The latest economic indicators reveal aspects of the crisis in the Turkish economy, with the lira recently registering a further drop to historic lows, in addition to the drop in net foreign exchange reserves at a time when the authorities seek to satisfy the demand for currency exchange and achieving stability in the local currency exchange rate, and in light of what is being reported regarding the loosening of the government’s grip on the lira.
In this context, the next meeting of the Central Bank of Turkey, scheduled for June 22, and after the appointment of Hafiza Ghaya Arkan, is considered the “first test” of Erdogan’s new presidency, which will reveal the nature of the policies who What if Turkey will change its “unconventional” policies related to lower interest rates in the current new phase, or will this policy continue despite high inflation rates?
Based on the results of the much-awaited central meeting, the future directions of the Turkish economy will be determined, which is facing a series of structural problems and far-reaching challenges, both related to these “unconventional” policies and exposure to external shocks. , starting from the Corona pandemic and its effects and ending with the war in Ukraine, as well as The devastating earthquake that hit ten Turkish cities on February 6th.
Turkish economic crisis
World Bank Advisor, Professor of Economics, Dr. Mahmoud Anbar, says in exclusive statements to Sky News Arabia that:
The Turkish economy – since the pre-war period in Ukraine and its aftermath – suffers from obvious fundamental structural problems. These problems then directly affected the Turkish lira, which recorded historic lows, and which fell sharply, as well as inflation rates, which reached more than 85% last October. The Turkish economy has also experienced – and as a result of these structural problems and the consequences of successive crises – a drop in productivity.
The Turkish lira fell to an all-time low in Friday’s session, and in Wednesday’s session it saw its biggest decline since a historic crash in 2021.
The lira has lost more than 19.9% ​​of its value since the start of the year, and its declines have worsened since President Recep Tayyip Erdogan was elected to a third term last month.
Anbar adds: “The main reason for these problems is the fiscal and monetary policy followed in Turkey, which was largely controlled by President Erdogan, in what was seen as an incursion of the presidency into the technical work of shaping the monetary policy, which had a negative impact on economic conditions.” “.
He underlines that “this imbalance was followed by the economic repercussions of the war in Ukraine, which had repercussions on all the countries of the world, in particular the countries with exposed economies, which are the most affected by external shocks”.
And the World Bank adviser continued: “Nevertheless, at a time when many central banks, including the United States Federal Reserve, have resorted to monetary tightening measures (the sum of the measures that central banks follow to reduce the demand for money) to curb inflation, and by raising interest rates. However, the Central Bank of Turkey, which relied on an unconventional policy, cut interest rates by a way that had negative effects on the economy.
Hafiza Ghaya Erkan, a US financial executive, has been named head of Turkey’s central bank, as the bank prepares to change course and tighten policy after years of falling interest rates and the global financial crisis. Cost of life. Prior to the former central bank governor’s appointment in March 2021, Erdogan ousted his three predecessors for tightening monetary policy against his will. Turkey’s central bank did not raise interest rates at all under current former governor Shihab Qawuji Oglu, but instead cut them to 8.5% from 19% at the start of his term. Erdogan was publicly calling for a rate cut below the 10% level, and he promised to do so more than once, as he believes it would support production and investment.
“conditional” improvement
According to Anbar, “future estimates indicate progress in the coming period with respect to the Turkish economy”, citing World Bank reports in this regard. However, he believes that “this progress depends on a number of factors, the most important of which is the sound management of financial policies, security and political stability, and transparency in the management of the economic file”.
Net foreign exchange reserves of the Central Bank of Turkey continued to decline to reach a new record high in the week ending June 2. On Thursday, data showed net foreign exchange reserves fell to -$5.7 billion, the lowest level on record.
Net central bank reserves fell by about $1.3 billion last week, the lowest level since data began to be released in 2002.
And the World Bank consultant added: “If the management of the economic file continues on the same previous situation, there will be no tangible progress and these positive future estimates will not be realized”, given the consequences of the earthquake which struck a number of Turkish cities and left losses exceeding 35 billion dollars, while it was not reached. The Turkish government has promised economic stability so far, and to in light of the significant challenges this file is witnessing.
The World Bank has revised its forecast for the Turkish economy for the year 2023, achieving growth of 3.2% instead of the 2.7% it forecast at the start of this year. The World Bank also raised its expectations for the growth of the Turkish economy for the year 2024 to 4.3% instead of 4% in the past, and expected a rate of 4.1% for the year 2025. The World Bank report expected that the earthquake that hit Turkey last February would result in losses of around $34.2 billion. Official data showed at the end of last month that Turkey’s economy grew by 4% in the first quarter of this year, slightly beating expectations. According to data from the Turkish Statistical Institute, the gross domestic product in the first quarter increased by 0.3% compared to the previous quarter on a seasonally adjusted basis and according to calendar considerations.
According to the estimate of the World Bank consultant, if the same unconventional policy linked to low interest rates is maintained, the Turkish economy will face more problems.
A number of banks and analysts were expecting the future course of interest rates after these changes in the Turkish government, whether at the next meeting this month or later.
Societe Generale: Banking analysts expect the Turkish Central Bank to raise interest rates by 650 basis points. JP Morgan: Banking analysts are eagerly awaiting the central bank to raise interest rates by 1,650 basis points in one go (which, if it happens, would be the biggest hike by the Turkish central bank since 2010 ). Barclays: Barclays analysts agree with JP Morgan analysts on the upcoming move, in terms of a 1,650 basis point hike.
Positive indicators
For his part, Karam Saeed, a researcher specializing in Turkish affairs, believes that the composition of the new Turkish government suggests several indicators, which he monitors in statements exclusive to “Sky News Arabia Economy” as follows:
Professionally attract a group of technocrats and file managers (especially with regard to the Minister of Finance Mehmet Simsek and Cevdet Yilmaz, the new Turkish vice-president). Push elements that enjoy a wide reputation and presence in local and international circles, and enjoy the trust of foreign investors, especially Minister Simsek (which is an encouraging factor for foreign investors). The tendency to “reduce” the intervention of the Turkish president in the question of the development of monetary policy in the country.
He indicates that these indicators would support the economic policy in the right direction, and in a way that supports the positive estimates at the level of the Turkish economy in the future, as well as the foreign policies which are organized in terms of the capacity of the Turkey to open up to its regional environment and zero problems, and in the presence of Finance Minister Hakan Fidan, who was the head of intelligence.
Saeed identifies the most important priority economic files that the Turkish government has in mind at the current stage, the most important of which are:
Siege the deterioration in the price of the lira (it has lost more than 19.9% ​​of its value since the start of 2023, and it had lost 29% in 2022, and 44% in 2021). Inflation rates down to single digits (after inflation rates hit their highest level in almost a quarter century last October at 85.51%, before rates fell to 39, 59% in May). Foreign investment decline crisis. High external debt (at a time when Turkey’s budget deficit exceeded $13 billion in Q1 2023). The consequences of the earthquake and the economic cost (the cost can reach 100 billion dollars for reconstruction).
Build trust
Turkish economist Naghi Bakir told “Sky News Arabia Economy”: “I’m not very optimistic. The biggest problem right now is the lack of outsourcing (referring to falling foreign investment). It’s taking action to build trust, law and stability .. in the country.
He points out that there will be local elections in March next year, and by then, if the government gets enough resources to repay the external debt, finance the current account deficit and keep the economy afloat , the great economic collapse will be postponed and Erdogan will have his chance in these elections.
“For a definitive solution to the economic collapse, fundamental changes and reforms are needed in the political, legal and economic fields,” he concludes.
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