Since his re-election, Turkish President Recep Tayyip Erdogan has publicly doubled down on his privileged economic policies.
“If anyone can do it, I can do it,” he declared in his victory speech last Sunday, referring to his ability to solve the country’s disastrous economic problems.
His outrageous confidence is not shared by many analysts and economists.
The Turkish lira fell to a low score against the dollar this week, and foreign investors have been disappointed by the president’s refusal to deviate from what is widely seen as a whimsical economic trajectory.
Instead of fighting staggering inflation by raising interest rates and making borrowing more expensive — as most economists recommend — Mr. Erdogan has repeatedly lowered interest rates. He argues that cheap credit will boost manufacturing and exports.
But his strategy is also fueling inflation, now running at an annual rate of 44 percent, and eroding the value of the Turkish lira. The government’s attempts to shore up the ailing currency have drained the dwindling pool of foreign reserves.
As the value of the lira depreciates, the price of imported goods – such as medicine, energy, fertilizers and auto parts – rises, making everyday costs more affordable for consumers. It also increases the amount of debt payments to businesses and households that have borrowed money from foreign lenders.
The national budget is also under increasing pressure. It is estimated that the devastating earthquakes in February that tore parts of southern Turkey caused more than $1 billion in damages, roughly 9 percent of the country’s annual economic output.
At the same time, Mr. Erdogan has gone on a pre-election spending spree to woo voters, increasing salaries for public sector workers, paying pensioners and offering families free natural gas for a month. Expenditures drove growth, but economists fear such expenditures will fuel inflation.
Trying to encourage Turks to hold their savings in lira by guaranteeing their balances against currency depreciation adds to the potential liabilities of the government.
Critics of the president’s economic approach have been somewhat encouraged by reports that Mr. Erdogan is expected to appoint him this weekend. Mohamed SimsekFormer Minister of Finance and Deputy Prime Minister, to the cabinet. Mr. Simsek is well-versed in financial circles and has previously supported tighter monetary policy.
“What Turkey really needs now is more exports and more foreign direct investment, and for that you have to send a signal,” said Henry Barkey, a professor of international relations at Lehigh University. One signal, he said, could be Mr. Simsek’s appointment.
Mr. Barkey argues that Mr. Erdogan will have no choice but to make a drastic change in policy by winter, when energy import costs will rise and some debt payments will be due.
Others are more skeptical that Mr. Erdogan will back down from his insistence that high interest rates fuel inflation. Regardless of the cabinet’s makeup, he doesn’t think a policy shift is imminent, said Kadri Tastan, a senior fellow at the German Marshall Fund, a Brussels-based public policy think tank.
“I’m very pessimistic about the massive change, of course,” he said.
To deal with large external deficits and depleting central bank reserves, Mr. Erdogan has been counting on allies like Russia, Qatar and Saudi Arabia to help boost their reserves by depositing dollars in the central bank or extending payment deadlines and discounts on imported goods such as natural gas.
In a note to investors this week, Capital Economics wrote that any optimism about a policy shift is likely to be short-lived: “While policymakers like Simsek may be pursuing a more restrictive fiscal policy than we imagined, we suspect Erdogan will give the central point. A banking license to raise interest rates to rebalance the economy.”
Türkiye’s economy of over $900 billion makes it the eighth largest economy in Europe. Mr. Erdogan’s efforts to position himself as a power broker between Russia and European allies since the start of the war in Ukraine have also highlighted Turkey’s geopolitical clout.
Mr. Erdogan, who has been in power for two decades, has built his electoral success on growth-oriented policies that lifted millions of Turks into the middle class. But the massive expansion was not sustainable.
The borrowing frenzy drove up prices, leading to a cost-of-living crisis. However, Erdogan insisted on lowering interest rates and dismissing central bank chiefs who disagreed with him. The pandemic has exacerbated the problems by reducing demand for Turkish exports and curbing tourism, a great source of income.
Mr. Erdogan will likely continue his expansionist policies until the next local elections next year. Until then, Hakan Kara, former chief economist at the Central Bank of Turkey, said the country will probably “run through”.
“The Turkish authorities will have to make difficult decisions after the local elections, when something will have to be conceded in the end,” Mr. Kara said. “Turkey must either return to traditional policies, or deviate further from a free market economy where the central authority runs the economy through micro-control measures.”
“Either way, the adjustment is likely to be painful,” he added.
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