Turkey’s recent devastating earthquake is expected to cause a surge in inflation and require an additional budget for the upcoming elections in June. According to a government official and four economists, the earthquake that occurred on February 6, which killed over 43,000 people, will cost the economy over $50 billion. The disruption to the production side and a surge in prices of goods and services, such as food and housing, will result in a high inflation rate that will fall far less than previously expected.
Inflation had hit a 24-year high in October, reaching over 85%. Due to a series of unorthodox interest rate cuts sought by President Tayyip Erdogan, it dropped to 58% in January with a favourable base effect. It was expected to keep falling to around 35-40% by June. However, the earthquake has led to a new forecast of inflation of 42-46% at the time of the election.
In addition to the inflation surge, the lira presents another challenge for Turkey. Central bank data shows that net reserves dropped $7 billion since the earthquake. Bankers expect further steps from the authorities to reduce foreign exchange demand. The disaster is expected to reduce economic growth by 1-2 percentage points this year, and the central bank has lowered its policy rate by 50 basis points to provide support.
Impact on Agriculture and Industry
More than two million people are estimated to have left the quake zone, pushing up rents in other provinces. The region accounted for 16% of Turkey’s agricultural production last year, so food inflation will be pushed higher. The rising construction costs are also problematic. The earthquake has also affected the industry in the quake zone, as employees are reluctant to return to work due to the trauma of the disaster. This has led to a significant problem in the industry, as the return of those living in the region is critical to its survival.
Budget Implications
The earthquake has given the government an additional challenge on the budget, which has long been one of the strongest areas of the economy. The 2023 budget for this year allows for net borrowing of up to 661 billion lira ($35 billion), but the official stated that this will not be enough. Economists predicted that the budget deficit to GDP ratio for 2023 would be around 3.5% before the earthquake. However, predictions are now rising towards 5%. JPMorgan has revised its budget deficit forecast to 4.5% of GDP for 2023, citing increased spending due to the earthquake.
Conclusion
Turkey’s recent earthquake has caused significant damage to the economy, leading to inflation surges and the need for an additional budget. The earthquake’s impact on agriculture and industry, as well as the reluctance of employees to return to work, has further worsened the situation. While the central bank has provided support by lowering its policy rate, the government will need to take additional measures to tackle the ongoing challenges.
