Turkey’s Economic Reforms
Turkey’s president Recep Tayyip Erdogan has pledged to rein in government spending and bring the inflation rate below 10 percent as part of efforts to rebuild credibility with investors after years of economic turbulence.
The government is prioritising efforts “to achieve single-digit inflation” and will create a price-stability committee, Erdogan said on March 12, in what had been flagged as a major policy speech.
Plans include indexing public sector price and tax increases to government inflation targets and increasing the issuance of lira-denominated bonds. Turkey will also abolish extrabudgetary spending, reform the public tender process and reduce the budget deficit to 3.5 percent of gross domestic product from a previous target of 4.3 percent, he said.
“The public finance reforms we will implement in this period will positively distinguish us from many other countries. We are determined to write a new success story,” Erdogan said.
In recent months, Erdogan has promised a return to free-market principles after he replaced his economy team late last year. His son-in-law, Berat Albayrak, quit as finance minister after complying with Erdogan’s demands to keep interest rates low to fuel economic growth, a move that devalued the lira currency and sparked an exodus of foreign capital.
Low interest rates helped Turkey’s $730bn economy expand last year during the coronavirus pandemic. But inflation has been stuck in the double digits for much of the past three years, and unemployment remains above 12 percent.
The new finance minister, Lutfi Elvan, and central bank governor, Naci Agbal, have vowed to keep monetary policy tight to bolster the lira and curb inflation that accelerated to 15.6 percent in February.
Agbal raised interest rates by 675 basis points to 17 per cent in November and December, helping the Turkish lira recover, although a stronger dollar and rising US treasury yields have halted the rally in Turkish assets.
Erdogan’s promise in the speech to tighten state finances and lower inflation “were welcome but there was little else that was meaningful and concrete in terms of major reform initiatives,” said one London-based investor who was not authorised to be quoted by name.
What was most notable was what Erdogan did not say — he did not reiterate his unconventional theory that high interest rates cause inflation nor his recent defence of Albayrak’s stewardship of the economy.
The real test will come at the central bank’s next monetary policy meeting as expectations mount it will increase rates. “That will be seen as a validation of Erdogan’s willingness to support the central bank governor, part of a bigger reorientation of the policy framework in Turkey and a much stronger message than this speech.
Erdogan’s recent pivot has also included a pledge to reform the judiciary to improve human rights, as well as diplomatic outreach to allies and rivals alike. Relations are strained with Turkey’s Western partners and across its own region as Erdogan pursued a more assertive foreign policy.
In the latest sign, Ankara wants to heal these rifts, Erdogan said separately that his government had re-established diplomatic contacts with Egypt “right below the highest level,” seven years after Cairo expelled the Turkish ambassador in the wake of the overthrow of the late president, Mohamed Morsi, an Erdogan ally.
Turkey is at odds with Egypt, as well as Greece, Israel and Cyprus, over maritime boundaries in the eastern Mediterranean as the countries seek to exploit hydrocarbons below the seabed. The EU has threatened to impose sanctions on Ankara for dispatching warships to contested waters last year, prompting Turkey to strike a more conciliatory tone in recent months.