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Turkey: Can Erdogan’s new economics team turn things around?

Erodgan's appointments signal that his economic policy is off to a good start, but there are still reasons for concern
Turkish President Tayyip Erdogan shakes hands with the new Treasury and Finance Minister Mehmet Simsek alongside new Energy Minister Alparslan Bayraktar, 3 June 2023 (Reuters)

With the elections behind us, it is now time to return to reason in managing the Turkish economy.

This has already started with the appointment of a new cabinet just two days after the final election results were announced.

Turkish President Recep Tayyip Erdogan had a choice: either appoint the former central bank governor, Sahap Kavcioglu, as the minister of finance and treasury to continue his highly unconventional monetary policy based on the motto "interest is the cause, inflation is the result", thus insisting on maintaining low interest rates by obtaining currency swaps and the injection of billions of dollars, or appoint Mehmet Simsek to revert to a reasonable policy framework.

Erdogan chose the second option. It's a good start, but there are still reasons for concern.

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We are at a point in economic governance when domestic discussions within the business community mull "Argentinisation" or "Lebanisation" in talking about a severe balance of payments crisis.

But Turkey is of course neither Argentina nor Lebanon. It is an industrial country where more than 80 percent of exports are manufactured industrial goods. So any balance of payments crisis, or sudden stop in fund flows, could have a devastating impact in terms of unemployment.

That's not great for the government's prospects in the March 2024 local elections.

Restoring credibility

This year, Turkey's budget deficit will reach its highest level in 20 years, widening to 10 percent of its gross domestic product (GDP), as well as a 10-year high in its current account deficit, reaching six percent of GDP.

There are a number of factors behind the rapid rise in budget expenditures in the first and second quarters of 2023: earthquake expenditure, the election cycle, the decision to raise the minimum salaries of government employees to TL 22,000, and the impact of the recent hike in the wider minimum wage to TL 11,400. All these factors will have an impact on the budget deficit in 2023.

Erdogan starts his new term with a huge credibility gap on economic policy

However, we are now at a stage where an unsustainable economic policy framework has become a very acute problem.

Erdogan starts his new term with a huge credibility gap when it comes to economic policy. His appointments of Simsek as minister and Gaye Erkan as the first female governor of the central bank are designed to break with the shortcomings of the past.

However, these appointments on their own don't go far enough to restore credibility to Erdogan's economic policies.

Turkey still needs a full economic policy team and a comprehensive economic stabilisation programme to halt any further doubt.

Challenges ahead

The elections were three weeks ago, and we still can't tell what is going to happen.

There is no established plan, backed by decisive and persuasive action, for the next few months, let alone years, of economic governance. The appointment of Kavcioglu as the head of the Banking Regulation and Supervision Agency is clearly not a good decision. The bank had the highest reputation deficit during his term. 

Mixed signals are not good when you are trying to fill in the credibility gap.

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So, why the mixed signals? Could the new parliamentary arithmetic be the reason?

In the previous parliament, Erdogan's Justice and Development Party (AKP) had 295 MPs, six short of a simple majority of 301. Now the AKP has declined to 263 seats.

Although, in both cases, President Erdogan’s coalition partners more than make up the difference, one still wonders about the possibilities this parliamentary arithmetic opens up.

A stabilisation programme with fiscal measures would definitely need a simple parliamentary majority.

That should be easy, especially as the government is freshly elected and needs to get the economy into shape before local elections in nine months.

Turkey’s direction remains uncertain, especially considering the raging debate about which direction the country might take: Argentinisation and Lebanisation.

The current economic situation is unsustainable and Erdogan is starting his term with a huge credibility gap in the markets.

Is it time for the International Monetary Fund to revisit Turkey? We will soon see. The possibilities are wide open.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Eye.

Güven Sak is the Director of the Area Studies Programme at the Economic Policy Research Foundation of Turkey. He holds a PhD degree in Economics from the Middle East Technical University and an M.A. degree from the University of East Anglia. He worked as a senior researcher at the Capital Markets Board of Turkey, and as a faculty member at the Department of Public Finance, the Faculty of Political Sciences, Ankara University and as an external founding member of the Monetary Policy Council of the Central Bank of Turkey.
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