A side of the headquarters of the Central Bank of Türkiye (on file)
With the economic challenges facing Turkey escalating as President Recep Tayyip Erdogan’s new presidency begins, expectations are high for the new government’s policies and whether they will bring about fundamental changes to Fix previous imbalances.
The latest economic indicators shed light on the facets of Turkey’s economic crisis, with the lira recently falling to record highs and, moreover, net foreign exchange reserves falling as authorities seek to meet demand for foreign exchange and stabilize the local currency’s exchange rate, and as the government eases controls on Reports of Lira’s control.
Against this backdrop, the meeting of the Central Bank of Turkey, scheduled for June 22 and following the appointment of Hafiza Ghaya Arkan, is seen as the “first test” of Erdogan’s new presidency, which will shed light on the nature of policy Turkey Will it change its “unconventional” policy related to rate cuts in the current new phase, or will it continue in the face of high inflation?
Based on the results of the much-anticipated central meeting, the future direction of the Turkish economy will be determined, which faces a series of structural problems and wide-ranging challenges, both related to those “unconventional” policies and external shocks, from the new crown From the beginning of the pandemic and its effects to the end of the war in Ukraine and the devastating earthquake that hit ten cities in Turkey on February 6 last year.
Turkish economic crisis
In an exclusive statement to the Sky Arab News website, World Bank advisor and economics professor Dr Mahmoud Anbar said:
- The Turkish economy – since the pre-war period in Ukraine and its fallout – has suffered from clear fundamental structural problems.
- These issues then directly affected the Turkish lira, which hit a record low and fell sharply, and inflation, which hit more than 85% last October.
- The Turkish economy has also witnessed – as a result of these structural problems and successive crises – a decline in productivity.
The Turkish lira slumped to record lows in Friday’s session, after posting its biggest drop since 2021’s historic crash in Wednesday’s session.
The lira has lost more than 19.9 percent of its value since the start of the year, and its losses have worsened since President Recep Tayyip Erdogan was elected to a third term last month.
Anbar added: “The main reason behind these problems is the fiscal and monetary policies that Turkey follows, which are mainly controlled by President Erdogan, which is considered to be the president’s encroachment on the technical work of setting monetary policy, which produces had a negative impact on economic conditions.””.
He noted that “following this imbalance is the economic impact of the war in Ukraine, which affects all countries in the world, especially economically exposed countries, which are the most affected by external shocks.”
The World Bank adviser continued: “Nevertheless, at a time when many central banks, including the Federal Reserve, have adopted monetary tightening measures (the sum of measures taken by central banks to reduce the demand for money) to curb inflation, and by raising interest rates, however, Turkey’s central bank, which relied on unconventional policies, began cutting interest rates in a way that negatively affected the economy.
- U.S. financial executive Hafiza Ghaya Erkan has been named head of Turkey’s central bank as it prepares to change course and tighten policy after years of low interest rates and a cost-of-living crisis.
- Erdogan has ousted three of his predecessors for tightening monetary policy against his wishes, before appointing former central bank chiefs in March 2021.
- Under current former governor Shihab Qawuji Oglu, Turkey’s central bank has not raised rates at all, instead cutting rates to 8.5 percent, down from 19 percent when he took office.
- Erdogan has publicly called for rates to be cut below 10%, and he has more than once committed to doing so because he believes it will support production and investment.
“Conditional” improvements
Citing a World Bank report in this regard, Anbar said that “future estimates point to some progress in the Turkish economy in the coming period”. However, he argues that “this progress depends on many factors, the most important of which are the correct management of financial policy, stability at the security and political levels, and transparency in the management of economic records.”
Turkey’s central bank’s net foreign exchange reserves continued to fall to record lows in the week ended June 2. On Thursday, data showed that net foreign exchange reserves fell to -$5.7 billion, the lowest level on record.
The central bank’s net reserves fell by about $1.3 billion last week to the lowest level since the data began in 2002.
“If the management of economic documents continues in the same way as before, there will be no apparent progress and these positive future estimates will not be realized,” the World Bank consultant added, considering the aftermath of the earthquake in which the number of Turkish cities and losses exceeded $35 billion, and that didn’t happen. The Turkish government has so far committed to economic stability and given the wide-ranging challenges witnessed in this document.
- The World Bank revised its forecast for Turkey’s economy in 2023, showing growth of 3.2 percent instead of the 2.7 percent forecast at the start of the year.
- The World Bank also raised Turkey’s economic growth forecast to 4.3% in 2024 from 4% in the past, and is expected to be 4.1% in 2025.
- The World Bank report predicted that the earthquake in Turkey in February last year would cause about US$34.2 billion in losses.
- Official data late last month showed that Turkey’s economy grew 4 percent in the first quarter of this year, slightly more than expected.
- Gross domestic product rose 0.3 percent quarter-on-quarter on a seasonally adjusted and calendar basis in the first quarter, Turkish Statistics Institute data showed.
The Turkish economy will face more problems if the unconventional policy tied to low interest rates continues, World Bank consultants estimate.
Many banks and analysts expect the future path of interest rates following these changes in the Turkish government, either at or after the next meeting this month.
- Societe Generale: Bank analysts expect Turkey’s central bank to raise interest rates by 650 basis points.
- JPMorgan Chase: Bank analysts are eager for the central bank to raise interest rates by 1,650 basis points in one go (if it happens, it will be the largest rate hike by the central bank of Turkey since 2010).
- Barclays: Barclays analysts agree with JPMorgan analysts on an imminent 1,650 basis point hike.
positive indicators
According to Karam Saeed, a researcher specializing in Turkish affairs, the formation of Turkey’s new government is indicative of several indicators, which he monitored in an exclusive statement to Sky News Arab Economy, as follows:
- Attract a group of technocrats and professionals in charge of documents (notably Finance Minister Mehmet Simsek and Turkey’s new vice president Geoffdette Yilmaz).
- Promote elements of widespread reputation and influence locally and internationally, and enjoy the confidence of foreign investors, especially Minister Simsek (this is an encouraging factor for foreign investors).
- The tendency to “reduce” the intervention of the Turkish President in matters of setting monetary policy in the country.
He said that these indicators will support the development of economic policy in the right direction and to some extent support the positive estimation of the future economic level of Turkey, as well as the foreign policy according to the arrangement of Turkey’s open capacity to its regional environment and zero problems, And in the presence of Finance Minister Hakan Fidan, who is the head of the intelligence services.
Saeed identified the most important priority economic documents considered by the Turkish government at this stage, the most important of which are:
- Besieging the deterioration of lira prices (more than 19.9% depreciation since the beginning of 2023, 29% in 2022 and 44% in 2021).
- Bring inflation down to single digits (inflation hit 85.51% last October, the highest level in nearly a quarter-century, before falling to 39.59% in May).
- The crisis of foreign capital decline.
- High external debt (when Turkey’s budget deficit exceeds $13 billion in Q1 2023).
- Earthquake consequences and economic costs (reconstruction costs could reach $100 billion).
Confidence
Naghi Bakir, a Turkish economist, told Sky News Arabia: “I’m not very optimistic. The biggest problem now is the lack of outsourcing (referring to the drop in foreign investment). It’s taking steps to strengthen trust, law and stability. In the country.”
He pointed out that before local elections are held in March next year, if the government gets enough resources to service foreign debt, finance the current account deficit and keep the economy afloat, a major economic collapse will be delayed and Erdogan will have a chance participate in these elections.
“Fundamental changes and reforms in the political, legal and economic spheres are needed to finally resolve the economic collapse,” he concluded.