Turkish inflation and Devconnect
Devconnect will be in IstanBULL. Coincidence? I don’t think so.
This blogpost is aimed at the crypto industry in the process of organising their trip to Istanbul for Devconnect. I’ll talk about some issues you may already know about, while some things you may have heard about but forgotten. I’ll try to be as concise as I can to keep things brief and to the point. All in all, this is a guide about the associated opportunities of having Devconnect in Turkey (officially the Republic of Türkiye), and how crypto projects should capitalise on it.
Istanbul is the economic capital with 16 million inhabitants. The political capital of Turkey has been Ankara since the establishment of the Republic in 1923. Turkey joined NATO in 1952. Turkey was renamed to Türkiye in 2021 (pronounced “TurkeyYeah”). The country has 85 million inhabitants, and increased threefold over the last 60 years.
Here is a monetary fun fact about Turkey. On Turkish lira bills, there's a pattern involving the orientation of the head of the nation's founder, Atatürk. The higher the value of the Turkish lira bill, the more the head of Atatürk is oriented towards us. As the bill value increases, from 5, to 20, to 100. Atatürk rotates his head towards the bill holders. As if having a bigger bill gets us “closer” to the founder of your country. This could be interpreted as a subliminal and candid reminder that money brings you political protection.
Turkey is an amazing country. Turkish people are the most generous people I know. The landscapes are gorgeous. The potential for cultural exploration is limitless. Turkey has a good economy, but there is one big BUT:
Inflation.
In the graph below, the Turkish Consumer Price Index's yearly rate of change that illustrates inflation is denoted by the yellow line as reported by the Turkish Statistical Institute. The closeness of this line to the Argentinian line (depicted in green) is indicative of the worrisome inflation in Turkey. Things may get even bleaker given that public officials are facing criticism not only from the public but also from a group of autonomous researchers known as the ENA group (Inflation Research Group). This group has introduced its own independent inflation calculations, represented by the red line. Their numbers reveal an inflation rate approximately double that of the official statistics, even surpassing the inflation rates of Argentina. That’s a L.
Inflation is so bad that prices in the supermarket are changing daily, daily inflation reports are circulating, and most contracts have to be renegotiated monthly.
Why Inflation?
What is fueling inflation in Turkey?
Structural Issues: Turkey has a deficit in commercial balance.
During the first half of 2023, the foreign trade deficit was at $61 billion. In the same period, exports covered imports only by 66.8%, while it was 70.9% in January-June 2022. While we could dive deeper into the top import/exports partners, or the booming industries (Tourism, Manufacturing), the core takeaway is that 33.2% of the imports are not compensated by exports (Turkstat).
Monetary Policy: Turkey's central bank has faced challenges in implementing an effective and consistent monetary policy to control inflation. The central bank prioritises export competitiveness to boost GDP growth (by devaluating the Turkish Lira). Turkey has an overreliance on external financing. The current inflation is related to the private sector's high debt levels. Apparently, conglomerates took on too much debt as they wanted to capitalise on the high Turkish GDP growth, which ended up backfiring.
Political Instability: Political instability affects investor confidence, the value of the currency and contributes to inflation. A significant instance of this was observed on 15 July 2016 when a faction within the Turkish Armed Forces, organised as the Peace at Home Council, attempted a coup d'état against state institutions, including the government and president Recep Tayyip Erdoğan. Since the Turkish Republic (1923) was created, there have been 2 coup d’etat that worked and at least 8 tentative coups. The incumbent Turkish president has held office since 2003, and Reporters Without Borders ranked Turkey 160th (out of 180th) for press freedom (RSF).
Exchange Rate Movements: FOREX volatility can lead to higher import prices, driving up the overall price level in the economy. In 2003, the National Assembly of Turkey passed a law about the removal of six zeroes from the currency, and the creation of the new lira (1 new lira = 1,000,000 old lira) (strong meme coin vibe).
Inflation Expectations: If the public expects higher inflation in the future, it can become a self-fulfilling prophecy, as people and businesses may adjust their behaviour, leading to actual inflation being higher.
Collectively, the overall morale in Turkey is considerably low. The government introduced austerity measures and increased interest rates. This led to an increase of unemployment (up to 14%). There is a strong sense of despair and economic depression among Turks. To complicate the situation even more, Turkey is acting as a refugee gate-keeper for the European Union — there are more than 5.2 million foreign nationals present in Turkish territory (most of them are war refugees from Syria, Irak, Afghanistan) (UN report).
Opportunities
We do these things not because they are easy, but because we thought they were going to be easy.
Crypto is about equalising financial opportunities with inflation resistance, and it’s our time to shine.
This bit comes from Morgan Housel’s book “The Psychology of Money” (you are going to have a good time reading it if you have been through a crypto bull and bear cycle). People come from different backgrounds, they have different childhoods, and different parents. This brings different perspectives and different values. And what may be irrational to some, might make sense to others.
Let’s use the example of lottery tickets in the USA. The lowest earning households spend $400 yearly on lottery tickets, and the highest earning households spend 4 times less on lottery tickets. Also, ⅓ of Americans can’t come up with $400 in case of an emergency. So it seems that people spend emergency funds on lottery tickets. Therefore, someone might say that buying lottery tickets is like flushing money down the toilet. For the lowest income households who can’t afford going on vacation or getting healthcare or higher education, those lottery tickets are an opportunity to escape a grim reality. All this is to say that when it comes to spending money, all sorts of behaviours may manifest themselves.
I quote Morgan Housel here, just to stress that we need to understand the regional mentality before offering services locally. Another way to put it would be “To go global you need to go local”. Living through a few years of 100% inflation, especially during developmental teenage years, will for sure impact your financial behaviours dramatically. The potential is huge (85 million Turks + 5 million refugees). We need to remind ourselves that at its core Crypto is about providing vulnerable world citizens good, stable, and fair financial products that will lead them to a better life.
In short, inflation resistance tools would bring financial inclusion, and dollar pegged stable coins could enable Turkish citizens to navigate the economic uncertainties more confidently. As a result, this would empower local economies, enable people to save, and foster an entrepreneurial mindset, as well as boost social mobility in Turkey.
Thank you for reading my manifestation that Devconnect in Istanbul will bring tangible positive changes. And thank you to the group who made the bold decision to organise Devconnect where Crypto is needed the most.
Source
1 - “Inflation Research Group.” ENAGRUP, https://enagrup.org/?hl=en.
2 - Turkstat. https://data.tuik.gov.tr/Bulten/Index?p=Foreign-Trade-Statistics-June-2023-49625.
3 - RSF. Reporter without border, https://rsf.org/en/country-t%C3%BCrkiye.
4 - “DTM Turkey Migrant Presence Monitoring - Overview of the Situation with Migrants, Annual Report 2022 | March 2023 - Türkiye.” ReliefWeb, 8 March 2023, https://reliefweb.int/report/turkiye/dtm-turkey-migrant-presence-monitoring-overview-situation-migrants-annual-report-2022-march-2023.
5 - Eurostat + ENAGRUP + Turkstat dataset. https://docs.google.com/spreadsheets/d/1pKFK9wONR5eiwe2A9_hj5YlIoTdPH_BUfeQGgskyYes/edit?usp=sharing