Mehmet Simsek, a former Turkish chief of finance popular with foreign investors, has taken the helm of the economy again, signaling a return to more orthodox economic policies.
UK-educated Simsek, a former strategist at London-based Merrill Lynch, was appointed finance and finance minister on Saturday as Turkish President Recep Tayyip Erdogan announced his new cabinet after winning the May 28 presidential runoff , who extended his reign for five more years and into a third decade.
Turkey is in the midst of a cost-of-living crisis due to high inflation, which peaked at 85.5 percent in October compared to a year ago before falling to 43.7 percent in April with a favorable basic effect.
Analysts largely blame the crisis on Erdogan’s unorthodox economic strategy of low interest rates and credit expansion with increasing state control of financial markets, which the government says it pursues to boost investment, output, exports and growth.
The Turkish lira has lost some 150 percent of its value in the past two years as the country’s $900 billion economy came under tremendous pressure amid depleted foreign reserves, a rapidly widening current account deficit and a snowball effect from the state-sponsored scheme of lira deposits protected against currency devaluation.
The lira has lost some 23 percent of its value since the beginning of this year and hit a record low of nearly 21 against the US dollar on Sunday.
‘Transparency, consistency, predictability’
Simsek, 56, who served as finance minister from 2009 to 2015 and then deputy prime minister until July 2018, is a market-friendly figure known to foreign investors as a supporter of conventional economic policies, transparency and an independent central bank.
He said at a handover ceremony on Sunday that the country has “no choice but to return to a rational ground” and that a “rules-based, predictable Turkish economy will be key to achieving the desired prosperity”.
“Transparency, consistency, predictability and adherence to international standards will be our guiding principles to achieve this goal,” he said, adding that one of the main goals was “to establish fiscal discipline and ensure price stability for sustained high grow”.
Seref Oguz, a senior economist and columnist, said negotiations between Simsek and Erdogan for the position took a long time because the former wanted to secure his terms before accepting.
“Simsek set three conditions to get on board,” Oguz told Al Jazeera.
The first condition, according to Oguz, was the authority to make his own decisions. The second was to be able to design the country’s economics teams, and the third was to give him enough time to solve the problems of the economy.
Ahead of the first round of presidential elections on May 14, local and international media reported talks about Simsek’s possible reappointment.
After none of the candidates secured more than 50 percent of the vote for an outright victory, media close to the government intensified their coverage of a likely nod to Simsek, provided Erdogan stays in power.
Addressing his supporters after his election victory on May 28, Erdogan said he would have “financial management of an international reputation”, in a clear reference to his former minister.
Therefore, foreign investors knew even before Saturday’s announcement that Simsek’s appointment was highly likely.
Erdogan named Cevdet Yilmaz — another cabinet member who supports orthodox economic policies — as Turkey’s vice president.
Simsek said on Sunday that the government’s main goal is to increase social security in Turkey.
Tackling inflation
Ceyhun Elgin, an economics professor at Istanbul’s Bogazici University, said Simsek is expected to pursue a monetary policy aimed at low inflation rather than credit expansion and growth.
“This means there will be higher policy interest rates to fight inflation,” he told Al Jazeera.
Elgin added that the new minister will not abolish the lira deposit scheme protected against foreign exchange amid depleted foreign exchange reserves, but that he could do so “after Turkey’s foreign reserves reach a certain level under the influence of rising interest rates”.
Indirect state controls on the lira’s exchange rate against foreign reserve currencies are expected to be gradually lifted, Elgin said, leading to a controlled depreciation of the Turkish currency.
Erdogan is known for his belief that high interest rates are the cause of high inflation, not the cure.
“Interest rates and inflation are directly proportional. Interest is the cause, inflation is the result. There may be people who don’t believe this, but this is what I believe,” the president said earlier this year.
Simsek said it was vital for Turkey “to return inflation to single digits over the medium term … and to accelerate the structural transformation that will reduce the current account deficit”.
Turkey’s central bank, whose independence appears to have eroded over time, has cut its key rate from 19 percent to 8.5 percent since late 2021 due to Erdogan’s economic views.
The lira deposit system, protected against the depreciation of the currency, was launched in 2021 in an effort to keep the lira valuable. It now owns the equivalent of about $125 billion.
Erdogan has also pursued a policy of credit expansion, sometimes using public banks to provide loans at extremely low borrowing costs, which has seen real estate and car purchases skyrocket in recent years.
Oguz said Simsek’s name and appointment are important for Turkey to attract foreign investment, but that investors want to see the new finance chief’s autonomy and authority.
“That is why Simsek’s first 100 days are crucial, in which we will see which authorities he will be able to use and how he will monitor or change positions related to the economy, including the central bank chief,” Oguz said. . .
He added: “In particular, the investors will be looking at the actions that will be taken on interest rates and the exchange rate of the lira, which has been held in value until now but is slowly being released to depreciate against the dollar.”