Turkey is completely changing its economic policy – The Post

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Six months have passed since the re-election of Recep Tayyip Erdogan as the President of Turkey, and since then his economic policies have changed significantly. After years of controversial and economically ill-advised decisions to maintain the consensus, which caused a very serious increase in inflation and a strong depreciation of the Turkish lira, he took a completely opposite path that gradually leads to the normalization of the economy.

The policy adopted in recent months has three goals: to stop very strong inflation and the depreciation of the Turkish lira, to replenish the currency reserves that the central bank has used in the past to support Erdogan’s decisions, and to reduce the country’s huge trade deficit. This necessary reversal of the trend could result in a partial slowdown of the economy after very strong growth in recent years.

In recent years, Erdogan has pushed for measures to push economic growth at all costs, but which have led to huge consequences: mainly because of his insistence on keeping interest rates low, unlike most of the world’s economies, today inflation is very high. poverty and international investors lost confidence in the Turkish economy. After the election, he made two appointments that had a big role in changing economic policy: the new economy minister, Mehmet Simsek, and the new central banker, Hafez Gaye Erkan, both economists of rather traditional ideas and highly respected internationally.

The government’s priority now is to stop inflation, which at times reached 80 percent and is now around 60 percent. It means prices have almost doubled over time, leaving residents in considerable trouble. Such increases have had an impact especially on the poorest, but also on the upper middle class: for example, the president of the central bank recently declared that he has to move back in with his parents because he has trouble affording a house on his own. .

This gives an idea of ​​the urgency of the fight against inflation in Turkey. And that’s why the central bank decided on a series of significant and rapid increases in benchmark interest rates: raising them from less than 10 percent to 40 percent in six months.

Turkish central bank reference interest rate. Source: Trading economy

From 2021, while the rest of the world raised interest rates to fight inflation, Erdogan effectively forced Turkey’s central bank to cut them to stimulate economic growth. Cutting rates is the exact opposite of what economic theory says should be done in times of high inflation, because it essentially means leaving it unchecked and allowing it to rise further.

The rate hike means the country is abandoning Erdogan’s experiment and returning to more traditional economic policies. “We are on the right track. There is clear evidence that confidence is returning. But we have to be patient, it’s still a challenge,” Economy Minister Simsek al said recently Financial Times.

A rate hike policy takes time to produce effects. Year-on-year inflation is still very high: in November, prices were 62 percent higher than a year earlier. However, when we look at monthly increases, i.e. how prices develop compared to the immediately previous month, inflation appears to be falling: in July prices rose by 9 percent compared to June, while in November they rose by just 3 percent compared to October.

According to most analysts, interest rates will need to rise further to further reduce inflation. A side effect of this policy is a threat to economic growth, and for this reason it is rather unpopular and criticized at the political level.

So the job of a central banker is quite delicate. And not only because he found himself managing the monetary policy of a country with an extremely compromised economic situation, but also because Erdogan has a notoriously tumultuous relationship with central bankers: he has replaced four of them between 2020 and today, mainly due to disagreements. whether or not there is a need to raise interest rates.

Although Erdogan publicly supports the new policy, many investors and analysts remain skeptical about how much leeway the president will give Erkan and Simsek. A number of important local elections are taking place early next year, including those in Istanbul and Ankara, which could influence economic policy decisions.

But so far, things seem to be moving forward, also because the current monetary policy is proving to be positive, especially for the trend of the Turkish lira, the local currency, which has lost a lot of value against the dollar in recent years, and other strong currencies precisely because of these counterintuitive decisions monetary policy. In the first six months of the year alone, the Turkish lira lost almost 30 percent of its value against the dollar. It has continued to weaken since June, but at a much slower pace, a sign that international investors have more confidence in the appropriateness of current monetary policy decisions.

The lira is also supported by the fact that, in the meantime, the central bank has also committed to restoring foreign exchange reserves, i.e. stocks of foreign currency that each central bank holds for precautionary reasons: in recent years, Erdogan’s ill-advised elections caused the Turkish lira to weaken and the central bank had to intervene on currency markets to prop up its value and drain its reserves. If he didn’t, the currency would collapse even more.

Economy Minister Simsek then set out some policies to support exports and investments, which must become the basis for supporting growth and which must serve to compensate for any decline in domestic consumption due to inflation and interest rate increases.

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