Turkey’s economy is in a bad way. In June the budget deficit, seven times higher than a year earlier, reached 219.6 billion lira ($8.37 billion). The forecast for July shows it widening still further.
On July 16 Turkey raised the tax on gasoline, adding to the recent two percent increase to VAT (value added tax) and five percent hike to corporation tax. Aimed at tackling the budget deficit, those tax hikes will have the deleterious side-effect of stoking inflation, which stood at 38 percent in June. Two days after the tax hike, the Turkish lira weakened to a record low of 26.6 against the dollar.
On July 17 Turkey’s newly re-elected president, Recep Tayyip Erdogan, hoping to capitalize on his recent diplomatic efforts at repairing ties with the Gulf states, landed in Saudi Arabia. He was on a mission to shore up his country’s economy through new trade deals. “This visit has two main topics,” he told a news conference at an Istanbul airport before setting off, “investments and a financial dimension. We have high hopes for both.”
Accompanied by an entourage of some 200 business people, the first stage of his three-stop tour was the Red Sea city of Jeddah in Saudi Arabia. Since the deal had already been made, it was no surprise to Erdogan that the next day Saudi agreed to boost Turkey’s struggling economy by way of a major contract.
Erdogan and Saudi Crown Prince Mohammed bin Salman (MBS) attended the signing ceremony between the Saudi defense ministry and the Turkish defense firm Baykar. In a tweet, the company’s CEO, Haluk Bayraktar, said the deal covered the export to Saudi Arabia of the Bayraktar Akinci plus the necessary technical cooperation, and called it “the biggest defense and aviation export contract in the history of the Turkish Republic.”
The Bayraktar Akinci is a high-altitude long-endurance unmanned combat aerial vehicle, equipped with dual artificial intelligence avionics. It is, in other words, a highly sophisticated drone.
Saudi Arabia is acquiring it, according to its defense minister Prince Khalid bin Salman, “with the aim of enhancing the readiness of the kingdom’s armed forces and bolstering its defense and manufacturing capabilities.” No doubt Saudi’s newly acquired friend, Iran, took note of this addition to Saudi’s military capability, together with its Houthi proxies who have been launching missiles into Saudi Arabia from Yemen since 2017. The deal has the added advantage of boosting MBS’s ambitious Saudi Vision 2030 plan, aimed at diversifying the kingdom’s economy away from oil.
Before Erdogan moved on to the next leg of his expedition, Turkey and Saudi Arabia signed several memoranda of understanding (MoU) in sectors including energy, real estate, defense and direct investments. Erdogan left a further clutch of signed MoU’s in his wake as he rounded off his three-country tour of the Gulf. Turkey and the United Arab Emirates (UAE) signed deals worth $50.7 billion – “to further cement ties between the UAE and Turkey,” as UAE finance minister Mehmet Simsek tweeted. The agreements involve export financing, earthquake bonds, energy, defense and other sectors.
In the long-term Erdogan’s trade and financial deals in the Gulf will certainly play a part in restoring Turkey’s economic balance, but they are unlikely to have a significant effect in the short term Which may explain Erdogan’s sudden, and certainly unexpected, U-turn on his veto on Sweden’s membership of NATO.
NATO’s Secretary General, Jens Stoltenberg, announced the decision on July 10 from Vilnius, Lithuania, where the alliance was preparing to open its annual summit. The deal, said Stoltenberg, was that Tukey’s president had lifted his objections to Sweden’s entry into the alliance while, in return, NATO would establish a new “special coordinator for counterterrorism.” The comparative freedom that Sweden allows its Kurdish minority, among whom Erdogan is regarded negatively, was a major factor in Erdogan’s veto.
There was an additional dimension to the deal, said Stoltenberg. Sweden and Turkey would continue to work bilaterally against terrorism, and Sweden would help Turkey renew its application to enter the European Union (EU), first made in 1987.
Turkey’s accession talks stalled in 2016 over the EU’s concerns about human rights violations and subverting the rule of law, Turkey would need to demonstrate significant improvements in both areas before EU membership could become practical politics. Nevertheless, in the light of Erdogan’s evident desire to re-open its EU application, on July 20 the 27 EU foreign ministers discussed relations with Turkey. They agreed that the bloc should re-engage with Ankara, but they did not endorse Erdogan’s call to revive its moribund membership bid.
As soon as Erdogan resumed the presidency, he made two new key appointments –- Mehmet Simsek as his new finance minister, and Gaye Erkan as governor of the Central Bank, the first woman to hold that position. Of dual Turkish and UK nationality, Simsek’s career includes a period working for Merrill Lynch, the investment and wealth management division of Bank of America. Erkan is a dual Turkish-US citizen, and her background includes a spell with Goldman Sachs. the multinational investment and financial services bank.
The flow of foreign exchange into Turkey has been insufficient to meet the nation’s needs, and Turkey will need to find new external debt channels. Simsek and Erkan have been brought in to address precisely this issue. The goals are to achieve strong economic output, reduce inflation, ensure looser capital restrictions, stabilize the exchange rate, and protect purchasing power.
One area that will cause few headaches to the two new brooms are Turco-Israeli economic relations. Trade between the two nations is flourishing, and indeed it continued to flourish throughout the serious political crises that have arisen between them over the past decade and more. Now it is positively booming.
Total trade volume between Turkey and Israel in 2021 was approximately $8 billion (29 billion shekels) – the highest in the history of the two countries to that point. But trade continued to mushroom, and the 2021 annual record was broken in the first ten months of 2022, with a total trade volume of $8.6 billion (31 billion shekels). Some 80% of that trade is represented by Turkish exports to Israel.
This will no doubt be a cause for mutual congratulation when Erdogan eventually meets prime minister Benjamin Netanyahu on his projected trip to Turkey, postposed on account of health and domestic issues.