Turkey’s central bank has finally ended its era of easy monetary policy, which had reflected President Recep Tayyip Erdoğan’s unorthodox theory that lower interest rates will reduce inflation. But policymakers still need to convince markets that Erdoğan’s New Economy Program will never be resurrected.
ISTANBUL – Despite facing his greatest electoral challenge in more than two decades in power, Turkish President Recep Tayyip Erdoğan won another five-year term in a run-off vote in May, while his Justice and Development Party (AKP) and its allies maintained their parliamentary majority. The contest was closely watched in part because the outcome would shape the direction of the country’s troubled economy.
When Erdoğan, who campaigned on a promise to maintain low interest rates, reappointed Mehmet Şimşek, a widely respected champion of economic orthodoxy, as minister of treasury and finance, it signaled a shift from his unstainable growth-oriented policies. The question is whether this apparent return to “rational ground,” as Şimşek put it, is here to stay.
The deterioration of Turkey’s economic environment began in 2018, triggered by a currency crisis that made it more expensive for Turkish companies – many of which had grown dependent on foreign lending – to repay their dollar-denominated debt. The crisis deepened in September 2021, when the government implemented the unorthodox New Economy Program (NEP). Reflecting Erdoğan’s economic mantra that high interest rates cause high inflation, the plan called for aggressive rate cuts to trigger a depreciation of the Turkish lira, which would, in turn, increase exports. An export boom would then strengthen the lira, in turn reducing inflationary pressures and replenishing the central bank’s foreign reserves.
ISTANBUL – Despite facing his greatest electoral challenge in more than two decades in power, Turkish President Recep Tayyip Erdoğan won another five-year term in a run-off vote in May, while his Justice and Development Party (AKP) and its allies maintained their parliamentary majority. The contest was closely watched in part because the outcome would shape the direction of the country’s troubled economy.
When Erdoğan, who campaigned on a promise to maintain low interest rates, reappointed Mehmet Şimşek, a widely respected champion of economic orthodoxy, as minister of treasury and finance, it signaled a shift from his unstainable growth-oriented policies. The question is whether this apparent return to “rational ground,” as Şimşek put it, is here to stay.
The deterioration of Turkey’s economic environment began in 2018, triggered by a currency crisis that made it more expensive for Turkish companies – many of which had grown dependent on foreign lending – to repay their dollar-denominated debt. The crisis deepened in September 2021, when the government implemented the unorthodox New Economy Program (NEP). Reflecting Erdoğan’s economic mantra that high interest rates cause high inflation, the plan called for aggressive rate cuts to trigger a depreciation of the Turkish lira, which would, in turn, increase exports. An export boom would then strengthen the lira, in turn reducing inflationary pressures and replenishing the central bank’s foreign reserves.