Possible election reboot delays economic reform in Turkey

Treasury and Finance Minister Berat Albayrak’s long-awaited structural economic reform package delivered far less than it had promised once finally announced this week following March 31 local elections.

Albayrak’s “New Economy Programme Transformation Steps” presentation on Wednesday, from the title onwards seemed to indicate the government’s lack of will to implement radical and decisive structural reforms.

Instead, Albayrak went over the New Economy Programme he revealed last year, reiterating the steps he plans for the future. 

The presentation was a matter of form, since it had been promised before the elections. It announced projects the government plans in the coming months: an agricultural programme in May, logistics and tourism master plans in August and September respectively, and plans to restructure tax.

The most tangible step was the decision to hand 28 billion lira ($4.9 billion) to public banks, which have been in dire need of funds after a long period of frequent elections. The ruling Justice and Development Party (AKP) has made low interest loans available as an incentive during its election campaigns, a tactic that has emptied out the coffers of the public banks.

Private banks will be required to strengthen their own capital structures, and dividends and executive bonuses will be suspended.

With these decisions, Albayrak has proven the validity of repeated warnings by credit rating agencies Standard and Poor's, Moody’s and Fitch that Turkey’s banking sector is facing heightened risk, an explosion of bad debt, and repercussions from restructured debt.

It was these institutions, however, that Albayrak and Turkish banking institutions accused of participating in what they called a perception operation against Turkey’s finance sector for making exactly these same warnings.

But while the majority of measures announced by the minister this week were promises to take action in the future, the immediate intervention in the finance sector and provision of state support showed how urgent the situation has become.

In fact, the government had planned something much different. The plan was to announce a structural economic reform package after the March 31 local elections that would restructure institutions and include tax and price increases and a host of other radical measures to meet the expectations of the International Monetary Fund and global markets.

The idea was to show those markets the government’s will to implement a tight policy fit for the IMF without the actual involvement of the IMF.

The reform package was scheduled to be announced on April 8, but the plan was drafted before the elections. The loss of Istanbul, Ankara and nine other large cities on March 31 forced the ruling party to rethink; given that it intends to campaign for Istanbul again in the repeat election it has demanded, it toned down the strict reforms it had planned. 

This prompted the delay of Albayrak’s announcement until April 10. While the reforms are nowhere near as stringent as originally planned, the measures taken to support the banking sector will mean Albayrak is not completely empty-handed when he leads a delegation to the IMF-World Bank spring meetings.

One other eye-catching detail from Albayrak’s presentation was the promise of a comprehensive legal and judicial reform package prepared by the Justice Ministry.

Evidently the government is aware of foreign investors’ fears regarding the politicisation of the justice system and how this has prevented new investment and led to a flight of old investors. 

Those fears have taken just as strong a hold in Turkey, where local investors have started looking abroad and foreign currency savings account balances have leaped to $182 billion.

This presents a real predicament for the government. On the one hand, it wants to at least give the impression that it is willing to undertake legal reform in order to re-establish trust among foreign investors. On the other hand, it has overseen a period of contradictory decisions by electoral institutions since March 31.

While almost every appeal lodged by the opposition has been rejected, the ruling party’s appeals are almost all immediately accepted. 

Meanwhile, the Supreme Election Council has been placed under political pressure by government officials including President Recep Tayyip Erdoğan, who have claimed opposition victories were the result of fraud.

Even more striking has been the intervention of the Interior and Justice Ministries. Police have searched voters’ homes and launched investigations of polling officials using the usual pretext: allegations of links to “terrorist organisations”. 

Hundreds of police have been sent to Büyükçekmece, a district in Istanbul where the AKP says serious electoral fraud took place, to go door-to-door questioning voters. 

While the whole world looks on at the government’s reaction to unfavourable election results, just how convincing can any announcements of economic transformation and legal reform ever be?

Indeed, just as Albayrak was attempting to soothe investors’ fears with his presentation, Erdoğan was meeting his alliance partner, far-right Nationalist Movement Party (MHP) leader Devlet Bahçeli, and rumours from Ankara suggest they discussed strategies to cancel the Istanbul election.

The delay to radical economic reforms must be evaluated in connection to the plans to cancel and rerun the elections in Istanbul. 

Economic reforms have likely been put on the back burner to avoid putting voters off if the Supreme Election Council decides to repeat the election this year. The likely date of a rerun will be June 2.

If this does not come to pass, the government may choose the even more radical route of repeating local elections entirely to conform with a new system devised by Bahçeli.

But this would require a change to the constitution, and to put such a change to the public would require 400 votes in parliament – more than the combined total of seats controlled by the AKP and MHP. 

As a result, political circles have even begun to discuss the possibility that Bahçeli, a figure many see as the power behind the throne in Turkey, could call for snap national elections, which are not due for over four years. 

The MHP leader scolded a Fox TV reporter who asked him about that possibility after the local elections. Yet this is not something to be simply disregarded.

The fact that Albayrak has played down the need for immediate economic reform and suggested measures could be implemented in stages over years suggests that the ruling party has factored in the possibility of early elections.

To hold snap elections, the AKP and MHP’s simple parliamentary majority is all that is required. This would mean presidential and parliamentary elections would be held together, and a date in autumn this year is reportedly being discussed. 

If this takes place, it would show the extent of the ruling party’s surrender to Bahçeli, but also its willingness to sacrifice financial considerations for political gain.

* The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.