Turkey will be forced to revisit 1990s IMF reforms, columnist says

Turkey will be forced to turn back the clock and re-enact the economic reforms of the 1990s to stabilise its economy, said Erdal Sağlam, a columnist for the Cumhuriyet newspaper.  

Ankara is keeping interest rates well below the rate of inflation, causing imbalances in the economy, just as the government of former Prime Minister Tansu Çiller did more than two decades ago, Sağlam said on Tuesday.

Back in the 1990s, Turkey was forced to enact reforms to its banking system and other measures before the IMF would agree to new loans because trust in the country’s economic management was lost, despite a very qualified bureaucracy, Sağlam said. It took years to conclude a deal due to government backtracking, he said.  

Sağlam said former Economy Minister Kemal Derviş finally helped Turkey carry through on pledges to the IMF after a financial crisis erupted in 2001. Thanks to the measures, the bureaucracy and Turkey’s economy made it through to today without the need for more IMF help.

But now Turkey is in danger of returning to the dark days of the 1990s. But it will not be able to enact the reforms needed with the current economic leadership, Sağlam said.

The columnist pointed to inflation, which has surged to 12.6 percent from 11.4 percent in May, well above a central bank estimate of 7.4 percent for the end of the year. The central bank’s benchmark interest rate stands at 8.25 percent, meaning rates are negative to the tune of more than 4 percentage points.

Furthermore, the central bank has been providing cash to banks at even lower interest rates of interest averaging 7.6 percent through the money markets, Sağlam said.

Just like Çiller, Turkish President Recep Tayyip Erdoğan is trying to keep interest rates well below inflation, Sağlam said. Erdoğan says higher interest rates cause higher inflation, not the other way round.

The central bank will be forced to increase its estimate for inflation by at least 1 percentage point in its next quarterly report and will most likely keep interest rates on hold, Sağlam said.

The bank has been seeking to lower interest rates towards its year-end estimate for inflation, but in economies where confidence in monetary authorities is so low, policymakers should be concentrating on current inflation when setting interest rates, not the price increases they see for the future, Sağlam said.