After being squeezed by the tumbling Turkish Lira, the Turkish Cypriots are now under threat of widening financial repercussions from the continuing downward spiral of the Turkish economy.
Political and financial analysts fear that the worst is yet to come for the Turkish Cypriots in the north of Cyprus.
Turkey has seen its growth rate halted after almost seven years in 2018 while recording a negative turn in Q1 2019, retreating 2.5%, with a negative outlook for the following two quarters.
Turkey’s economy over the last few years has been characterized by a high inflation rate which reached 25.2% in January. Devaluation of the Turkish Lira and the high rates of unemployment have taken their toll on the living standards of the poor and middle class in society.
Unemployment in Turkey reached 12.3% at the end of 2018, with a 20% unemployment rate among young people aged 20-35.
The Turkish Cypriot economy in the north of Turkish-held Cyprus is directly linked to Turkey so it felt the brunt of the financial jolt. In 2018, the north closed with an inflation rate of 29.96%, the highest since 2003. Inflation was severely affected by the increase in prices of furniture, home appliances and services which rose by 43.88% and of food and non-alcoholic beverages which rose by 40.4%.
Mustafa Besim, a Turkish Cypriot economist and professor at the Eastern Mediterranean University told the Financial Mirror that the economy in the north has been affected deeply by the TL’s plunge against the EUR and the USD.
“As the Turkish Cypriot economy is dependent on imports which are booked in a foreign currency, mainly the EUR and the USD, even those from Turkey, prices is skyrocketed by 40%. This situation has seen the purchasing power of Turkish Cypriots diminish.
This has led the administration to increase the budget in order to apply adjustments on wages of public servants which take place every six months according to the inflation rate, increasing the budget deficit,” said Besim.
Turkish Cypriots were also hit by the increase in interest rates imposed by Turkish banks.
“This has increased financing costs which have led to a drop in investments made in the construction sector, while has also increased the cost of consumer loans, slowing down the economy in the north even more,” he added.
Besim said the slowdown of the Turkish economy could get worse with tourism and the education sector also feeling the impact.
Partly as a result of the financial crisis Turkey is going through, it has halved its financial help to the north in 2018. “Whereas in 2017, Turkey had given TL 800 mln in credit and grants, it gave just 400 mln in 2018.”
Stressing that the Turkish Cypriot economy has yet to recover from the blow it took from the TL depreciation, economist Mertkan Hamit said that the worst is yet to come.
“We are in for negative developments, starting from next week when an increase of 30% is expected to be applied on electricity bills. This will have a chain effect on all sectors,” Hamit said.
He added that the financial protocol with Turkey, which will see the north obtaining money from Turkey if the administration sticks to a reform programme, has yet to be signed.
“This means there will be no public investments, making it even harder for the economy to revive,” added Hamit.
Nicolaos Stelyas, a political analyst writing for Kathimerini and Duvar newspapers in Cyprus and Turkey, said the downfall of the Turkish economy is not the only factor in play.
Stelyas said Turkish Cypriots are seeing their wages lose value, as the price of everyday commodities are sky-rocketing.
“The fact that events in Turkey have played a decisive role in the new crisis must not lead us to the wrong conclusions. The Turkish Cypriot economy has long been showing signs of fatigue, systemic crisis and significant problems. The political and economic dependence of the Turkish Cypriot community on Turkey in combination with the inefficiency of all the ruling parties contribute to the perpetuation of these problems”.
Turkey elections
Asked what is to be expected in the near future, especially with the upcoming local elections coming up in Turkey, analysts told the Financial Mirror said that although Erdogan’s AKP is expected to lose some political grip, this will not necessarily pose a threat to Erdogan’s rule.
Hamit commented that as Turkey has a presidential system with all powers concentrated in the hands of its president, Recep Tayyip Erdogan, the result of the local elections is not expected to put any particular political pressure on ruling AKP.
“The question is what will Turkey’s government do after the elections regarding the economy. They have a three-year period until the next presidential election,” said Hamit.
“During this period, they will implement reforms. Whether they will look to the West or they will embark on new adventures is hard to tell… But if they are to pick a fight with the western capital, we are in for serious turbulence,” he added.
Besim predicts that following the local elections, Turkey will have to introduce some sort of restructuring program with or without the contribution of global financial institutions such as the International Monetary Fund.
Cyprus peace process
On how developments surrounding the Turkish economy could shape Cyprus peace talks in one way or another, Besim believes that the driving force in the process is the Cypriots.
“If we are to expect Turkey, Europe or any other country to perform well financially for talks to advance, we will go nowhere.”
Stelyas argued the economic aspect will not be decisive in determining Turkey’s or Turkish Cypriots stance at the negotiation table.
“Two factors are needed to see a change in direction followed by the Turkish Cypriot community. One, strong democratic opposition has to be built, and a change of balance in the Turkish Cypriot community’s relations with Ankara,” said Stelyas.
“However, financial difficulties combined with the remaining political problems could force Turkish diplomacy to seek compromise solutions. What has happened in the cases of the American pastor and the German journalist speak for themselves,” he added.
