Turkey: Erdogan forced to radically change economic policy

A delicate situation

The former governor paid from his post for the dramatic drop in central bank reserves, which have been halved since the start of the year to $ 18 billion; that of the Turkish lira, which lost 30% of its value in 2020 to fall to the historic low of 8.5 per dollar on Friday; and keeping inflation above 10%.

Against the backdrop of anemia in the fifteenth world economy, which entered recession at the end of 2018 with little prospect of a strong rebound, due to Covid-19. Geopolitical tensions are also doing nothing to lure investors right now to the Bosporus, as the country must borrow to close its structurally high current account deficit.

The appointment of Naci Agbal, 52, appreciated by investors during his time at the head of the Ministry of Finance in 2015-2018, signals a significant realignment of positions and influences around the Head of State, as illustrated by the resignation, a few hours later, of Berat Albayrak, Minister of Finance since 2018 and also son-in-law of the Head of State. A thunderclap, since Berat Albayrak was often presented as a potential successor to the Turkish president, 67 years old and in power since 2003.

The son-in-law leaves

The new governor of the central bank had repeatedly criticized the policy of Berat Albayrak, who advocated, with Recep Tayyip Erdogan, the fall in interest rates at all costs. A decline supposed, of course, to stimulate growth, but also, according to Recep Tayyip Erdogan and his son-in-law, to contribute to the fight against inflation, contrary to what historical experience and economic theories show. Indeed, low interest rates automatically lead to an expansion of the money supply and therefore stoke inflation.

The policy advocated by Recep Tayyip Erdogan, by making investments in national currencies less profitable, also contributed to the weakness of the pound. The former governor had only dared to brave the head of state’s allergy to any increase in interest rates only once in two years, confining himself to a defense of the Turkish lira by very costly interventions in financial markets.

The all-powerful Turkish president therefore seems to have “eaten his hat” this weekend by calling Naci Agbal. It remains to be seen whether the new governor, who could increase the key rate, currently set at 10%, at the next meeting of his monetary committee on November 19, will be able to pursue an independent policy for long. Recep Tayyip Erdogan is already on his second dismissal as central bank governor in sixteen months.