Turkey’s new finance minister has vowed to return to “rational” policies after years in which President Recep Tayyip Erdoğan’s unconventional strategy strained the $900 billion economy and sent the lira to record lows.
“Transparency, consistency, predictability and compliance with international standards will be our basic principles in achieving the goal of increasing social security,” Mehmet Şimşek said at a handover ceremony with his predecessor Nureddin Nebati on Sunday.
“Turkey has no choice but to return to a rational basis,” he said, adding: “We will prioritize macro-financial stability.”
Şimşek previously served as deputy prime minister and finance minister before leaving government in 2018. Erdoğan brought him back into the cabinet on Saturday as part of a stir that has raised expectations that Turkey will move away from unorthodox policies that have seen a severe cost of living and foreign investors flee the market.
“Mehmet Şimşek’s choice. . . raises the likelihood that monetary policy will shift in a more orthodox direction,” Goldman Sachs said in a note to clients on Saturday.
Şimşek and other officials appointed to steer the economy face major challenges in putting Turkey on a more sustainable path. Inflation is over 40 percent and foreign exchange reserves have been severely depleted in an effort to prop up the lira and fund a massive current account deficit.
Despite efforts to halt the lira’s fall, the currency has fallen 67 percent against the dollar over the past three years.
“Reducing inflation to single digits over the medium term. . . and accelerating the structural transformation that will reduce the current account deficit are vital for our country,” Şimşek said on Sunday.
As part of a “liraization” policy pursued by Nebati, the government launched a series of measures that provided strong incentives for businesses and consumers not to hold foreign currencies. One of the most talked-about instruments was the launch in 2021 of savings accounts that protected savers against a depreciation of the lira, at the expense of the government.
There are about $125 billion in the accounts and some economists are concerned that a significant weakening of the lira will soon hit public finances.
Other measures included managing companies’ ability to purchase foreign currency, which some analysts have likened to capital controls.
Erdoğan’s government also tried to stimulate the economy ahead of the elections, raising the minimum wage and public sector wages and handing out free petrol for a month. Many economists warn that the measures have increased inflationary pressures.
A test will be to what extent Erdoğan, a longtime opponent of high borrowing costs, will raise interest rates, say investors and economists. Erdoğan urged the central bank to cut interest rates from 19 percent two years ago to 8.5 percent now, despite rising inflation.
The gap between the central bank’s policy rate and inflation has pushed “real” interest rates deep into negative territory – one of the reasons for the lira’s sharp depreciation.
Investors are now waiting to see if Erdoğan will reshuffle leadership at the central bank. Incumbent Şahap Kavcıoğlu has overseen a series of sharp rate cuts ordered by the president since taking over in March 2021.
Another question is whether Erdoğan will be willing to stick to the program if the central bank implements the sharp rate hikes economists say are needed.
Goldman predicts the lira will weaken sharply from just under TL21 to the dollar to TL28 over the next year, even if Şimşek directs economic policy.
Şimşek, a former Merrill Lynch senior bond strategist who is highly regarded by foreign investors, left his post as deputy prime minister in 2018 when the president appointed his own son-in-law Berat Albayrak as finance minister.
Albayrak was blamed for burning up tens of billions of dollars in foreign exchange reserves during his two years in the role in a failed attempt to quell a currency crisis while the central bank slashed interest rates.
Economists fear a similar situation could reoccur if Erdoğan loses patience with an economic adjustment program.
“Will a policy change include greater central bank independence and higher interest rates or will this be a half-baked effort?” said Liam Peach of Capital Economics in London. “Presumably Simsek has demanded tighter monetary policy as part of his agreement, but it would still be a surprise to us if Erdoğan relinquished full control.”
Additional reporting by Funja Güler
