If any country needs an IMF economic program to stabilize its economy, it has to be President Recep Erdoğan’s Turkey. It’s not just that his country has inflation and balance of payments problems. This means that President Erdoğan’s mismanagement of economic policy over many years has seriously damaged economic confidence at home and abroad.
The IMF could help Turkey restore economic stability, as well as provide much-needed foreign exchange support. It could also help design and provide approval for a coherent economic stabilization program. In doing so, the IMF could act as a deus ex machina to boost confidence in the economy and put the country on a better economic trajectory.
To say that President Erdoğan has major economic credibility flaws would be a gross understatement. He has long held to the unorthodox view that high interest rates are not a cure for inflation, but rather a cause of it. He pressured central banks to cut interest rates at a time when the rest of the world was raising interest rates to fight inflation. He has also established himself a reputation for firing central bank governors on a whim, and has personally appointed his own country’s finance minister, as highlighted by the appointment of his son-in-law as Turkey’s finance minister. tended to impose their will.
As a result of these unconventional policies, Turkey’s economic performance has left much to be desired over the past few years. Inflation was rising, the economy was heating up, demand for dollars was exploding, the currency hit record lows, the country’s foreign exchange reserves were depleted and foreign investors headed for the door.
Indeed, the events of last June forced President Erdoğan to reverse his politically embarrassing policies and adopt a more orthodox monetary policy. Inflation was rising, the Turkish lira was in crisis, the country was running a large current account deficit, and locals were fleeing to the dollar. With his back against the wall, he appointed an orthodox central bank governor and finance minister respected in the domestic and international business community. He also gave them permission to pursue a more rational economic policy path.
Turkey’s central bank has raised interest rates by more than 40 percentage points since June 2023, to the current level of 50 percent. However, this has not yet affected price and wage inflation. Inflation over the past 12 months was 67%. High interest rates also failed to stabilize the currency. Since the beginning of this year, the Turkish lira has fallen more than 7% and is currently at an all-time low of more than 30 Turkish lira to the dollar. Not so long ago, as of September 2021, the Turkish lira was below 10 lira per dollar.
Prospects for Turkey to stabilize inflation in the near future do not look good. Even at 50%, interest rates are well below inflation at a time when the economy still appears to be overheating. Meanwhile, the country is at risk of falling into a wage-price spiral. As if to emphasize this point, the minimum wage was recently increased by 49 percent ahead of local elections at the end of the month.
A normal country in Turkey’s current economic situation would ask the IMF for a standby agreement to ease the pain of fighting inflation and strengthening the balance of payments. The frustration for Turkey is that this would be extremely difficult politically, given that Erdogan has been vocally opposed to any deal with him in the past. Turkey’s deteriorating relationship with the United States, the IMF’s largest shareholder, also hardly helps.
All this suggests that President Erdoğan must try to stabilize the Turkish economy without IMF support. This is unfortunate because it is very likely to be more painful and take longer than if the country were able to get the IMF support it so desperately needs.
