Prices that double every year, the Turkish lira at record lows, the Central Bank’s foreign exchange reserves in negative for the first time in 21 years, a tangle of regulations and rules applied to foreign exchange markets to avoid a bank freeze, international credibility on the rocks, and policies and institutions — both economic and monetary —over which one man, the re-elected Turkish president, Recep Tayyip Erdogan, has the last word.
Given the situation in Turkey, there are few takers for the position of Minister of Finance and Treasury. “It is not a good position, it is one of the worst jobs that you can get,” said Bilge Yilmaz, professor of Economics at the Wharton Institute in Pennsylvania, a few weeks ago. Despite this, he wanted the role if the opposition won. Mehmet Simsek — a man trusted by the markets who led several economic ministries between 2007 and 2018 — declined Erdogan’s offer to return to the post.
The president proposed the ministry to him at the beginning of the presidential campaign, but Simsek said that, at most, he would help advise decisions when asked. It takes great courage to say no to someone like Erdogan, but one must also have little regard for one’s reputation to agree to run the Turkish economy as Erdogan’s helmsman. Because, in the end, it is Erdogan’s policies that will be carried out, however discredited they may be.
Indeed, ultranationalist politician Sinan Ogan — who came third in the first round of the presidential election — said he would only support Erdogan in the runoff if he stopped arguing that high interest rates cause inflation, an idea he called “nonsense.” Erdogan has clung on to this idea against all odds and the advice of his advisers, such as Simsek. The president has steadily replaced his advisers with figures who are more loyal to him and in line with his views. The case in point is the current Finance Minister, Nureddin Nebati, who wrote his doctoral thesis about the democratic achievements of Erdogan’s party. When a journalist asked him about economic figures, he replied that the economy was not so much about numbers, but rather the “brightness” in his eyes.
Maintaining the idea that low interest rates combat inflation has been very costly for Turkey. Since the 2018 elections, the lira has lost 80% of its value, which in turn, has contributed to skyrocketing inflation.
Credit has not flowed as intended, either, because the banks have restricted the clients to whom they grant it. What’s more, the banks offer credit with interest rates that are three times higher than the official rate. To maintain the value of the lira without raising interest rates, the Central Bank and the Ministry of Finance have had to resort to workaround measures in order to avoid having to declare a freezing of financial assets. The authorities have established a system of savings for which the state pays savers the differential between the interest rate offered by the bank and the depreciation of the lira against the dollar.
Exporting companies have also been forced to exchange part of their earnings into foreign currency. They must request permission from the Ministry of Finance and justify each purchase of currency. What’s more, Turkey has resorted to the mass sale of funds in currency from the Central Bank, which they have had to replace on the fly with deposits made by countries such as Russia, Saudi Arabia, China, Qatar and the United Arab Emirates. These deposits will have to be returned some day, and it is not clear what political conditions are attached to the payments.
Despite this, Bilge Yilmaz believes that the situation can be salvaged, given that the state is not in excessive debt. But, he said, this is only possible if the current course is corrected and international confidence is recovered. Economists warn that if people who are trusted by the population, companies and markets are not placed at the head of Turkey’s financial authorities, there is a risk of a balance-of-payments crisis in the coming months that could lead to tougher controls on capital. “You need to have credible agencies, decent monetary regulations and a reasonable inflation outlook for the next three or four years. These will be necessary steps, but they’re not enough to stabilize the economy. Without that, the outlook is scary,” said economist Osman Cevdet Akçay.
The problem is that Erdogan has shown little sign of wanting to change course — before the elections, he insisted that he would continue with the same economic policy — or of listening to advisers who present ideas contrary to his own. “It is likely that with this electoral victory, Erdogan’s new government will feel vindicated and continue with the status quo despite the doubts it raises even among his followers,” added Akçay.
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