Erdogan Plans to Tighten His Grip on Turkey’s Economy
(Bloomberg) -- Turkish President Recep Tayyip Erdogan said he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month.
With the Turkish lira at a record low against the dollar and down this year against all 17 major currencies tracked by Bloomberg, Erdogan told Bloomberg TV in London on Monday that after the vote transforms Turkey into a full presidential system, he expects the central bank will have to heed his calls for lower interest rates. The central bank’s key rate is now 13.5 percent, compared with 10.9 percent consumer-price inflation.
“When the people fall into difficulties because of monetary policies, who are they going to hold accountable?” the 64-year-old president said in the interview. “They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies.”
That “may make some uncomfortable,” he said. “But we have to do it. Because it’s those who rule the state who are accountable to the citizens.”
The lira slid to its weakest level ever against the dollar after his remarks were published, losing as much as 0.9 percent to 4.4045, down 14 percent this year.
Even the threat of political interference in setting interest rates will harm the economy, said Durmus Yilmaz, Turkey’s central bank governor from 2006 to 2011 and now an adviser to a newly formed opposition party.
“This rhetoric is extremely dangerous and will put Turkey in a dead end street,” Yilmaz said in an interview responding to Erdogan’s remarks. “Turkey did try the exact same thing in 1994 and that's how we ended up with a crisis where interest rates, which politicians at the time thought were too high,” rocketed to more than 400 percent.
Erdogan last month called snap elections for June 24, when a victory would consolidate his one-man rule of a country he’s governed since 2003. Since putting down a coup attempt in 2016, Erdogan has used emergency rule to increase his control over the region’s largest economy. A referendum last year weakened the role of parliament and gave the president sweeping authority in the most radical constitutional overhaul since the republic was founded 95 years ago.
“From the moment we move to a presidential governing system, our effectiveness there will be very different,” he said. “We’re going to do this so we can be held accountable for the responsibility we’ve taken.”
The one-time Islamist firebrand, who was jailed on charges of inciting hatred in 1999, was in London meeting with executives, bankers and investors amid a sense of mounting crisis in Turkey’s economy. He’ll meet U.K. Prime Minister Theresa May and Queen Elizabeth II later on Tuesday.
The outreach comes as Turkey’s relations with its NATO allies fray and its diplomatic focus shifts toward Russia and Iran. The country faces the unprecedented risk of sanctions from the U.S., a risk that Erdogan downplayed.
“We can’t cut off our ties with Russia,” he said in response to whether he was prepared for U.S. sanctions should he consummate the purchase of a missile defense system from Vladimir Putin’s government. “If we’re allies with the U.S., we need solidarity, not sanctions.”
The rapidity of the changes to Turkey’s economic and foreign policies has shaken investor confidence, which is critical because Turkey’s current-account deficit demands steady inflows from abroad. The shortfall in the first quarter of this year was more than $16 billion, almost double the same period last year.
What our economist says:
Sentiment has been the main reason behind the decline of the lira this year, and Erdogan’s comments won’t improve that. Investors have been concerned about government intervention in monetary policy, which is compromising the independence of the central bank. The president’s latest remarks will indeed make some uncomfortable. Unfortunately, unnerving investors is the last thing he needs to do if he wants to stabilize the lira.
–Ziad Daoud, chief Middle East economist for Bloomberg Economics
Erdogan has routinely criticized the central bank for setting interest rates that he says have helped stoke rising prices, an argument that contradicts conventional economic theory. Central bank governor Murat Cetinkaya has said higher borrowing costs would help anchor the currency, a view in line with orthodoxy.
“Of course our central bank is independent,” Erdogan said. “But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive. It will make its evaluations according to this, take its steps according to this. And I believe this will result in very beneficial steps in the future.”
On other topics discussed in the interview:
- Regarding the violence in Gaza:
“There are two people responsible: Mr. Trump and Netanyahu.”
- Regarding a U.S. court ruling against a banker from Turkiye Halk Bankasi AS for trying to evade U.S. sanctions against Iran:
“Right now a great injustice is being done against Halkbank... Such an injustice can’t be... I can’t know what result is going to come from this... I hope it doesn’t yield a result that will completely destroy Turkish-U.S. relations.”
“Hakan Atilla is definitely innocent. So we want his acquittal… If Hakan Atilla is going to be declared a criminal, that would be almost equivalent to declaring the Turkish Republic a criminal.”
- Regarding the U.S. administration:
“We haven’t had a problem up to now. But that doesn’t mean there aren’t areas where our thoughts don’t align, there are.”
©2018 Bloomberg L.P.