Straightening out Turkey's economy, the main challenge for Erdogan's new term

Prices doubling every year, the Turkish currency at historic lows, the Central Bank's foreign exchange reserves in negative for the first time in 21 years, a tangle of regulations and regulations applied to foreign exchange markets to avoid calling it corralito, international credibility at rock bottom, and policies and institutions — both economic and monetary — on which one man, re-elected Turkish President Recep Tayyip Erdogan has the final say.

Given such a panorama, there are not many resumes bidding for the position of Minister of Finance and Finance of Turkey. "It's not a good position, it's one of the worst jobs you can get," said a few weeks ago Bilge Yilmaz, professor of Economics at the Wharton Institute (Pennsylvania, USA) and who sounded for the position in case of opposition victory. Mehmet Simsek, a confidant of the markets who held several economic ministries between 2007 and 2018, declined Erdogan's offer to return to the post.

The president proposed it at the beginning of the campaign, but Simsek said that, at most, he would limit himself to advising when asked. You have to be very brave to say no to someone like Erdogan, but you also have to have little esteem for one's reputation to agree to run the Turkish economy as Erdogan's helmsman. For, in the end, the doctrines he deems expedient, however discredited, will be applied.

One of the demands made to the president by the ultranationalist politician Sinan Ogan, who came third in the first round, to support him in the second round was to abandon "the nonsense" that high interest rates cause inflation. Erdogan has maintained this postulate against all odds and advice from his advisers and has been replacing his previous advisers, such as Simsek, with others more loyal and capable of following the flow. One of them is current Finance Minister Nureddin Nebati, a doctor in politics with a thesis on the democratic achievements of Erdogan's party. For him, the economy is not measured so much by numbers, but by the "brightness" of his eyes, as he replied to a journalist when he asked for figures.

Maintaining the idea that low interest rates serve to combat inflation has cost Turkey dearly. Since the 2018 elections, the lira has lost 80% of its value, helping to push inflation to crazy limits.

Credit has not flowed as intended either, because banks have restricted the customers to whom it is granted and the interest to those who give it is three times higher than the official rate. And to maintain the value of the currency, without being able to raise interest, the Central Bank and the Ministry of Finance have had to resort to patches that will avoid having to declare a corralito: they have established a savings system by 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 convert part of their profits into currency and have to ask permission from the Ministry and justify each purchase of currency. In addition, it has resorted to the massive sale of funds in currency of the Central Bank that have had to be supplemented on the fly with deposits made by countries such as Russia, Saudi Arabia, China, Qatar and the United Arab Emirates, which will have to be returned one day and whose political counterparts are not clear.

However, Yilmaz believes that the situation can be reversed, given that the state's indebtedness is not excessive, but as long as the course is straightened out and international confidence is restored. Without a reinstitutionalization that puts at the head of the agencies people who generate confidence both in the population and in companies and markets, several economists have warned of the danger of a balance of payments crisis that in the coming months could force the imposition of tougher capital controls. "There needs to be credible agencies, decent monetary policy, and a reasonable outlook for inflation over the next three to four years. These will be necessary steps, but not enough to stabilize the economy. In the absence of it, the prospect is scary," says economist Osman Cevdet Akçay.

The problem is that Erdogan has shown little sign of wanting to change course – in fact, before the elections he insisted that he would continue with the same economic policy – or of allowing himself to be advised by advisers who present him with 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 generates even among its followers," Akçay predicts.

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