Has Erdogan really replaced "Erdoganomics" with orthodox economics?

By John Solomou

Nicosia [Cyprus] June 26 : Recep Tayyip Erdogan, having succeeded in getting re-elected for a third time as Turkey's President, in the face of the big economic crisis plaguing his country, has given some indications that he may replace his unorthodox economic policies, dubbed by prestigious foreign media as "Erdoganomics", with orthodox economics.

But first, let's see what "Erdoganomics" are. According to an explanation of the term given by the Washington Post, it includes erratic management of the economy, coupled with double-digit inflation, fuzzy statistics and departure from a rules-based order. The underlying doctrine is that interest rates are the mother of all evil and cause inflation, though conventional economics says otherwise."

As a result of the application of "Erdoganomics", Turkey which in 2014 was the world's 16th largest economy has slipped three places in the relevant ranking and now, according to the World Bank, occupies number 19, with a GDP of US$906 billion, compared to almost US$1 trillion in 2013.

Last February's devastating earthquakes that struck Turkey caused the loss of life of about 56,000 people and more than USD 34 billion in direct loses, while reconstruction of damaged buildings will require more than USD 70 billion. The earthquakes have added pressure to an increasingly fragile macro-financial situation.

According to financial experts, in the last months before May's elections, the Central Bank of Turkey has depleted all its foreign currency reserves as it tried to prop up the Turkish Lira and in May net reserves reached a record low of negative USD5.7 billion.

Erdogan's unorthodox economic policies of keeping interest rates low in order to boost exports, growth and employment have created a serious currency and cost-of-living crisis, while the average Turkish family is struggling to afford daily essentials.

Also, since the start of the year, the Turkish Lira has lost around 21 per cent of its value against the dollar.

After his re-election, Erdogan appointed two internationally respected officials, former Merrill Lynch economist Mehmet Simsek, as Finance Minister, and Hafize Gaye Erkan, formerly of Goldman Sachs and First Republic Bank, as Governor of the Central Bank.

Immediately after his appointment as Finance Minister Mehmet Simsek declared that "Turkey had no other option but to return to a rational ground. Price stability will be our main target. Reducing inflation to single digits in the medium term is of vital importance for our country."

In a recent Twitter post, Simsek said that he favours a free-floating foreign exchange regime.

Last Thursday, Turkey's Central Bank, for the first time in 16 months, raised interest rates from 8.5 per cent to 15 per cent. However, as the markets are convinced that a much bigger increase is necessary to improve the country's financial situation and that the increase announced was significantly less than expected, the Lira fell by 4 per cent resulting in a historical high of 24.5 against the US dollar.

The Central Bank stated that further increases in interest rates would follow "in a timely and gradual manner until a significant improvement in the inflation outlook is achieved."

On Friday, Central Bank Governor Hafize Gaye Erkan, during a meeting with the Turkish Banks Association, said she was confident that all economic units in Turkey would be working hard to combat inflation in line with the government's economic targets and added: "I am sure that we will tackle this in a stable, determined, and goal-oriented manner."

Simsek and Erkan are expected to do their best to implement rational economic policies, but they have to tread very carefully, as Erdogan may change his mind on the subject of economics, as he did in the past.

Many economists doubt Erdogan's commitment to abandon his firm view about keeping interest rates low. They recall that he unceremoniously fired three previous Central Bank Governors who refused to lower interest rates according to his wishes. In the end, he found a compliant Governor, who in 2021 reduced the Central Bank policy rate from 19 per cent to 8.5 per cent.

The fact that Erdogan has recently repeated that he has not changed his views on the economy may mean that he intends to use the new Finance Minister and the Governor of the Central Bank to absorb the political cost of unpopular reforms and then replace them with people who are willing to implement his unorthodox views on the economy.

That Erdogan has not changed his way of thinking is evidenced by a statement made last week, when he said: "Some friends should not make the mistake of thinking whether the President is going through a big change in interest rate policies. I am the same here. We have worked with a low-interest rate, low-inflation theory. I still work with the same understanding."

As it happened many times in the past, when the dividing lines of politics and economics become fuzzy, the government is usually unable to take independent and pragmatic decisions that could really serve the country's economy and convince the world markets.

As Gabriel Gavin and Geoffrey Smith point out in a recent article in Politico: "Erdogan is hedging his bets politically on the anti-inflation strategy. On the one hand, he has brought in a new team of main-steam financial experts to prescribe the bitter medicine needed to control runaway prices, but he is also simultaneously distancing himself from rate hikes by insisting that he still believes slashing rates will tame spiraling costs for basic goods and staple foods."

So, it remains unclear whether we have seen the end of "Erdoganomics" and the return to economic rationality in Turkey or not.

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