Where are Turkey’s economic reforms?
Turkey’s new treasury and finance minister pledged a package of economic reforms in early November to help steady the lira and draw in foreign investment.
On March 8, it will be four months since Berat Albayrak, the son-in-law of President Recep Tayyip Erdoğan, resigned as treasury and finance minister. His replacement, former deputy prime minister Lütfi Elvan, arrived on Nov. 10. But despite a series of meetings with business leaders, little information has emerged about the steps he might take.
Erdoğan appointed Elvan and central bank governor Naci Ağbal in a revamp of his economic team after the lira slumped to successive record lows against the dollar. Ağbal has since raised interest rates to 17 percent from 10.25 percent to help engineer a rally in the currency and rein in inflation. He has also taken steps to make the central bank’s activities more transparent and re-instated an inflation-targeting regime.
But the rally in the lira against the dollar, which has totalled around 20 percent, is stuttering. On Monday, the currency dropped by more than 1 percent after Erdoğan and Elvan praised Albayrak’s record on the economy.
A series of economic missteps by Albayrak’s team last year led to an exodus of foreign capital from Turkey’s financial markets and prompted Turks to sell their liras for dollars, euros and gold. Foreign investors are now expecting Elvan and Ağbal to rectify those mistakes, to put economic growth on a more sustainable path, and to restore locals' confidence in the lira.
Among the errors Albayrak committed were to persuade the central bank into keeping interest rates at below the rate of inflation and to create a borrowing boom through loans from state-run banks that caused a surge in demand for imports and a gaping current account deficit.
Albayrak also instructed the central bank to spend tens of billions of dollars of its foreign currency reserves in the lira’s defence. As the reserves shrunk, the bank engaged in opaque foreign currency transactions with state banks to bolster its firepower. On Nov. 5, Goldman Sachs estimated that former bank governor Murat Uysal spent $101 billion to defend the lira in 2020, leaving the reserves, net of the swaps, deeply in the red.
Elvan and Erdoğan praised Albayrak’s efforts to steady the currency in comments on Sunday and Monday, while slamming the main opposition Republican People’s Party (CHP) for demanding that he account for his actions. Albayrak has disappeared from public life since his resignation.
Ağbal has pledged to avoid any further clandestine interventions in the foreign exchange market, to report all swap transactions held with state-run banks and to refill the bank’s reserves of foreign currency by buying dollars in regular auctions.
But while praising Ağbal’s performance, foreign investors say sustainable economic growth in Turkey is dependent on the government backing his efforts with long overdue reforms.
In its annual review of Turkey’s economy published in January, the International Monetary Fund recommended that the authorities take a series of steps to reform management of the economy. Among the measures should be to underpin the independence of the central bank, the fund said.
The IMF also called on Turkey to do the following:
--Carry out a comprehensive third-party asset quality review and stress tests of banks to develop confidence in the finance industry. Encourage banks to restructure corporate debt by phasing out loan deferrals.
--Quickly restructure temporarily insolvent firms that under corporate debt distress as “going concerns”. Efficiently wind down unviable businesses.
--Limit loans under the Credit Guarantee Fund (CGF) to small and medium-sized enterprises (SMEs), in line with its original mandate, as the global COVID-19 pandemic abates.
--Monitor extra-budgetary institutions and refine the governance of the Turkey Wealth Fund to limit potential conflicts of interest. Erdoğan is chairman of the fund, which controls Turkey’s largest public enterprises largely free of parliamentary oversight.
--Avoid further delays to proposed revisions to the banking law to strengthen the independence of the Banking Regulation and Supervision Agency (BRSA).
--Strengthen oversight and management of Public Private Partnerships (PPPs), which the government has used to complete large infrastructure projects such as airports, bridges, toll roads and hospitals. Legislate a new PPP law and publish a monitoring report.
--Carefully monitor banks’ foreign exchange liquidity risks and strictly enforce regulatory limits on their open foreign exchange positions.
--Legislate a consolidation plan for the budget, which would include phasing out ad-hoc transfers, subsidies and investment incentives, to return debt to a declining path.
--Publish a fiscal risk statement and comprehensive information on the quasi-fiscal operations of all state-owned enterprises.
--Introduce policies that help labour market flexibility, encourage the employment of women and that help deal with youth unemployment.
So far, there is no indication that any of the above measures recommended by the IMF will be carried out.
Erdoğan’s government has introduced few economic reforms of note since the departure in August 2015 of Deputy Prime Minister Ali Babacan, widely credited with successfully implementing an IMF-backed loan accord between 2002 and 2008. It has instead preferred to carry out ad-hoc, unorthodox steps focused on boosting economic growth.
In November, Elvan pledged steps to attract foreign investment but provided few details. In early December, he said the government would ease the effects of high inflation on the population through fiscal measures and by working in tandem with the central bank. He did not provide details.
Elvan said in early December that the country's central bank has "instrumental independence" from political influence, stopping short of pledging full independence for the institution.
Despite central bank rate hikes, inflation in Turkey accelerated to 15 percent in January, the highest among major emerging markets outside of Argentina. Price increases are expected to accelerate over the next three months, perhaps necessitating further central bank rate measures.
Late last month, the Trade Ministry sent inspectors into shops to check on the price of foods after increases in the cost of basic foodstuffs helped drive inflation higher. The steps were reminiscent of the unorthodox measures taken under Albayrak's watch.
In late January, Dünya, Turkey’s leading financial newspaper, said Erdoğan would announce plans to reform the economy in February.
The measures would include structural reforms and legal reforms, the newspaper said. Steps to improve the investment environment, speed up foreign investment, and to guarantee property rights would be included in draft legislation, it said. The president has yet to announce the measures.
(This story was updated with government steps in the 26th and 28th paragraphs.)