Turkey was already battling runaway inflation and relying on wealthy allies to fund its economy when a massive earthquake killed tens of thousands, leveled entire cities and left millions in need of a urgent help.
Now it must pour billions into rebuilding 11 southeastern provinces flattened by the February 6 earthquake – the worst disaster in its post-Ottoman history.
This money will have to be added to the billions of dollars in electoral promises that President Recep Tayyip Erdogan has made ahead of the crucial elections still tentatively scheduled for May 14.
All that money could boost consumer spending and industrial production, two key indicators of economic growth.
The problem for Erdogan, however, is that Turkey is seriously short of funds.
The central bank’s dying coffers were replenished with help from Russia and the oil-rich Gulf states, which helped Turkey spend tens of billions of dollars to prop up the pound during of recent years.
But economists believe the money is only enough to keep Turkey’s finances in order – and prevent the struggling lira from collapsing – until May’s election.
Now Erdogan must repair some $84.1 billion in earthquake damage, according to an estimate by a leading business group.
Other experts’ estimates are more conservative, approaching the total of $10 billion.
Ahead of the elections, Erdogan has already promised to provide new housing for the millions affected within a year.
If he finds the money, again relying heavily on foreign donors, Erdogan will have to allocate much of it to the construction sector to rebuild parts of Turkey from scratch.
Although contractors are now blamed for following lax standards that allowed so many buildings to crumble, Erdogan has relied on the sector to modernize much of the country with airports, roads and hospitals.
“Increased output from reconstruction activities could more than offset the negative impact of the disruption in economic activity,” the European Bank for Reconstruction and Development (EBRD) said.
For the global economy, at least, there are glimmers of hope.
The affected area is one of the least developed in Turkey, contributing only 9% of gross domestic product (GDP).
But Turkey’s agricultural production could take a hit.
Unay Tamgac, associate professor of economics at TOBB ETU Ankara University, said the region creates 14.3% of the total output of agriculture, fisheries and forestry in Turkey.
The region is a global exporter of foodstuffs such as apricots, she added, warning there could be a ripple effect on prices.
The Food and Agriculture Organization of the United Nations has warned of disruptions to basic food production in Turkey and Syria.
The earthquake also damaged energy facilities, infrastructure, transport, irrigation and logistics, Tamgac added.
Some look to history for guidance.
Mahmoud Mohieldin, executive director of the International Monetary Fund (IMF), said the magnitude 7.8 quake could harm the economy less than a magnitude 7.6 quake in 1999, which killed more than 17,000 people. .
An IMF spokesman later said Mohieldin was speaking in a private capacity and did not represent the official view of the fund.
Turkey’s economy weakened by around 0.5 to 1.0 percent of gross domestic product (GDP) in 1999. But this jolt hit the country’s industrial heartland, including economic powerhouse Istanbul.
However, the economy quickly rebounded, with GDP growth of 1.5% in 2000 thanks to reconstruction efforts, the EBRD said.
Last week’s earthquake “also did not affect areas further west favored by foreign tourists, which have become one of Turkey’s main sources of foreign currency,” said Wolfango Piccoli, analyst at consulting firm Teneo, in a note.
So the focus is on where Erdogan will get the money to spend on reconstruction.
“It is clear that there will be a need for foreign currency,” said Baki Demirel, associate professor of economics at Yalova University, since Turkey will now import more.
Turkey’s sovereign debt levels are relatively low, meaning the government has some leeway to issue long-term debt.
By contrast, foreign investors have shunned Turkey due to Erdogan’s unorthodox economic views, which include an ill-fated attempt to fight inflation by cutting interest rates.
When the earthquake hit, Turkey’s annual inflation rate had slowed from a two-decade high of 85% last year to 58%.
With all the headwinds, economists agree that the economy will stagnate in the coming year.
“Despite the uncertainty and the various factors at play, such as global economic conditions and internal political expectations, the Turkish economy is likely to stagnate or grow below its natural rate,” economist Murat Kubilay wrote. in an online note.