Erdogan’s return to ‘orthodox policies’ as Lira continues slide

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Turkish President Tayyip Erdogan’s AK Party is returning to its roots, as a draft election manifesto marks a return to more orthodox, free market economic policies, after the Lira hit rock bottom a fortnight ago.

With presidential and parliamentary elections on May 14 drawing nearer, and the majority of opinion polls showing that Erdogan will face his biggest electoral challenge yet, AKP appears to be leaving behind unorthodox policies of the past, according to Reuters.

The Turkish leader’s popularity has suffered mainly due to an erosion of living standards caused by the depreciation in the lira at a time when Ankara began pursuing a controversial economic model that was based on low interest rates.

The lira hit rock bottom earlier on 2 February when it was trading at 20.62 to the euro. The lowest to the USD was recorded on Thursday, March 16, when it was trading at 18.99, according to Financial Mirror data.

The dive of the country’s currency, later combined with the soaring food and energy crisis triggered by Russia’s invasion of Ukraine in February 2022, led inflation in Turkey to spike to more than 85% last year.

In response, and on President Erdogan’s instructions in 2021, Turkey embarked on a rate-cutting cycle in the face of soaring inflation, defying traditional monetary policy and running against a global trend of rising borrowing costs.

The Turkish central bank, CBRT, slashed its benchmark rate by 500 basis points in 2021 and then again in 2022, after calls for rate cuts from Erdogan.

Fiscal woes

Turkey’s fiscal woes were also exacerbated when the devastating 7.8 magnitude earthquake struck its southern regions on February 6, killing tens of thousands and leaving millions of people homeless and causing billions of dollars worth of damage.

Reuters quoted sources close to procedures in the ruling AKP, as saying that a draft election manifesto makes no reference to Ankara’s more recent economic policies, but instead hints to a return to the party’s prior, more orthodox approach.

The sources also said Erdogan wanted to give a top role in running the economy to former deputy prime minister and finance minister Mehmet Simsek, who is highly regarded in international circles.

“The approach to the economy is very similar to that of the 2002 AK Party election manifesto. In other words, the AK Party is returning to its origins,” one government official said about the draft, adding that work on it had reached the final stage.

He said that its priorities included free market economy rules and practices parallel to those applied in the global economy, with “no sign of any kind of non-market practices.”

“A pivot back to orthodox economic policy would be welcomed by investors,” said Blaise Antin, head of EM sovereign research at asset manager TCW in Los Angeles.

“But foreign investors are likely to treat such news with extreme caution”, he added, “given multiple past head-fakes by Turkish authorities and President Erdogan’s very public skepticism about conventional monetary policy and market-oriented economic policies more generally.”