Turkey Has the Chance to Do Things Differently on Its Economy

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Long criticized for its unconventional economics, Turkey’s government has started taking steps toward a more rational approach.

The adjustment was triggered first by the sacking of the country’s central bank governor, Murat Uysal, and then the puzzling resignation on Sunday of the finance minister, Berat Albayrak. The latter — son-in-law to President Recep Tayyip Erdogan — was quickly replaced by Lutfi Elvan, a respected AK Party politician and ex-deputy prime minister. Former Finance Minister Naci Agbal is taking over the central bank.

Having such a seasoned economic management team is a welcome change, but its task will be complicated by the extreme centralization of power in Turkey and a backdrop of geopolitical risk.

This transition will certainly be remembered for its strangeness. Albayrak communicated his resignation by putting out a statement on his Instagram account. It was so badly worded that for hours the working hypothesis was his account must have been hacked. It took almost a day before Erdogan’s government gave a clear signal that the resignation had been accepted. In the meantime, the Turkish lira gained almost 6% against the dollar on Monday, not exactly a sign of confidence in the outgoing minister.

It’s still not clear why Albayrak resigned. His choice of a social media platform to announce his decision may indicate that it was made without telling his father-in-law. One possible reason for his departure is that he wasn’t consulted before Erdogan’s sacking of Uysal. Another possibility is that Erdogan became spooked by the significant depletion of the country’s foreign-exchange reserves over the past 12 months, and recognized the urgent need for change.

Whatever the cause, the result is potentially positive. Agbal is known to have been critical of Albayrak’s handling of the economy, with good reason. Together, Elvan and Agbal will be responsible for redressing Turkey’s macroeconomic imbalances. They’ll need to start by raising nominal interest rates to switch to a policy of positive real interest rates. Expectations have built for the next meeting of the central bank’s monetary policy committee scheduled for Nov. 19.

It won’t be easy meeting those expectations. Turkey’s switch to an executive presidential system in 2018, with weak checks and balances, has usurped the independence of its economic institutions. Executive interference in the conduct of monetary policy has become more common. Government officials, including Erdogan, have made declarations about interest rate policy. To win back the confidence of the financial markets, the new economics team will need to demonstrate its independence.

They’ll need to achieve this at a time of rising geopolitical risk for Turkey. An American administration under President Joe Biden will likely be less clement toward Turkey than Donald Trump, who used his presidential prerogatives to forestall possible economic retaliation against Erdogan.

U.S. sanctions are in the pipeline on account of Turkey’s acquisition of the Russian S400 air-and-missile defense system. A similar outcome may await Turkey’s state-held Halkbank because of alleged violations of Iran sanctions. The acrimony with the European Union over the delineation of maritime borders in the Eastern Mediterranean could ultimately lead to EU sanctions against Turkey by the end of the year.

Elvan and Agbal will, therefore, need Erdogan’s assistance to achieve their objective of returning Turkey to sustainable growth. For the Turkish president, this will mean allowing the new team to switch economic policy despite his firm and often repeated belief that high interest rates drive inflation. In foreign affairs it will mean more focus on diplomacy — and less reliance on hard-power tactics — to reduce geopolitical risk.

Even with this sorely needed transition in Turkey’s economic leadership, the outcome will be determined ultimately by Erdogan. How willing is he to fix the institutional deficiencies introduced by Turkey’s shift to a hyper-centralized presidency?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sinan Ulgen is the executive chairman of Istanbul-based think tank EDAM and a visiting scholar at Carnegie Europe in Brussels.

©2020 Bloomberg L.P.

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