The new Turkish Finance Minister pledges a return to rational economic policy

Mehmet Simsek announces intention to abandon unorthodox strategy which has fueled crisis Turkey’s new finance minister has vowed to return to “rational” policies after years in which President Recep Tayyip Erdoğan’s unconventional strategy put the country’s $900bn economy under intense strain and sent the lira to record lows.

Mehmet Simsek, at a Sunday handover ceremony, said: “Transparency will be the key to achieving our goal of increasing social welfare. We will adhere to international standards, and we’ll also ensure consistency.”

He said: “Turkey must return to a rational base.” “We will prioritize macro financial stability.”

Simsek served as deputy premier and finance minister prior to leaving the government at the end of 2018. Simsek was brought back to the cabinet by Erdogan on Saturday, as part of an overhaul that raised expectations that Turkey would move away from unorthodox policies which have exacerbated a severe crisis of cost of living and driven foreign investors out of the market.

“The Choice of Mehmet Sissek” . . Goldman Sachs wrote in a client note on Saturday that the likelihood of a shift to orthodox monetary policy was increased.

Simsek, and the other officials who have been appointed to lead Turkey’s economy, face significant challenges. They must set Turkey on a sustainable path. The inflation rate is over 40% and reserves of foreign currencies are severely depleted as a result of the attempt to support the Lira in order to finance an enormous current account deficit.

The lira has fallen 67 percent against the dollar over the last three years, despite attempts to stop the fall. “Reducing inflation to single digits in the medium term . . . and accelerating the structural transformation that will reduce the current account deficit are of vital importance for our country,” Şimşek said on Sunday.

The government, under Nebati’s “liraisation” policy, launched a number of measures to encourage businesses and consumers to avoid holding foreign currency. The government launched in 2021 a savings account that would protect depositors from a depreciation of the lira at its expense.

Around $125bn in accounts, and some economists worry that a significant lira weakening would quickly hit the government finances.

Some analysts have compared capital controls to other measures, such as limiting the ability of companies to buy foreign currency.

Erdogan’s government tried to boost the economy before the elections, by increasing the minimum wage, public sector pay and giving away a month of free gasoline. The measures, according to many economists, have increased inflation.

Investors and economists believe that Erdogan’s willingness to allow interest rates to increase, as he has been a staunch opponent of high borrowing fees, will be a test. Investors and economists say that Erdogan forced the central bank to reduce rates from 19% two years ago to 8.5% today despite a surge in inflation.

The widening gap between the policy rate of the central bank and the inflation rate has driven “real” rates into negative territory, which is one reason for the severe depreciation of the lira. Investors are now waiting to see whether Erdoğan will reshuffle the leadership at the central bank. Incumbent Şahap Kavcıoğlu has overseen a series of sharp rate cuts at the behest of the president since taking the helm in March 2021.

A second question is whether Erdogan would be willing to adhere to his programme if central bank implemented the rate increases economists believe are necessary.

Goldman predicts that the lira, even under Simsek’s economic policy, will fall sharply over the next 12 months from TL21 per dollar to TL28.

Simsek is a former Merrill Lynch senior bond strategist, who was well respected by foreign investors. He left his position as deputy premier in 2018, when the president named his son-in law Berat Albayrak to be finance minister.

Albayrak has been blamed for destroying tens billions of dollars of foreign exchange reserves in his two-year tenure in an attempt to stop a currency crisis. The central bank also reduced interest rates sharply.

Economists are concerned that a similar situation may occur again if Erdogan loses his patience with an economic adaptation programme.

Liam Peach, a London-based economist at Capital Economics, asked: “Will the policy shift be one that includes greater central bank autonomy and higher interest rates? Or will it just be a half baked effort?” “Simsek may have demanded a tighter monetary policies as part of the agreement. But it would be surprising to us if Erdogan gave up full control.”