Will Turkey’s new economic management succeed in steering the country in right direction?
Due to a series of highly erroneous decisions made by Turkey’s top leadership, the country has entered one of the greatest financial crises in its history. The nation is still grappling with this crisis. Although the President has not openly admitted his mistakes, the appointment of a prominent technocrat Mehmet Şimşek as Finance Minister to lead the economy indicates that he has come to realize the dire situation. As a result, some improvements have been observed in certain areas.
This should not be misconstrued as an easy task for the economic management; on the contrary, it is an extremely challenging responsibility. Nevertheless, it appears that Minister Şimşek and Central Bank Governor Gaye Erkan have started collaborating to at least set the economy on the right path. This impression is supported by recent interest rate hikes, especially aimed at preserving the value of the Turkish lira and reducing inflation.
Regarding the issue a prominent expert (Şeref Oğuz from Ekonomim.com) has shared the following valuable insights:
DECISION ON INTEREST RATES BY CENTRAL BANK COMPLETE SURPRISE
“The decision on interest rates by the Monetary Policy Committee came as a complete surprise. While expectations were for an increase of 1.5-2.5% in response to permissible interest rate hikes, the policy rate suddenly jumped to 25%. This is a sign of extraordinary efforts to combat inflation, and the Central Bank seems to have remembered its founding principles…
Previous interest rate decisions were made under the influence of the President’s suggestions, with decreases during heterodox periods and minimal increases during orthodox ones. Now, we see that the airy phrases in the policy text have been replaced by ‘rational’ expressions. The new leadership has only just begun.”
RATIONALITY BECAME THE NEW ORDER TO REPLACE RELIGIOUS PRACTICE
“In fact, the Central Bank’s interest rate decision served as a ‘sincerity test’ for the new economic management. We were curious whether they would deliver on their promises. The point where the economy had reached under the control of leaders who were trapped in the “inflation is the result of high interest rate” paradox (strongly suggested by the President) inevitably demanded rationality…
I see this step as an effort to rein in out-of-control inflation. It was known that taking interest rates low enough to eliminate the concept of interest would not work, as evidenced by the Public Sector Debt’s (PSD) reaching 3.4 trillion Turkish liras. The circulation of interest-related obligations was facilitated by low interest costs.”
The same expert, when asked the following question, provides the following response:
WILL THE CENTRAL BANK BACKTRACK ON THIS DECISON?
“I don’t think so. At least until the elections, the President will not oppose increase in interest rates. It needs to turn practical results into election promises. However, tackling inflation solely through interest rates seems unlikely. The Medium-Term Program (OVP) must also be aligned with this interest rate hike process. My estimation is that if a downward trend in inflation starts, the Şimşek & Erkan duo and their teams can continue their roles. However, if the low inflation figure presented as a success to the voters as the election draws near doesn’t materialize, the ‘Naci Ağbal syndrome’ (dismissed Central Bank governor earlier) will come into play, and their names will appear in the Official Gazette overnight.” (content by ŞEREF OĞUZ from EKONOMIM.com)
