The fate of Elvan and Ağbal in light of Turkey’s economic 'reforms'
After important monetary policy decisions by the U.S. Federal Reserve and Turkish central bank this week, the focus now is rightly on rising inflation rates in both countries.
While the Fed underscored its commitment to a low interest policy when electing to keep rates steady this week, yields on U.S. 10-year bonds, which surged in recent weeks, have nudged higher.
In Turkey, despite President Recep Tayyip Erdoğan’s public aversion to high interest rates, central bank governor Naci Ağbal hiked borrowing costs by a more than anticipated 200 basis points to 19 percent on Thursday to defend the lira and rein in double-digit inflation, as investors questioned putting capital to work in emerging markets.
Erdoğan announced a new package of economic reforms last Friday. Many credible economists agreed that pledges made in the plan fell far short of what might be termed as reform.
Turkey's economy and its deteriorating justice system clearly need significant change. But, of course, expecting remedies from the very people who have created the problems in the first place would be far too optimistic. However, after 19 years of rule, it was important to see what Erdoğan and his team could come up with.
The announcement of the economic programme, and another in early March aimed at allaying concerns over Turkey’s human rights record, serve to underscore how the Erdoğan government lacks the capacity and dynamism to address Turkey’s most pressing problems.
It was obvious that the People’s Alliance of Erdoğan’s governing Justice and Development Party (AKP) and the far-right Nationalist Movement Party (MHP) would be incapable of reforming the justice system and bolstering human rights. But when it came to economics, the situation could have been different.
For Erdoğan, who came to power after the 2001 financial crisis and strengthened his power due to better economic management, the state of the economy is critical. Problems have intensified over the past three years, threatening his tenure. The resignation of his son-in-law Berat Albayrak as treasury and finance minister in early November shows how critical a recovery in Turkey's economy is to Erdoğan’s political future.
So, it is intriguing that the economic programme announced by Erdoğan last week was almost devoid of real reform. It even failed to live up to the kind of pledges made by Albayrak in a much-criticised series of "New Economy Program" texts announced over the past two years.
Although the latest programme highlights Turkey’s serious economic problems such as accelerating inflation, the lack of transparency in public institutions, increasing unemployment and a widening current account deficit, it contains nothing more than promises that lack any substance.
For example, Erdoğan announced plans for new boards that would coordinate the work of the central bank, related ministries and presidential advisers, but it was not clear what purpose the bodies would have beyond creating new layers in the bureaucracy. They included a new Price Stability Committee, an Economic Coordination Board and the already existing Financial Stability Committee.
Preventing wasteful spending in the public sector, restructuring state economic enterprises and establishing new committees to improve corporate governance constitute other pledges made under the economic programme.
Meanwhile, while Turkey is one of only five countries in the world to not sign the Paris Climate Agreement, the government says that “green energy transformation will be encouraged in order to attract a new generation of green funds from abroad”.
The government has also pledged to establish the Private Sector Bonds Guarantee Fund to render the bonds attractive to investors, but it did not provide any details of how the new vehicle would be financed. It also said it would revive repayments on a stockpile of non-performing loans in the banking sector despite the absence of a transparent method to account for the debt and its previous enactment of multiple schemes to rollover the arrears.
Since Erdoğan’s announcement of the programme, Turkish columnists and analysts have penned a series of quality analyses highlighting its insufficiencies, including how some of its content appeared to have been copied and pasted from a previous programme announced in 2015 under former Prime Minister Ahmet Davutoğlu. Erdal Sağlam, in a column for Cumhuriyet newspaper, perhaps provided the most enlightening of the analyses.
Sağlam said there were significant frictions between new Treasury and Finance Minister Lutfi Elvan and Erdoğan’s economic advisers during the preparation phase of the programme. He said that Professor Erişah Arıcan, the doctoral dissertation adviser of Elvan’s predecessor Albayrak, made alterations to the plan, both to its headline messages and text.
Sağlam explained how Albayrak could have imparted his indirect influence on the content of the programme. Its pledges of reform simply do not stand up to scrutiny, he said.
If we look at the situation optimistically, the programme’s vagueness may have been rooted in Erdoğan’s desire to ensure that its social costs remained hidden. He faces re-election in 2023. If we were to be more critical, we could say that the programme’s shortcomings could have been caused by a lack of communication and coordination between the presidential palace and relevant ministries, even though Erdoğan brought all of these institutions under his control when he assumed vast new executive powers in 2018.
The chart below shows clearly the disconnect between Erdoğan’s team of advisers and government ministries under the new presidential system.
It could be that Elvan, who Erdoğan appointed along with central bank governor Naci Agbal, is now in a power struggle with Erdoğan’s influential economic advisers. Elvan may simply not have sufficient authority granted by the president, prompting discord among the economic policy team on the steps to be taken.
While Elvan’s position may have been undermined by Erdoğan’s advisers at the palace, he has been forced to own the programme. Hence, we may question how long Elvan will be able to endure such policy interventions while at the same time ensuring that the economy does not go off the rails.
We can ask the same questions about the position of Ağbal, who has assumed a similar role as a so-called saviour of the economy, and about his ability to carry out his work effectively during a very challenging period. The central bank’s foreign currency reserves were severely depleted last year, leaving monetary policymakers in a weakened position. It may be that Agbal finds himself increasingly estranged from and perhaps criticised by Erdoğan’s advisers and a large part of the governing party, either directly or indirectly, after his most recent hike to interest rates.