its economy grow at a double-digit rate as it powered out of recession in the first half of 2010 was high liquidity. Another arm of the AK Party’s sorting out the economy drive was to heavily reform the banking sector, making reforms similar to those made in many western countries after the recent crisis exploded. The reforms are thought to have been crucial in the Turkish banking system’s resilience against the recent financial shock.

This stability and high liquidity is why we have seen Turkey become the fastest growing economy in Europe in 2010 and the fourth fastest in the world. It also suggest that the growth is sustainable over the mid-long term.

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