The title of a recent FT Big Read “Turkey’s economic woes catch up with Erdoğan” (https://on.ft.com/44B1WGK) could equally well be edited to Erdogan’s policies have led to Turkey’s economic woes.
In particular, the arrest (on 19th March) of Erdoğan’s biggest political rival, Istanbul mayor and presidential candidate Ekrem İmamoğlu, sparked a financial crisis. The central bank raised interest rates and used its foreign exchange reserves in an attempt to stabilise the Turkish lira.
Business and consumer confidence seem to have been hit (one of the main points made in the FT article). However, the latest hard data (as opposed to soft, more anecdotal evidence) show Turkey’s economy holding up well and inflation coming under control. The IMF’s April forecast showed GDP growth at 2.7% and 3.2% in 2025 and 2026, respectively. Consensus forecasts are close to 3% growth.
The finance minister, Mehmet Şimşek, claimed in June 2024 that a permanent decline in inflation was about to start. Inflation has fallen but to claims of permanence would, as yet, be premature. Simsek sees the maintenance of fiscal discipline and high interest rates as required for lasting success. But caution is warranted given that Turkey has had two twin peaks in inflation in the twenty first century.
Private sector credit as a share of GDP has been trending lower since 2020, an encouraging sign that another credit-fuelled house price bubble and more general inflationary pressures can be avoided. But broad money growth is still too high (40% year-on-year) and the Turkish lira has remained weak. Inflationary risks are certainly not yet contained.
Of course, Erdoğan might abandon his reform programme. Finance Minister Şimşek and Fatih Karahan, a former New York Federal Reserve economist, could be replaced. A return to low interest rates and loose fiscal policies could mean a reversion to Turkey’s former, poor, policy settings with attendant inflationary risks and poor growth.