It's the economy, stupid

It was a Dane, Knud (Canute) the Great, who became king of England in 1016. The story is told that he was persuaded by courtiers that he could not only rule England but also command the waves. However, he got his feet wet. It is tempting to draw a parallel with Turkey’s president, Recep Tayyip Erdoğan, who believes he can command market forces.   

The president parted company with reality when he decided to fire the governor of the central bank, Murat Çetinkaya, in July 2019. He has since fired two more, and the latest to be dismissed, Nacı Ağbal, has been replaced by Şahap Kavcıoğlu, who will probably be more malleable. Former governor Durmuş Yılmaz, who got retired in 2011, and is now vice-chair of the secular opposition party İyi (‘Good’) Party, blasted the management of Turkey’s economy in Foreign Policy in August 2018, when a lira crash had been preceded by government stimulus.   

In short, Yılmaz concluded “Turkey’s best and brightest have made way for its worst and dimmest” and that “loyalty has replaced merit as the sole criterion”. Already four years earlier U.S. economist Jesse Colombo foresaw in an in-depth analysis that Turkey’s economy was a bubble that would burst. in 2018, Colombo repeated his warning that a credit bust was on the way.   

Now, given the market reaction to Ağbal’s dismissal, it is crunch time. Ağbal tweeted his gratitude for his dismissal and added “May God grant us all good luck”, which will definitely be needed. Ağbal’s deputy, Murat Çetinkaya, has also been fired.

On March 18, Ağbal had strengthened the market’s confidence in the lira by upping the central bank’s benchmark interest rate to 19 percent from 17 percent, but in the process he lost the president’s confidence. As a believer in Islamic finance, for example, sukuk (Islamic bonds) rather than interest-bearing bonds, Erdoğan has had a long-held aversion to Western finance. For example, he claimed the “interest rate lobby” was behind the Gezi Park uprising in 2013.  

Erdoğan aims to make Istanbul the centre for Islamic finance and economy, and Turkey’s economic crisis comes athwart his plans. At a conference on Islamic economics and finance last year, he had the effrontery to state: "Over-financing has created a bloated economic model, which acts only over concern about unearned income, without considering social and human costs", which is the reason Turkey is in its present jam.

Back in 2000, when Turkey was still queuing up to start EU membership talks, the European Commission noted in a pre-accession report: "Investors need a stable, predictable and supportive legal and regulatory framework in order to make long-term investments." But now, as then, this framework in Turkey is conspicuously lacking.

Despite Turkey’s economic collapse in 2001, the EU agreed in 2008 that it had a functioning market economy. Nevertheless, six years later Muharrem Yılmaz, the president of Turkey’s Business and Industry Association (TÜSIAD) warned: “A country where the rule of law is ignored, where the independence of regulatory institutions is tainted, where companies are pressured through tax penalties and other punishments, where rules on tenders are changed regularly, is not a fit country for foreign capital.” Erdoğan denounced Yılmaz as a traitor and he was forced to resign.

In 2019, former economy minister Ali Babacan, who is credited with overseeing Turkey’s economic recovery in the 2000s, resigned from the AKP and last year formed his own party, DEVA (Democracy and Progress Party). The day after Naci Ağbal was dismissed as central bank governor, Babacan came up with a novel proposal:

President Erdoğan has appointed himself head of Turkey’s Wealth Fund, an aggregate of the country’s major public assets, for example, banks, petroleum companies, insurance companies, Turkish Airlines and Türk Telekom. To avoid the frequent change of central bank governors, he could also issue a new decree and declare himself head of the central bank, Babacan said.

The abrupt resignation of Erdoğan’s son-in-law, Berat Albayrak, as treasury and finance minister in November and Ağbal’s appointment as central bank governor raised hopes of a return to a more orthodox monetary policy, but the damage has already been done - $130 billion in foreign currency reserves have evaporated in defence of the lira and according to U.S. economist Steve Hanke inflation is more than double the official 15.6 percent.  

Facing a short-term external debt of some $180 billion dollars, a collapsing lira and an exodus of foreign investors, Turkey is up the metaphorical creek without a paddle. There is talk of capital controls and even the return of Albayrak, which can only exacerbate the situation. Support for the People’s Alliance between the AKP and MHP has sunk to 46 percent, which could make a snap election tempting.

The Constitutional Court will now examine a motion to ban a political rival, the Kurdish-led HDP (Peoples’ Democratic Party). If it does so, it will improve the re-election prospects of the People’s Alliance by default. 

Good Party leader Meral Akşener has already predicted “a poverty election” in June. In which case, the issue will be a given. As Bill Clinton’s strategist, James Carville, told his campaign staff in 1992: It’s “the economy stupid”.  

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