Turkey’s new economic development plan: Postponing the currency crisis until local elections

The recent plan announced by Turkey’s Economic Coordination Board (Ekonomi Koordinasyon Kurulu) to fight against inflation of the Turkish Lira has failed to meet expectations of the markets and many citizens. The economic approach will seek to suppress the country’s currency crisis until local elections take place in March 2024. Medyascope spoke with economic expert Dr. Mustafa Durmuş regarding Turkey’s fight against inflation. The conversation discussed how a potential increase in interest rates at the country’s central bank could affect citizens and the stability of the Lira. 

he first meeting of the Economic Coordination Board since the reelection of President Recep Tayyip Erdoğan last month was held at the Presidential Complex in Ankara. Hafize Gaye Erkan, the Chairman of the Central Bank, was also present at the meeting. Following the meeting a press conference was held in which Turkish Vice President Cevdet Yılmaz made a statement.

The statement failed to meet expectations of both markets and citizens. Many have wondered whether the new presidential term will mark a departure from President Erdoğan’s previously hardline stances against high interest rates. Addressing this issue indirectly in the press statement, Vice President Yılmaz said: “We will take effective and decisive steps in the fight against inflation, which we see as the main problem”. Yılmaz’s statement included the following key points:

“With the Medium Term Program, we will review public policies and practices and direct resource allocation within this framework. We will reveal our priorities in detail during the budget process, and we will further strengthen our economic structure with the vision of the Century of Turkey.”

“…while achieving our investment, employment, production and export targets, we are determined to remove the current account deficit from being an obstacle to sustainable growth.”

“We will act with an understanding of fiscal discipline and savings in the public sector, and we will use our financial space for social expenditures and qualified investments. We will act with a common mind in consultation with the relevant parties, and we will continue on our way by making the most of the fast and effective working opportunities offered by our new management system, with the contribution of NGOs, business world, academia and other stakeholders in the sectors.”

Turkey’s economic crisis in a nutshell

Crushing yearly inflation has been a persistent feature of the Turkish economy in recent years. President Erdoğan has long opposed interest rate hikes at the country’s central bank. In a notable episode from December 2021, the President insisted on lowering interest rates as the Lira’s value against the US Dollar crashed from around 12 to 18.3 in a matter of weeks. The Lira recovered partially following the interest rate cut after the central bank instituted emergency measures criticized by many as risky and short-sighted, and the past 18 months have seen continued and steady devaluation of the currency. Since his election victory last month, many have paid close attention to whether President Erdoğan might resort to more orthodox economic policies in a bid to salvage the Turkish economy heading into next year’s local elections. Erdoğan’s recent hiring of Mehmet Şimşek as Minister of Treasury and Finance was interpreted by many observers as a possible reversal to such economic orthodoxy. Şimşek, a respected economist in international circles, had previously served in the role between 2009 and 2015 in which he oversaw Turkey’s recovery from the global financial crisis of 2008. It remains to be seen whether Şimşek’s hiring signals a new economic approach from Erdoğan. The potential hiking of interest rates at the Turkish Central Bank, which would represent a reversal for Erdoğan, would likely calm inflation but also present the risk of a larger economic recession. 

What does it all mean?

Medyascope spoke with Dr. Mustafa Durmuş following the statement to make sense of it all and assess how citizens could be affected by a new economic approach. 

“Most people will be employed for more and lower wages”

“The text read by Yılmaz includes much rhetoric heard in the past from such statements. Human-oriented development is the type of development that increases the income of the workers, increases the real wages, the quality of education, and health. So far we haven’t seen anything like this in practice. I expect that real wages will be further suppressed. The quality of education has been greatly reduced due to this government. There are serious problems with health services. When one takes these factors into account, there is no human-oriented development. They envisage a ‘growth and development strategy’ by employing the highest number of people for more and lower wages and providing competitiveness in exports. The message in the text that “…while achieving our export targets, we are determined to remove the current account deficit from being an obstacle to sustainable growth” is not a social and economic development message that values people.”

“There is nothing in this statement that could positively affect the markets”

“Turkey used to make development plans before, and the new approach somewhat reminds me of this. These plans are implemented symbolically. Do not expect a human- or nature-oriented development strategy. In these programs, some growth, inflation, exchange rate and unemployment targets are set, but none of them are met. They repeat what is done every year according to the law. To date, none of these targets  have been fulfilled. Neither of the medium-term programs materialized. There is nothing in the statement that could positively affect the markets. There is nothing reassuring either.”

“The interest rate hike has been accepted because Turkey has no other choice”

“The only thing that can be talked about in detail from this statement is the fight against inflation. But they do not say it clearly one way or the other. It is said that “effective steps” will be taken. This likely means news of an interest rate hike. We’ve already been waiting for this for a while because Turkey really had no other option. President Erdoğan also made a statement indicating that he would accept such a rate hike. The reason is very simple: Turkey faces a very serious risk of a currency crisis. They’ll probably increase interest rates to 20-25% in two months. Thus, they think that they can make Turkey attractive for hot money. With the inflow of hot money, the exchange rate is suppressed. It will then be managed for a while by preventing it from causing foreign exchange and banking crises.”

“They will postpone the risk of currency crisis until local elections”

“The current account deficit has reached 58.60 billion dollars. Short-term foreign debt payments exceeded 200 billion dollars. More importantly, the Central Bank’s debt to the domestic market has reached $158 billion. We are at risk of a real currency crisis and the government knows it. This is the reason why Mehmet Şimşek and Gaye Erkan were appointed. They brought people who gave confidence to the international financial markets, knew them, lived with them, and could obtain finance from them, so that there could be a very fast financial inflow. With such a financial inflow, they should be able to postpone a possible currency crisis at least until the local elections. In other words, they are trying to postpone the crisis that they cannot eliminate.”

“Unemployment will be ignored because the government got what it wanted in the elections”

“If interest rates are increased, we will face a very serious risk of recession. Unemployment will increase. Before figures were announced a few days ago, they had kept unemployment around 10%. Now they don’t need it either, because the government got what it wanted in the presidential and general elections. After that, they are not worried about the increase in unemployment. Their main concern from now on is the emergence of the currency crisis and its postponement.”

“Since their election victory, tough decisions will be made with the mindset ‘you have chosen us once again and given us your approval'”

“People have been waiting for this announcement with hope, but it didn’t meet expectations. There is no news that will please the retirees and the minimum wage earners, there are fancy words. There is austerity under the name of the anti-inflation program. They say, ‘We will ensure financial discipline’. This does not mean that they will save on their own luxuries. ‘Savings in public’ means that the raises of public workers will be kept low and social expenditures for society will be low. There is nothing that gives hope to the workers and makes them say, ‘We will be more comfortable this period’. On the contrary, he says, ‘We will make effective decisions’, and this is scary. They will make tough decisions and implement them in narrow groups, with the assurance that ‘you have chosen us once again, that is, you gave us your approval’. When we look at it from the labor side, we may be faced with news that we will regret from now on.”