Earthquake sends tremors through Turkey's fragile economy

 11 southeastern provinces in Turkey must be rebuilt with billions of dollars after the earthquake on February 6 destroyed them.

By AFP

19 February 2023

On February 18, 2023, a guy leaves his damaged shop in Antakya carrying musical instruments. the AFP/File

On February 18, 2023, a guy leaves his damaged shop in Antakya carrying musical instruments. the AFP/File

ISTANBUL: Tens of thousands were killed, entire cities were levelled, and millions were left in need of immediate assistance when a big earthquake struck Turkey, which was already struggling with rampant inflation and dependent on wealthy partners for money to keep its economy afloat.

The 11 southeastern provinces that were destroyed by the earthquake on February 6 must now be rebuilt with billions of dollars, making it the greatest calamity in its post-Ottoman history.

The sum of money will need to be added to the tens of billions of dollars in election pledges made by President Recep Tayyip Erdogan prior to the important elections, which are still tentatively scheduled for May 14.

With all this money, industrial productivity and consumer spending, two important measures of economic expansion, may soar.

Erdogan's issue, though, is Turkey's severe financial shortage.

Russia and oil-rich Gulf states have helped Turkey spend tens of billions of dollars over the past few years supporting the currency by replenishing the central bank's shrinking coffers.

But according to experts, there is barely enough money to keep Turkey's finances in check — and the faltering currency from crashing — until the May elections.

Erdogan must now fix earthquake damage estimated to have cost $84.1 billion, according to a well-known business organisation.

More conservative calculations by some analysts place the cost closer to $10 billion.

Increased reconstruction

Erdogan has already committed to giving new dwellings to the affected millions within a year in order to win over voters ahead of elections.

Erdogan will need to devote a large portion of the money he finds—probably by relying significantly once more on foreign donors—to the construction industry in order to completely rebuild some regions of Turkey.

Erdogan relied on the industry to modernise much of the nation with airports, highways, and hospitals, despite the fact that they are now being accused for the inadequate standards that allowed so many buildings to collapse.

The European Bank for Reconstruction and Development (EBRD) stated that "the increase in output from reconstruction efforts may substantially counterbalance the adverse effects of the disruption to economic activity."

There are signs of promise, at least for the overall economy.

One of Turkey's least developed regions, the impacted area barely contributes 9% to the country's GDP (GDP).

Yet, Turkey's agricultural output might suffer.

According to Unay Tamgac, an associate professor of economics at TOBB ETU University in Ankara, the region generates 14.3% of Turkey's overall output in the fields of agriculture, fisheries, and forestry.

She went on to say that the area exports food to other countries, including apricots, and warned that this could have an impact on prices.

Turkey and Syria's fundamental food production could be disrupted, according to the UN's Food and Agricultural Organization.

superior to 1999?

According to Tamgac, the earthquake also caused damage to infrastructure, transportation, irrigation, and logistics.

Some people seek wisdom from the past.

The 7.8-magnitude earthquake, which could have less of an impact on the economy than a 7.6-magnitude tremor that struck in 1999 and cost more than 17,000 people, according to Mahmoud Mohieldin, an executive director at the International Monetary Fund (IMF).

Afterwards, an IMF representative said that Mohieldin was speaking in private and not on behalf of the organisation.

In 1999, the Turkish economy saw a 0.5% to 1.0% decline in GDP. Yet, that tremor struck the nation's industrial core, which included Istanbul, a regional economic powerhouse.

Nonetheless, the economy soon recovered and grew by 1.5% of GDP in 2000 as a result of reconstruction efforts, according to the EBRD.

A comment from Wolfango Piccoli, an analyst at Teneo consultancy, said that the quake last week "did not harm places farther west preferred by foreign tourists, who have become one of Turkey's most important suppliers of foreign cash."

Headwinds

The main concern is where Erdogan will find the money to use for reconstruction.

Since Turkey would now import more, Baki Demirel, associate professor of economy at Yalova University, noted that there will undoubtedly be a need for foreign money.

Turkey has very low levels of national debt, which gives the government some room to issue long-term debt.

On the other side, Erdogan's unconventional economic views, which include a disastrous attempt to battle inflation by reducing interest rates, have scared away international investors from Turkey.

Turkey's annual inflation rate had decreased from a two-decade high of 85% last year to 58% when the earthquake struck.

The economy will stagnate in the upcoming year, according to analysts, given all the challenges.

The Turkish economy is most likely to stagnate or develop below its natural rate, economist Murat Kubilay stated in a letter posted online. This is true despite the uncertainties and other other factors at play, such as the state of the world economy and domestic political expectations.