Taking measures becomes tougher as unemployment rises in Turkey

The unemployment rate in Turkey is continuing to rise. The figure was 10.5 percent in September, the highest level since the global financial crisis. Worse, the unemployment rate is expected to increase in the near future, while it is also getting more difficult to take necessary measures against this rise.

The unemployment rate, which has been climbing over the past couple of months, was expected to continue climbing anyway because of the slowdown in growth. But nevertheless, the September rate released at the beginning of the week disturbed some markets. A year ago at this point, the rate was 9.2 percent, while the current seasonally-adjusted unemployment rate is 10.7 percent, the highest since October 2010. 

The total number of unemployed has also reached its highest level since 2009; in September, the number of unemployed people increased over the previous year by 537,000. In seasonally-adjusted figures, the number of unemployed people has increased by 103,000 since August, reaching a total of 3.1 million people.

There is no expectation for the unemployment rate to recover in a short space of time. Low expectations, combined with the fact that the growth rate in the third quarter was low, indicate that unemployment rates announced in the coming months will be even higher.

At the same time, this rate could affect fiscal discipline as the election process is set to begin. It is obvious that the government would not want to enter elections with such a high unemployment rate, so there is a strong possibility that public expenditures will be increased to lower the rate. However, the budget data released at the beginning of the week showed that there were higher than planned increases in November for expenditures, as has happened in the last couple of months. As a result, December’s budget data has now become critical in terms of budget targets.

Interest rates cannot go down

It should therefore be considered normal for those in political power, using these high unemployment rates as an excuse, to demand that expenditures be increased and interest rates lowered. Especially during an election campaign period, all kinds of means in this direction will be used.

However, the situation in the markets absolutely prevents the Central Bank from lowering interest rates. The strengthening of the expectation that the U.S. Federal Reserve will bring forward interest rate rises is causing the dollar to seriously gain value against all national currencies. For this reason, the dollar exchange rate continues to rise against the Turkish Lira. It is also apparent that the rapid rise in exchange rates is particularly troubling the private sector and its foreign debt. For this reason, the expectation that this rise will be permanent will push the demand for foreign currencies, thus possibly causing foreign exchange rates to rise further. 

To prevent the demand for foreign currency, the Turkish Central Bank has significantly shrunk the liquidity of the lira, but this situation brings along an increase in interest rates. Because of these difficulties, it is now very hard for the Central Bank to lower interest rates. Despite pressure from President Recep Tayyip Erdoğan and the alarming unemployment rate, for the Central Bank to decide to lower rates now would disrupt the equilibrium to a great extent.

In short, we have been caught unprepared for all these developments, which nevertheless were expected.