The New Turkish Economic Policy: Priorities, Benefits, And Risks – OpEd

Turkey is a country that has faced many economic challenges in recent years such as high inflation, currency depreciation, low growth and external imbalances. The COVID-19 pandemic has also added to the difficulties of the Turkish economy which contracted by 3% in 2020.

In this context, the new Turkish government, led by President Recep Tayyip Erdogan, has announced a new economic policy that aims to address these issues and restore confidence and stability. 

What is new in the new Turkish government’s economic policy?

The new Turkish government’s economic policy is based on a change of personnel and a change of approach. On June 3, 2023, Erdogan unveiled his new cabinet which included some notable appointments in key economic positions. The most prominent one was Mehmet Simsek, a former Merrill Lynch strategist and finance minister who became the treasury and finance minister. Simsek is seen as a market-friendly and pragmatic figure who can communicate effectively with investors and international institutions. Another important appointment was Hafize Gaye Erkan, a former co-CEO of First Republic Bank in the US who became the central bank governor. Erkan is expected to bring her expertise and credibility to the central bank which has been under political pressure to lower interest rates despite high inflation. 

The new economic team has signaled a turn in economic policy from the previous unorthodox and interventionist approach that Erdogan favored. Erdogan has been known for his unconventional views on monetary policy believing that high interest rates cause high inflation and advocating for low or negative real interest rates to stimulate growth and investment. This stance has led to frequent clashes with the central bank and market expectations resulting in volatility and uncertainty in the Turkish economy. The new economic team, however, has vowed to implement “rational” and “orthodox” policies that are consistent with macroeconomic fundamentals and international standards. They have also pledged to respect the independence and autonomy of the central bank and to support its efforts to fight inflation. 

What are the new Turkish government’s economic policy priorities?

The new Turkish government’s economic policy priorities can be summarized as follows: 

Reducing inflation: The new economic team has identified inflation as the main problem of the Turkish economy and the main obstacle to growth and stability. Inflation reached 36% in December 2022, the highest level since 2002, eroding the purchasing power of households and businesses and undermining confidence in the Turkish lira. The new economic team has committed to bringing inflation down to single digits by 2025 using a combination of monetary tightening, fiscal discipline, structural reforms, and exchange rate flexibility. The central bank has already raised its main policy rate from 14% to 19% in June 2023, signaling its determination to curb inflationary pressures. The treasury and finance minister has also announced a medium-term fiscal plan that aims to reduce the budget deficit from 2.5% of GDP in 2022 to 1% of GDP in 2025. 

Stabilizing the exchange rate: The new economic team has also recognized the importance of stabilizing the exchange rate as a means of restoring confidence and reducing external vulnerabilities. The Turkish lira has depreciated by about 28% against a euro-dollar basket since mid-November 2022 reflecting the financial stress and uncertainty that Turkey has faced due to its unorthodox policies and geopolitical tensions. The new economic team has adopted a more flexible exchange rate regime that allows for market-based adjustments and avoids excessive interventions that deplete foreign reserves. The central bank has also introduced a more transparent and predictable communication strategy that informs market participants about its policy actions and expectations. 

Boosting growth: The new economic team has also expressed its ambition to boost growth by leveraging Turkey’s competitive advantages and potential. Turkey has a large domestic market, a young and dynamic population, a diversified industrial base and a strategic location between Europe and Asia. The new economic team has outlined a growth strategy that focuses on increasing exports, investment, domestic credit, innovation and productivity. The treasury and finance minister has announced a series of incentives and reforms that aim to improve the business environment, enhance competitiveness, attract foreign direct investment, support small and medium enterprises, foster digital transformation and diversify export markets. 

What are the potential benefits of the new economic policy for Turkey and the region?

The new economic policy has some potential benefits for Turkey and the region if it is implemented successfully and consistently. Some of these benefits are: 

Improving macroeconomic stability: The new economic policy can help improve macroeconomic stability by reducing inflation, stabilizing the exchange rate and lowering external and fiscal imbalances. This can enhance the credibility and predictability of the Turkish economy and reduce its vulnerability to shocks and crises. Macroeconomic stability can also create a more conducive environment for growth and development as it lowers the cost of capital, increases the efficiency of resource allocation and encourages saving and investment. 

Increasing economic resilience: The new economic policy can also help increase economic resilience by diversifying the sources and drivers of growth and reducing dependence on external financing. By increasing exports, investment, innovation and productivity, the new economic policy can foster a more balanced and sustainable growth model that relies less on consumption and imports. By attracting foreign direct investment, improving the business environment and supporting domestic credit, the new economic policy can also strengthen the financial sector and increase its ability to withstand shocks. 

Enhancing regional integration: The new economic policy can also help enhance regional integration by improving Turkey’s relations with its neighbors and partners. Turkey is a key player in the region with strong economic, political and cultural ties with Europe, the Middle East, Central Asia and Africa. By adopting a more rational and orthodox economic policy, Turkey can restore its reputation and credibility in the international arena and increase its cooperation and trade with other countries. This can benefit both Turkey and the region by creating more opportunities for dialogue, exchange and development. 

What are the significant risks and challenges of the new economic policy for Turkey and the region?

The new economic policy also entails some significant risks and challenges for Turkey and the region that need to be addressed and overcome. Some of these risks and challenges are: 

Maintaining political support: The new economic policy requires maintaining political support from both the government and the public. The new economic team faces the challenge of convincing Erdogan and his ruling party to adhere to their policy framework and respect their autonomy. Erdogan has been known for his strong influence and interference in economic affairs especially in monetary policy. He has also been reluctant to accept any criticism or advice from external actors such as the International Monetary Fund or the European Union. The new economic team also faces the challenge of gaining public support for their policy agenda which may entail some short-term costs and sacrifices such as higher interest rates, lower public spending or structural reforms. The new economic team needs to communicate effectively with the public and explain the benefits and rationale of their policies. 

Dealing with legacy problems: The new economic policy also requires dealing with legacy problems that have accumulated over time due to previous unorthodox policies. These problems include high inflation expectations, dollarization of deposits, high foreign currency debt, low foreign reserves, weak corporate balance sheets, low trust in institutions and low social welfare. The new economic team needs to address these problems gradually and carefully, without causing further disruptions or instabilities in the economy. 

Managing external shocks: The new economic policy also requires managing external shocks that may affect Turkey’s economy adversely. These shocks include fluctuations in global commodity prices especially oil prices; changes in global financial conditions, especially interest rates; geopolitical tensions and conflicts in the region; sanctions or pressures from other countries; or health or environmental crises. The new economic team needs to monitor these shocks closely and adjust their policies accordingly to mitigate their impact.