Currency shocks, wild inflation mark Erdogan’s time as executive president (Al Monitor, June 22 2022)

Economic advance was a major pledge that President Recep Tayyip Erdogan made in promoting Turkey’s transition to a super-presidency system, but his record after four years as executive president leaves little to celebrate.

Erdogan was re-elected president on June 24, 2018 for a second term, armed with new, sweeping executive powers following a constitutional overhaul the previous year that weakened the parliament’s clout and concentrated power in the hands of the president. Four years on, his governance is widely criticized as a “one-man rule” that has eroded checks and balances, tightened control over the judiciary and imposed a firm grip on the Central Bank and other economic bodies.

In memorable remarks on the eve of the elections, Erdogan — a self-declared “enemy of interest rates” — had pledged to use the new presidential powers to streamline decision-making and remove snags holding back the Turkish economy.

On the fourth anniversary of the elections, Turkey’s economic outlook is a far cry from what he had pledged, marred by currency shocks and runaway inflation with severe impoverishing effects on the masses. Erdogan’s poll numbers have been sagging, raising the prospect of his fall from power after two decades at the helm, perhaps in early elections before he completes his five-year term in June 2023.

Erdogan had long argued for an executive presidency system, convinced that more power was all he needed to quickly fix the country’s economic problems. Even before he officially assumed his new powers, he had made it clear he would flout the independence of the Central Bank and stick to his view that high interest rates cause high inflation, which contradicts conventional economic theory. In an interview with Bloomberg in May 2018, he defended presidential influence on Central Bank policies, saying that “it’s those who rule the state who are accountable to the citizens.” Global money managers were dumbfounded by his intentions, foreshadowing the significant decline in foreign investments that Turkey has suffered since then.

The first currency shock came in August 2018 as then-US President Donald Trump targeted the Turkish economy in a row over the detention of an American pastor in Turkey. The Turkish lira lost 28% of its value in two months, tumbling to 6.4 from 4.6 versus the dollar. The crisis ended only after the Central Bank hiked its policy rate by a whopping 625 basis points to 24% in mid-September. Consumer inflation topped 20% that year.

A second currency shock hit in November 2020 amid the economic fallout of the COVID-19 pandemic and a deepening scandal over the Central Bank burning through $128 billion in foreign reserves. The bank had used the money in back-door operations to funnel foreign exchange to the market, desperate to prop up the lira. The turmoil saw the resignation of Treasury and Finance Minister Berat Albayrak, who is also Erdogan’s son-in-law, and the sacking of the Central Bank governor. Their respective replacements, Lutfi Elvan and Naci Agbal, attempted monetary tightening to ease the currency shock. Rate hikes under Agbal brought the Central Bank’s policy rate to 19% by March 2021, with annual inflation standing at about 16% that month.

In the first three years of the executive presidency system, Turkey’s economy grew only 3% in 2018, less than 1% in 2019 and 1.8% in the pandemic-hit 2020. Bent on stimulating growth to boost his popular support ahead of the next elections, Erdogan was convinced that borrowing costs should go down despite inflationary pressures, a plan that cost Agbal his post in March 2021 and Elvan later in the year.

Heeding Erdogan, the Central Bank’s new leadership began cutting the 19% policy rate in September, when inflation was running around 20%. Four cuts in as many months brought the rate to 14% in December, with inflation reaching 36% in the meantime. The controversial policy triggered a third currency shock. The lira, which traded at 8.3 against the dollar in early September, nosedived past 18 on Dec. 20.