ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon Print

Asia Stream: Asia's Inflation Dilemma

Rising prices are hurting wallets across the world. The crisis is particularly bad in Sri Lanka and Turkey, and in Japan, people are facing inflation for the first time in decades.

NEW YORK -- Welcome to Nikkei Asia's podcast: Asia Stream.

Every episode, Asia Stream tracks and analyzes the Indo-Pacific with a mix of expert interviews and original reporting by our correspondents from across the globe.

New episodes are recorded biweekly and are available on Apple Podcasts, Spotify and all other major platforms, and on our YouTube channel.

This episode, we report on three inflation stories of the moment that have similar causes -- particularly supply chain issues related to the pandemic and the Russia-Ukraine war -- but different results.

Akhil Bery of the Asia Society Policy Institute joins us to discuss Sri Lanka, which is on the brink of economic collapse. Then USC's Saori Katada, along with our own Alice French and Mitsuru Obe, analyze the situation in Japan, which is experiencing rising prices for the first time in decades. Finally, Koc University's Selva Demiralp discusses Turkey, where inflation is threatening the president's reelection chances.

Asia Stream is hosted by Wajahat S. Khan, our digital editor and executive producer, and produced by Monica Hunter-Hart and Jack Stone Truitt.

Related to this episode:

Nepotism, bad policy push Sri Lanka to brink of economic ruin, by Toru Takahashi

How 'transitory' is Japanese inflation?, by Mitsuru Obe

Turkey holds key rate at 14% even with inflation at 61%, by Sinan Tavsan

'Let's pray it holds': Turkey's lira gamble keeps investors guessing, by Sinan Tavsan


JACK STONE TRUITT, CORRESPONDENT: We want to start the show by noting that the Sri Lankan government has defaulted on its debt for the first time ever, just hours before the publication of this episode on May 19. The country's new prime minister said this week that the crisis will get worse before it gets better. Now without any further ado, to the show.

(Theme Music in)

WAJ KHAN, HOST: Hello, and welcome to Asia Stream, where we track, report and analyze the issues and interests of the world's largest region.

I am Waj Khan, Nikkei Asia's digital editor, here in New York City.

Today's episode: Asia's Inflation Dilemma.

Inflation is a worldwide problem right now. Most economies are trying to grapple with varying degrees of it. Indeed, inflation has been in the global economic conversation for over a year. But inflation isn't just about rising prices or changing consumer behavior. Nor is it simply related to the pandemic-induced supply chain disruptions or the war in Ukraine. Rather, inflation can be brought on, and exacerbated, by misgovernance, autocracy, unorthodoxy, kleptocracy -- even culture.

In this episode, Asia Stream brings you three case studies of extreme inflation from across Asia, highlighting not just the impacts of the stubborn economic phenomenon -- where inflation has been disrupting lifestyles and consumer choices -- but also its destructive side, where it has triggered riots, violence and even caused entire governments to capitulate.

We start with East Asia, as Asia Stream correspondent Monica Hunter-Hart zeroes in on Japan's inflation spike and how the world's third-largest, but deflated, economy was caught completely unprepared for it. Then we move to West Asia, as business reporter Jack Stone Truitt reports on Turkey, where an autocratic president has, well, autocratically tried to grapple with inflation, only to make it worse. And from my home base of South Asia, I investigate the political crisis in Sri Lanka, where the government, the economy and even basic services have all collapsed due to sclerotic misgovernance from a political dynasty that was unable to tackle the inflation crisis, among other emergencies.

Ready your checkbooks. We've got quite the show.

You're listening to the sound of Asia, streaming in your ear.

From Nikkei Asia, this is Asia Stream.

(Theme Music out)

(Sound of protests)

KHAN: Those are the sounds of mass protests in Sri Lanka from last week, triggered by severe shortages of fuel, food and medicine, with multihour power cuts and overnight queues for gas. As the protests turned violent and led to the resignation of the prime minister, Mahinda Rajapaksa, and most of the cabinet, the president, Gotabaya Rajapaksa, who is the ousted prime minister's brother, continues to cling on to power. A new PM has been installed and is attempting drastic measures like privatizing the state-run airline and printing more money.

But Sri Lanka's current economic crisis -- which is the perfect storm of high inflation, rising debt, a shortage of foreign reserves, an imbalance of payments, the Covid pandemic ripping through the all-important tourism industry, and the hubris of a political dynasty that has been in power for far too long -- is the worst the country has faced in over 70 years of independence.

Like most of its other South Asian neighbors, the island nation is a former British colony with a large agricultural base and a young population. The country is resilient -- Colombo successfully fought and won a bloody 26-year-old civil war -- but today, Sri Lanka is on its knees and poised to default on its foreign debt as the grace period for missed payments expires and the government scrambles for dollars to top up depleted fuel supplies, even provide basic services.

Indeed, debt, and not just inflation, is also the story here. Sri Lanka, South Asia's largest high-yield-bond issuer, is also a keen member of China's Belt and Road Initiative, having borrowed billions from Beijing for infrastructure and owing a whopping $50 billion in debt to India, Japan and private bondholders.

To stem the crisis and the hemorrhaging economy, creditors like the IMF are standing by, with emergency loans and debt restructuring as options. On the other, the government is, well, not a government. There is no finance minister, not much of a cabinet, and the new prime minister has barely spent a week in office and has already been challenged by a no-confidence motion. But Ranil Wickremesinghe isn't in a position to inspire much confidence. Earlier this week, he announced that the country needed $75 billion urgently but then admitted that the government couldn't even raise a million dollars.

Joining us from Washington, D.C. to discuss what ails Sri Lanka is Akhil Bery. He is the director of South Asia initiatives at the Asia Society Policy Institute, where he watches, of course, all things South Asia. Akhil has previously worked at the Eurasia Group, where he was responsible for the firm's coverage of South Asia.

So, Akhil, just the man we want to talk to regarding this unprecedented crisis. We haven't seen this in 70-plus years of Sri Lanka's post-independence history. So before the economics, let's start with the political basics here. The Rajapaksas are not a political dynasty. They are the political clan of Sri Lanka. Till recently, they seemed unmovable. There was five of them in the cabinet, the executive branch, and both the PM and the president are actually brothers! So much for checks and balances, but they seemed like they didn't have any vulnerabilities ... and yet here we are. So please explain this to us. How did it all come crashing down for the Rajapaksa clan in Colombo? How did we get to this moment today?

AKHIL BERY, GUEST: Absolutely. So this crisis has been building for a number of years. Sri Lanka has continued to run a current-account deficit, exports haven't grown, it's become heavily reliant on external foreign exchange financing. It has not implemented the necessary reforms needed to grow the economy. And as it emerged from the postwar period, it took on a lot of debts, a lot of external debts. The inability to enact the reforms, combined with a high debt load, that sets the stage for where we are today. So, in 2019, Gotabaya Rajapaksa wins the presidential election over Sajith Premadasa by 10 percentage points. This marks the comeback of the Rajapaksa family after they had lost the 2015 presidential election. It seemed like the Rajapaksa brand was on the decline. Yet after a constitutional crisis in 2018 and an Easter bombing attack in April 2019, he tapped into national security concerns, tapped into this ethnic Sinhalese nationalism and won by 10 percentage points in the 2019 presidential election.

REPORTER A: Sri Lanka's new president, Gotabaya Rajapaksa, has promised to make security his top priority.

REPORTER B: To his supporters mainly from the Sinhala Buddhist majority, Gotabaya Rajapaksa is the president Sri Lanka needs. They believe he can strengthen security after the Easter Sunday suicide bomber attacks.

BERY: Now, right off the bat, he implemented some decisions that started the downward spiral towards the debt crisis. So the first thing he did was he cut the income tax rate and the value-added-tax rate. The IMF in its latest Article IV report said that cost Sri Lanka approximately 2.4% of GDP and lost revenue. That's a significant amount for the country. Then, in 2020, you have the start of the pandemic. Now Sri Lanka is heavily reliant on tourism, foreign exchange. Foreign exchange, tourism is the third largest source of foreign exchange revenue for Sri Lanka. From April until November, there were no tourists in Sri Lanka. Then you had another ill-advised decision, which was fertilizer, a ban on nonorganic fertilizers.

REPORTER A: Gotabhaya was not done. In April 2021, he banned all chemical fertilizers. Why? "Good for health," he said. Critics rolled their eyes; they realized the real problem was not health but shortage of dollars.

REPORTER B: Anger on the streets of Hambantota in southern Sri Lanka. Farmers here say the government's move to make farming 100% organic threatens their livelihood.

BERY: So the ecosystem had not been prepared for that. And Sri Lanka's tea industry is its biggest export. There was not enough organic fertilizer to go around to sustain the agriculture there. Of course, you also had a central bank which refused to acknowledge the extent of the debt crisis. And this is one of the biggest issues. They chose to ignore the crisis, chose to ignore, try to approach the IMF when their debt was not sustainable. For legally speaking, the IMF could not loan to Sri Lanka. So now we're in the situation where there are 13-hour-plus power cuts. There's limited amount of food, they -- we're on the verge of running out of medicine. And the people are angry. And that's what's brought us to this current situation.

KHAN: My, that's a bit more than a perfect storm. But Akhil, let's talk about one of the myths surrounding this crisis. The China debt trap. There's this myth that Sri Lanka is a victim of the People's Republic of China -- that it owns the majority of Sri Lanka's debt and is holding the country hostage. What's the truth there?

BERY: China does not own the majority of Sri Lankan debt. China owns actually less, about 10% of Sri Lankan debt, of Sri Lanka's external debt. It's on par with the Japanese, and also the World Bank and Asian Development Bank are much further ahead. The largest source of Sri Lanka's debt is to international sovereign bondholders. Now, where China has exacerbated the crisis, and China is not at all an innocent party here. One of the Rajapaksas' biggest strategic mistakes, I would argue, that has exacerbated this crisis, is this belief that if they change various policies to benefit China, China would give them debt relief. But that is not the case. As you've seen, as we've seen in Pakistan, China is not willing to restructure loans, because of the fact that would mean that would set a precedent for the other countries it has loaned to. Rather, China is willing to refinance, i.e. give you more debt to pay off your existing debt. So this is what's happening right now is with this crisis, is Sri Lanka has approached the IMF for help. However, if it is to take, get money from the IMF, it needs to engage with all of its creditors. And that means China as well, on a restructuring package. So creditors, international creditors are watching to see what sort of haircut China will have to take. China does not want to do that. And so that's why they are slow-rolling the passage of another billion-dollar loan to Sri Lanka, which would be used to pay off the 9 -- 900 million loan that Sri Lanka has already taken from China.

KHAN: Right. Okay, so loans for more loans, but considering the larger theme of our program today is inflation, and of course, it doesn't take too much imagination to see what inflation has done to food prices, fuel prices, the lack of medicines, etc. What's the immediate inflation, or rather counter-inflation, plan here? And please contextualize that with moves that are being made by Colombo. As we've seen, there's a new prime minister in town, but the new boss is the same as the old boss, isn't he: Ranil Wickremesinghe isn't very popular, and he's been here before, and, well, the president, Rajapaksa, his family triggered a bunch of this mess, but he's constitutionally untouchable and doesn't seem to be going anywhere. Are moves like that going to satisfy creditors, like the IMF? And are they going counter inflation, on the ground?

BERY: So inflation is, last I saw, was about 30% in Sri Lanka. That is massive. The Sri Lankan rupee has completely crashed. I remember when I visited in 2019, it was about 170 rupees to $1. It's over 355 now. To, to kind of put it into context about how much the currency has declined. And that's, that is the preeminent problem right now. So this political crisis has also resulted in the fact that, who do you negotiate with? The IMF has been waiting to see what, who emerges from this, who will provide the political guarantees needed to pass the reforms that will be, that will eventually be needed for an IMF program. That will be raising taxes. That will be state-owned enterprise privatization. It will be reducing the size of the military. So those are going to be signals that the IMF is watching for. So here's the issue. Ranil has been in this position before. This is his sixth term as prime minister. I will note he has never finished, successfully concluded a previous term. There is a lot of anger on the streets, streets about this appointment. He is seen as having protected the Rajapaksas before from investigations, especially when he was prime minister. There were, there are a number of allegations against President Gotabaya Rajapaksa for his, for alleged crimes against humanity during the end of the Sri Lankan Civil War. None of those cases were prosecuted. So there's a feeling amongst the people on the streets, that this is the same old, same old. So on the one hand, it's not likely to mollify the protesters. The protesters are clear in their demand: President Gotabaya Rajapaksa needs to go.

(Sound of protesters shouting that Rajapaksa must go)

BERY: Let's see what happens there, because he only has, his party has only one seat in parliament. And he came in through the national list. He wasn't even elected to parliament this time. So he's an unpopular politician who's been here before. Allies are already not supporting him. [...] So the longer this political crisis remains, the longer the economic crisis is going to remain. Because without a political backing, the central bank governor cannot negotiate with the IMF. The Ministry of Finance cannot negotiate with creditors. So if the protests don't die down, and there's more pressure on Ranil to step aside, there will still be a leadership void, and that will prolong this economic crisis. And indeed the inflation.

KHAN: Right, well, I'm going to try to end on some sort of a note of resolution here, Akhil, even though it's difficult. But if you were to pinpoint one factor, the biggest factor, to pin this crisis on, what would it be?

BERY: My argument would be the inability or unwillingness to recognize that there was a debt crisis. I remember talking to clients and all of us pinpointed that July 2022 was going to be the breaking point for Sri Lanka. It's been obvious for years now that Sri Lanka's debt is unsustainable. And rather than engage in negotiations with creditors to provide some debt relief, the hubris of politicians led them to believe that Sri Lanka would emerge from this crisis, okay, that they, that their best, that China would bail them out without fundamentally understanding the international environment. And I think that is one of the biggest reasons we are here today.

KHAN: Akhil Bery of the Asia Society, South Asian initiatives director -- thank you, Akhil, for being with us.

BERY: Thanks, Waj.

KHAN: That's Sri Lanka. Now, onto an inflationary situation that is not as combustive but is still making history and testing the will and capacity of bankers and consumers. Asia Stream correspondent Monica Hunter-Hart investigates the weakening yen in Japan, coupled by the slow-growing country's inflation spike.

MONICA HUNTER-HART, CORRESPONDENT: To most people in the world right now, inflation is not a pleasant concept. Our wallets are being hit hard with rising prices, particularly with gas and wheat products. But the interesting thing about Japan is that its monetary policy officials have actually been wanting more inflation for decades now. Now, theoretically, most economists believe that a small bit of inflation is helpful for boosting economic growth; it's thought to encourage wage increases and more consumer spending. But for years, Japan hasn't been able to achieve that low level of inflation. Instead, it's been plagued by endemic deflation.

REPORTER A: Consumer demand in general is not so strong in Japan, and it hasn't been, and that's part of the inflation story.

REPORTER B: Prices that don't change very much can be reflective of a society that doesn't change very much.

HUNTER-HART: The problem really begins in the '90s, which are sometimes called Japan's "lost decade" because there was severe economic stagnation. There was rising debt and extremely slow growth, especially compared to other industrialized countries. Japan's crisis actually has parallels to the 2008 Great Recession that began in the U.S., because it was partially caused by overly inflated real estate speculation.

YOUTUBE EXPLAINER: Japan's equity and real estate bubbles burst starting in the fall of 1989.

DOCUMENTARY: The burst of Japan's economic bubble destroyed savings and cost millions their jobs.

HUNTER-HART: The problems of that lost decade have more or less continued ever since. For example, average wages in Japan have stayed about the same for three decades. But fast-forward to today, and we are seeing a disruption, for better or worse -- prices are finally rising in Japan.

REPORTER A: This is a historic move in the Japanese yen -- a fresh seven-year low.

REPORTER B: This is 12 consecutive days, longest losing streak in at least half a century for the yen, and there's no sign of a letup.

HUNTER-HART: Ironically, though, it's not exactly the situation the government had hoped for, because it doesn't seem to be triggered by rising demand as much as supply chain disruptions that are related to the pandemic and compounded by the Russia-Ukraine war. That means it isn't yet accompanied by more economic growth or higher wages. It's kind of like all the downsides of inflation, without any of the benefits. That's the background. But to give us a clearer picture of how inflation is hitting the world's third-largest economy, we are joined by Alice French, our deputy Big Story editor and the producer of Asia Stream's Tokyo Dispatch. Alice, please fill us in.

ALICE FRENCH, CORRESPONDENT: Yes, so obviously, as an expat or as someone who is originally not from Japan, living in Japan, the first place where I really noticed the inflation and the increase in prices was, of course, when I was sending money back home to the U.K. So I remember when I first moved to Japan in 2019, 100 yen was about 71 [pence], which is about 94 cents. And most recently, I think it was around mid-April, 100 yen went down to about 59 pence, which is about 78 cents, which is obviously a lot less than the 94 cents that it was before. And that meant that I really felt like I was losing money every time I was -- every time I was sending money back home to pay for things like Netflix subscriptions and paying off my student loan and things like that. Another place where you can really see the rising prices is the prices of ramen. So ramen is of course a staple food for many people in Japan, especially up in northern Japan. So I spent the last weekend in Yamagata, which is in northwest Japan, and apparently Yamagata City is the city in which the most ramen is eaten in Japan. So the most bowls of ramen per person are consumed. And when I first moved here in 2019, you could easily get a big bowl of piping hot ramen for around 750 yen, which is about $5.80. And now I think you'd struggle to get it for 1,000 yen, which is about $7.70. So you can really notice the prices going up there.

HUNTER-HART: Yeah, I mean that's a price increase of 33%. That definitely sounds like a blow for the ramen lover's paradise. And what's perhaps even more shocking is that those price hikes, as well as the yen's steep decline, have all come within the span of about two months. That's remarkable, since in most of the rest of the world, the inflation story has been ongoing for over a year. Well, thank you, Alice.

FRENCH: Thank you.

HUNTER-HART: Now, because Japan is so unaccustomed to inflation, it's having a unique impact there. As I mentioned before, inflation is typically tied to an increased demand for goods -- in other words, more consumer spending. But again, that's not true in Japan. Nikkei Asia had a story out just this weekend that touched on how Japanese consumers tend to respond to inflation defensively by reducing their spending more than people tend to do so elsewhere. I spoke briefly to the author of that piece -- one of our staff writers in Tokyo, Mitsuru Obe -- and asked him to explain how deflation has become psychologically ingrained in Japan.

MITSURU OBE, CORRESPONDENT: It's not just ingrained, but it's really part of the Japanese culture, you know, the Japanese people are more modest, you know, more cautious, and less risk-taking, perhaps. For most people, the quickest, the knee-jerk reaction will be that "I need to save money, because my wage is not likely to go up. Instead of, you know, go up to your boss and demand a pay raise, I try to deal with it by myself." You know, that's easier. But maybe, you know, maybe because some other, for some other reasons. Japan's labor movement might not have been as active, as strong as in the United States or in Europe, or in other countries. It's a little difficult to pin down on one reason, but certainly, you know, having this for such a long time, make it harder thing.

HUNTER-HART: Some analysts say that Japan's large elderly population is also responsible for the relatively low demand for goods, because senior citizens aren't aggressive consumers. And then, of course, that low demand is thought to hold back price and wage increases. But how did we get here, and what options does the Japanese government have to address the problem? Here to speak on that is Saori N. Katada, professor of international relations at the University of Southern California. She works on Japan's political economy and the geoeconomics of finance, trade and foreign aid, and she's the author of the 2020 book "Japan's New Regional Reality: Geoeconomic Strategy in the Asia-Pacific." Professor Katada, thanks for coming on Asia Stream!

SAORI KATADA, GUEST: Well, thank you.

HUNTER-HART: Professor, for the past decade, Japan's target has been to reach 2% inflation. As I understand it, that was a big part of "Abenomics," the signature economic strategy of former prime minister Shinzo Abe, Japan's longest-ruling PM. Professor, why has Japan, unlike so much of the world, had such a hard time reaching even a mild level of inflation, something acceptable and normal, like 2%?

KATADA: You know, many, many compounding reasons that Japan has not had inflation, even with a very aggressive monetary policy. Official starting of deflation was 1998. But a lot of lack of growth was attributed to deflation. Deflation is a problem in various ways. It's kind of like kind of a frog being boiled in water, kind of gradually getting hot, without realizing that was getting hot, where deflation actually discourage people from spending, deflation actually discourages companies from investing and if, you know, if Japanese economy wants to grow, that's not a good, good thing. And Japanese, Bank of Japan was in charge of addressing it. And many argue that they didn't do a good enough job or aggressive enough job until 2012. When are the Prime Minister Abe came in, and 2013, March of 2013, when the new BOJ governor, Kuroda, was appointed to serve the, serve as the the head of the Bank of Japan. Kuroda kind of came in very aggressive manner, saying, "Whatever it takes, BOJ will get this 2% inflation rate achieved." And it didn't get there. It still hasn't gotten there. It's been nine years now.

HUNTER-HART: Is there a potential scenario in which this turns out to be good for Japan? For example, is there still a chance we could see the declining yen boost demand for Japanese goods, both from consumers abroad and at home?

KATADA: Not likely. From my perspective, so, this inflation is not very good inflation, right? So it's consumer products, a lot of, you know, kind of a fresh, fresh produce, and as well as energy costs. All that is leading to pretty high inflation. Actually, the Bank of Japan actually, and, you know, it's the same for the Fed and all that, they don't include these pretty volatile pricing items as a part of their index. So, you know, obviously, if you count this in, inflation in Japan is much, much higher than 2%. And it's really tricky, because Japan relies on the oil imports. They're almost 100%, 90-some percent, 98% in the summer. So all the energy costs is going up really very know, kind of very drastically, along with obviously, the petroleum and natural gas prices are going up globally. So that will put another kind of pressure on the Japanese economy. But as you said, Japan might be able to export with this depreciated currency. But not actually, Japan has had this kind of a, I guess, myth, or at least kind of perception that Japan can really get out of crises, economic crises, if the yen is weak, but actually, for at least for the last almost 20 years, Japan has not exported that much, especially the kind of price-competitive goods. So depreciated currency doesn't help Japan getting back on its feet that much.

HUNTER-HART: What options does Japan have right now to bring the yen's value back up?

KATADA: So that's the catch-22, right? So Japan, the Bank of Japan needs to raise this short-term, low short-term call rate.

HUNTER-HART: For listeners who don't know, a call rate is the rate at which banks lend to each other.

KATADA: So that's one, because it is not what Japan does. But it's where Japan is in relation to other advanced, you know, other kind of large economies, especially the United States. So now the Fed is gradually raising its interest rate. Japan has to keep up with it in order to keep up the, the exchange rate. While Japanese, you know, Bank of Japan has been insistent on not doing that, at least for now. So that would maintain the kind of, that will put pressure, downward pressure on the yen and continue to do so.

HUNTER-HART: Looking at everything the Bank of Japan has tried to affect inflation rates in the past few decades, aggressively but unsuccessfully, I mean, is it too harsh to conclude that the Bank is a more or less impotent, powerless entity at this point?

KATADA: To me, the kind of function of BOJ has been deprived quite significantly. They have done everything possible for the last eight years to reflate so you know kind of kind of boost the economy. And no, they really didn't have that much impact. And it's very hard to be, become even more aggressive. Meanwhile, on the flip side of it, to reversing what it has done, so that, you know, that inflation will be addressed, and also, they can have some ways to reflate when there is another kind of crisis happening. Well, the BOJ is not doing that at all. And one of the reasons why they haven't been able to do that is that now BOJ has so much government bonds, and their monetary policy currently, is to basically make sure that the cost of borrowing would not go up for the Japanese government. Government revenue and expenditure is what is addressing all the challenges that's happening in Japan, from COVID, to this kind of energy crisis, and things like that. So, you know, so, if BOJ stops what it's doing, then the cost of borrowing will, you know, go up really significantly, which would not allow the Japanese government to address some of, you know, kind of many of these crisis issues. Their hands are tied at this point. You know, not much can be done about this. So, yes, it's a conundrum. And it's interesting that, you know, weak yen, which has always, always been Japan's kind of, what Japan's government and the businesses and so on, pursued and wanted, is now kind of coming back to haunt us, right?

HUNTER-HART: Saori Katada, thank you so much for coming on Asia Stream.

KATADA: Thank you. I enjoyed talking to you.

KHAN: That was Monica Hunter-Hart. From South Asia and East Asia, we now go west, to Turkey, a country that is quite used to the volatility of inflation but nevertheless has been caught unprepared for the staggeringly high price increases over the past year. Here to share the latest is business and markets reporter Jack Stone Truitt, who was just in Istanbul.

TRUITT: Thanks, Waj.

Restaurant menus in Istanbul these days can look like someone's math homework. There's marker smudges and accumulating layers of half-erased prices overwritten by new ones, as owners try and keep their heads above water with soaring price increases.

Turkey's annual inflation ballooned to 70% in April, a 20-year high for an economy heavily reliant on imported energy. Turkey imports more than 90% of its oil and gas, the cost of which has skyrocketed due to the war in Ukraine.

Alongside inflation is the dramatic decline of the Turkish lira, which had been steadily losing value since 2018, but began a record slide late last year and has lost nearly half of its value against the dollar in the last 12 months.This has prompted Turks to funnel their savings into gold, cryptocurrency, even hard goods like laptops. At one point, Apple had to block its sales in Turkey due to the lira's volatility.

Sure, much of the globe has dealt with levels of inflation not seen in decades, and many currencies have seen a fall in value. But what's unique about Turkey is the economic strategy its central bank -- and especially President Recep Tayyip Erdogan -- have taken to curb the crisis.

Basic macroeconomics suggests that when inflation soars, central banks raise interest rates to tighten the money supply and cool down the economy. But Erdogan has called interest rates "the mother of all evil" and has used his executive influence to push the central bank into keeping rates low or simply dismissing central bank officials who disagree.

REPORTER: Turkish President Recep Tayyip Erdogan has replaced the country's finance minister days after the lira reached record lows.

TRUITT: Erdogan's policies, which some call call "Erdonomics," have been unorthodox, even quirky. In fact, he's even quoted the Quran's passages against usury to explain his disdain for interest rates.

I spoke with Selva Demiralp, an economics professor at Koc University in Istanbul who has worked with central banks in Turkey, Europe and the U.S., about the ongoing crisis in Turkey and Erdogan's unorthodox approach to fix it.

Selva, thank you so much for joining Asia Stream.

SELVA DEMIRALP: Thank you for having me.

TRUITT: So, inflation has been a persistent issue for months, though it's gotten much worse recently. And, many have been confused by Erdogan and the central bank's policies. So, why do the central bank and Erdogan continue to go against these very simple, very accepted, very basic economic principles for fixing inflation?

DEMIRALP: So if we ask why a government would prefer lower interest rates, I think that's an easier question to answer because governments typically have short election cycles, and low interest rates promote growth, and more growth means more employment and therefore more votes for the government. So it's not just specific to Turkey to see the government preferring low interest rates, like very recently in the United States with former President Trump, we have seen similar pressures on the Federal Reserve, asking for rate cuts. The difference, however, is the independence of institutions, strength of institutions, and whether a central bank can implement what we call optimal, proper monetary policy to achieve price stability. In the U.S., the Federal Reserve could say no and did not give into these political pressures and implemented what they thought to be the proper policy.

But in Turkey, central bank facing similar pressures. cannot really remain indifferent and gives into these pressures, because institutions are weak. And during the pandemic period, we have seen central bank chair being sacked several times by the government. And each time a more obedient central bank governor is assigned to the job. And eventually what happens is that the central bank allows the government to essentially guide monetary policy.

TRUITT: What kind of toll do climbing prices and a volatile lira put on Turks and their businesses?

DEMIRALP: So that's what Turkish households are facing right now. The prices are changing very rapidly. And yet, the wages are not indexed to inflation, although prices that we face in the market are increasing, our wages are not increasing proportionately. Based on the most recent inflation data. Since the beginning of the year, we faced 30% inflation. Now, many of us had adjustments to our salaries at the beginning of the year, but that was not even 30%. And now all the wage adjustments that we have received is already erased and against inflation. So in terms of real purchasing power, many of us are feeling this poverty upon us, many of us are feeling poor, because the prices are increasing, and yet our salaries are not increasing proportionately.

And it's also a very pessimistic environment for investors, because suppose you want to expand your business. But you don't even know what your prices are going to be two years from now. Therefore, it's very difficult to make these long-term plans about how much profit you can make. And therefore investment appetite usually dies in these high inflation environments, which is another reason why growth for this year is expected to be revised downwards.

TRUITT: So Erdogan and his Justice and Development party, or AK-Parti, face an election next year. Of course with the power he has accumulated he may not be facing the kind of political backlash over inflation that someone like Joe Biden could receive in the next election. But what kind of political consequences is he realistically facing given the continued economic turmoil?

DEMIRALP: We are doing some research, actually, with my team, and we do find a significant economic relationship where if you voted for the government in the last election, but you are complaining about economic problems, then your likelihood of voting for the government again is declining. Now, I don't know whether this will actually be the result at the elections next year. But at least in the survey data, we do see that this economic cost of the elections is visible in the survey data. I don't know if it's going to be materialized or not.

TRUITT: Selva Demiralp is an economics professor at Koc University. Thank you for coming to the show today.

DEMIRALP: My pleasure, thank you.

KHAN: That was Jack Stone Truitt, replacing our Tokyo Dispatch with -- what shall we call it -- our Istanbul Diary. That's it for Asia Stream this week.

(Theme music in)

KHAN: As always, I encourage you to head to Nikkei Asia at for more in-depth coverage of Asia's economic crises, and all things related to Asia. If you enjoyed this podcast, please share, subscribe and leave us a review -- and hopefully, a five-star rating! And a reminder that Nikkei Asia is currently offering an exclusive discount for our podcast listeners: just type in the code ASIASTREAM, all caps, no spaces, at checkout when you visit This episode was produced by Monica Hunter-Hart and Jack Stone Truitt. I'm your host, Waj Khan.

We'll see you in two weeks, when we'll continue livin' the stream.

(Theme music out)

------ TRANSCRIPT END ------

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more