Why can't Turkey reshape its economy?
The Turkish central bank’s Monetary Policy Committee (MPC) meeting of April 25 has underlined once more how the Turkish administration has lost touch with economic reality.
The central bank last week almost inexplicably signalled to investors that it might soon cut interest rates by dropping a key pledge in its interest rate decision.
While keeping rates on hold at 24 percent, the bank omitted a reference in its accompanying statement that it stood ready to tighten monetary policy if needed.
Thursday’s decision is all the more disturbing because Turkey’s consumer price inflation (CPI) rate is almost 20 percent – four times higher than the central bank’s target – and the bank has recently lost a mouth-watering $20 billion from its foreign currency reserves.
As if that were not enough, investors have also become very wary of state-run banks carrying out undercover interventions in the foreign exchange market using the central bank’s reserves. They were also disturbed by interference in the swaps market before March 31 local elections, which punished them with four-figure interest rates in order to keep the lira on an even keel.
The MPC meeting could almost have been a non-event for investors. But whether omitting a regular promise that further monetary policy tightening would be delivered, if needed from its statement was a careless mistake or an intentional change, it backfired and hit the Turkish lira.
The lira slumped to 5.96 per dollar, extending a six-month low, and is down about 11 percent this year, adding to losses of 28 percent in 2018. The central bank’s decision obviously adds to lira vulnerability and has put more pressure on inflation. It also comes in the face of rising calls from investors for a rate hike, not a rate cut.
The central bank’s irrationality is part of a recurrent series of bad decisions that reflect the policy and logic of President Recep Tayyip Erdoğan’s close economic advisers.
While Treasury and Finance Minister Berat Albayrak’s new economic programme might have been hailed a success by Turkey’s pro-government media, it was panned by foreign investors at the IMF-World Bank spring meetings this month. Pages and pages of power-point presentations by Albayrak said little of substance about anything, apart from outlining an urgent plan to recapitalise state-run banks. Unsurprisingly, the programme was trashed by investors attending a meeting organised by JPMorgan on the side of the meetings in Washington.
On top of this unfortunate series of events and decisions, the IMF and ratings agencies have warned the government about the deteriorating state of public finance, the last remaining castle of economic and financial stability in Turkey. Predictably, investors have started to slowly but surely sell their Turkish assets.
Last year’s currency crisis was unfortunately rooted in macroeconomic imbalances driven by the government’s desire for strong economic growth at all costs. Investors had hoped, however, that a sound reform programme would follow the turmoil that peaked in August, particularly after the conclusion of local elections on March 31.
Albayrak has not only disappointed investors with his performance as the young and ambitious economy minister, but he has also failed those who were hoping that he would become the country’s new economy czar who, as Erdoğan’s son-in-law, could have used his personal connections to drive through much-needed measures.
Furthermore, the ambiguity following the results of the disputed local elections on March 31 is weighing heavily on market sentiment. Erdoğan and his party, which is tightly under his control, were shocked by the loss of major cities. A political drama has unfolded since because Erdoğan and his Justice and Development Party (AKP) have had trouble digesting the result and are seeking to rerun the vote for Istanbul. This only serves to blur the outlook for investors further.
The results of elections should be respected and doing otherwise hinders Turkey’s capacity to move forward and reverse the policy mistakes of the past.
The reasons for such delusional choices, approaches and perceptions listed above are, at least in part, rooted in the Erdoğan’s presidential system and his vision of the so-called “New Turkey”. The organisational chart of his presidency, vastly empowered at elections last June, tells a lot.
The presidential palace is at the very heart of Turkey’s new political, administrative and economic system. The network of ministries, the many policy boards and the offices created under the presidential system tell nothing but one, single story. These institutions have no connections between each other and they have no official communication routes. Even the president, whoever that may be, is isolated from information though he or she has the greatest power over the system.
Such a design, or rather design failure, of course blocks information flow through the system. This appears, in practice, to have created the delusional policies we are seeing today. It has also created a top-down policy framework that stands ill at ease with a socially and economically transforming Turkey of 82 million citizens with almost 40 percent of people aged between 15 and 40 years old.
Despite Turkey’s growing economic ailments, despite the clear message from voters that something is going terribly wrong (even in the eyes of AKP supporters), the vessels for communication appear paralysed. In fact, they appear completely absent.
So before one dwells on Turkey’s future economic needs and thus the reforms necessary today, one better first think about the dysfunctional presidential system in Turkey. This might provide the key we are all looking for.