Turkey — a key NATO player — is headed for serious economic turmoil
So much for Erdoganomics.
With Turkey’s inflation surging and a balance-of-payme🌌nts crisis looming, President Recep Tayyip Erdogan has been forced to backpedal hard on his highly unorthodox economic policy by finally allowing the central bank to hike interest rates to a jaw-dropping 25%, a 7.5 percentage-point jump.
This makes it all too likely that the chickens of Erdogan’s prolonged period of economic mismanagement will soon come ♔home to roost in the form of a very hard Turkish economic landing.
That could have large geopolitical repercussions, give🌟n Turkey’s key position in the Midd🥀le East and Erdogan’s continued antagonism to the United States.
In recent years, Erdogan’s e🦋conomic policy approach has rested on his strongly held belief that far from helping to combat high inflation, high interest rates were inflation’s princip🐟al cause.
This induced him over the p▨ast year to pressure the central bank to progressively more than halve interest rates to 8.5% at a time when inflation was climbing t꧂o as high as 60%.
The fact that Erdogan was cutting interest rates at a time when most major central banks were hiking rates to regain control of inflation underlined how 🍒highly unorthod𝓰ox his policy was.
Aside from causing the economy to overheat and inflation to soar, Erdogan’s approach caused the currency, the Turkish lira, to plummet and Turkey’s balance of payments to deteriorate.
Meanwhile, in the first quarter of this year, the country’s external cu🃏🌌rrent account deficit ballooned to almost 10% of GDP.
To say that Erdogan’s reckless interest rไates heightened the country’s external economic vulnerability would be an understatemen🍎t.
Indeed, the central bank’s international reserv❀es have dipped into ne🧸gative territory despite the fact that the bank has borrowed very large amounts of foreign exchange deposits from the domestic banks.
At the sa༺me time, the government has had to guarantee as much as $125 billion in domestic bank deposits against exchange ra🔯te depreciation.
All of💧 this has raised serious questions about Turkey’s longe🍸r-term economic outlook and its role as a key player in the Middle East and NATO.
Can inflation be brought down to single digits from its present lofty levels of closౠe to 50% without throwing the country into a deep economicꦗ recession?
How long can Turkey rely on the kindness of foreign governments to help finance its gaping external current account deficit🅷?
How will Turkey’s banks find the dollars to meeജt their depositors’ de🧸mands for dollars should they choose to withdraw their large dollar deposits?
How badly will the country’s public finances b🙈e impacted by the government’s past exchange-rate guarantee to domestic depositors?
The key ingredient of any pol🅠icy strategy to address Turkey’s deep🐽 economic problems would be the early restoration of domestic and foreign investor confidence.
Erdogan’s recent installation of a more ortho🅘dox economic team at both the Turkish Central Bank and the Ministry of Finance is a good step in th🌜at direction.
So too i🃏s his decision to allow the central baꦬnk to raise interest rates rapidly to their present level of 25%.
However, given Erdogan’s highly erra🅷tic economic policy record, it’s doubtful that those first step🧜s will be nearly sufficient to restore investor confidence and stabilize the economy.
After all, ♔in the recent past, Erdogan had no hesitation in firing as many as three central bank governors and replacing a host of other economic officials who had the temerity𝔍 to question the wisdom of his unorthodox approach.
The one institution that could help Tur♔key back to e𝐆conomic health is the International Monetary Fund.
It could do so by providing 𒁏Turkey’s economic policy with a much-needed seal of approval and by offering large-scale financing to help meet its immediate external🍨 financing needs.
However, calling in the IMF and subjecting himself to its loan conditionality would con🥃stitute a 🐠huge loss of face for Erdogan.
I don’t sugg𝓀est holding your breath for that to happen before a further deepening of Turkey’s economic 🌃crisis.
Desmond Lachman is a senior fellow at the American Enterprise Institute. He was a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
