The embattled Turkish lira has relatively recovered and some foreign short-term investors have returned to Turkey since early November, when Ankara replaced two key economy officials — the central bank governor and the treasury minister — in what it presented as a reform drive to overcome the country’s two-year economic turmoil, exacerbated by the coronavirus pandemic. But is the Turkish economy out of the woods?

After the brewing storm in early November, the economy does appear on a fresh course and many have breathed a sigh of relief — at least for now — that the country has come round a dangerous bend. The key component of Ankara’s “economic reform drive” is the reversal of its policy to keep interest rates low despite the dramatic slump of the currency and rising inflation. In a bid to make the lira more appealing to savers and curb dollarization, the central bank under new Gov. Naci Agbal announced two hikes in its policy rate in November and December that totaled nearly 7 percentage points and brought the rate to 17%. 

As recently as April, the bank had cut the rate to as low as 8.25% at the tacit behest of President Recep Tayyip Erdogan, who has long advocated an unconventional theory that high interest rates increase inflation. In a speech in August, Erdogan hailed the decreased rates, saying, “God willing, they will decrease further.” This, however, did not materialize. The relentless slump of the lira, coupled with a rising inflation and a growing current account deficit, forced Ankara to change tracks amid apprehension that the import-reliant Turkish economy could hardly afford a further increase in hard currency prices.

Agbal has put up a determined posture on the bank’s new approach, and new Treasury and Finance Minister Lutfi Elvan, who replaced Erdogan’s son-in-law Berat Albayrak, has pledged continued efforts at stability, leading market actors to believe that Ankara has at least put the brakes on the downturn.