Turkey’s opposition pledges return to economic orthodoxy, faces uphill task

ISTANBUL — A return to orthodox economic policies is a key election pledge of Turkey’s opposition bloc. However, the colossal damage of the February earthquakes will make its task much harder should it win the May 14 presidential and parliamentary polls. 

Turkey’s economic turmoil is a top issue on the election platform of the six-party Nation Alliance, which is mounting the strongest challenge yet to President Recep Tayyip Erdogan and his Justice and Development Party (AKP), in power for two decades. Kemal Kilicdaroglu, the leader of the main opposition Republican People’s Party, is the joint presidential candidate of the alliance, which includes disenchanted former associates of Erdogan, among them Ali Babacan, who presided over the economy in its heyday under the AKP and is well regarded by foreign investors.

The opposition blames Turkey’s economic woes on ill-advised government policies, especially after Erdogan assumed sweeping executive powers in 2018. Defying conventional theory, Erdogan has argued that high interest rates cause high inflation and pressed the Central Bank to lower its policy rate despite soaring prices. The bank has delivered a series of cuts since September 2021, at the expense of a plunging currency and runaway inflation, which peaked to 85.5% in October 2022. 

Last week, S&P Global Ratings revised its outlook for Turkey to “negative” from “stable,” citing fragilities stemming from the country's low policy rates, quake-recovery costs and uncontrolled inflation. 

#EconWatch: In a poll by @AlMonitor, 67% of respondents think the economy is the most important challenge that Turkey faces. As I've been saying for several years, Pres. Erdogan's nutty economic ideas will prove to be his Achilles' heel. pic.twitter.com/ox3n6Gjacu

— Steve Hanke (@steve_hanke) April 10, 2023

Turkey’s risk premium — reflected in credit default swaps that determine the cost of insuring exposure to a country’s sovereign debt — has largely decoupled from those of other emerging markets, hovering above 500 basis points. 

Annual consumer inflation, which stood at 50.5% in March, has been on the decline this year, largely due to a favorable base effect, but month-to-month price increases have continued at a rate of at least 2%. 

Turkey’s current account deficit, or foreign-exchange gap, reached nearly $50 billion last year, amounting to more than 5.5% of the country’s gross domestic product (GDP). The deficit was financed largely by foreign-currency inflows of unknown origin, underscoring how acute Turkey’s need for foreign investments has become. 

Meanwhile, the budget deficit amounted to nearly 2% of GDP last year, according to official figures, and was projected to expand to 3.7% of GDP in 2023. But increased public spending and decreased tax revenues after the Feb. 6 earthquakes are now expected to widen the gap further — to at least 6% of GDP, according to some pundits. 

In January, the opposition alliance made inflation a priority issue, pledging monetary and fiscal policies to bring it to low single digits in two years. It promised to restore the Central Bank’s independence and its prime duty of ensuring price stability, in addition to bringing interest rates in line with market realities. The alliance also pledged to invigorate Turkey’s agricultural sector in the face of alarming food inflation, which hit 68% in March.

Other major objectives include tackling the country’s income disparities and incentivizing the industry and tourism sector to boost hard-currency revenues and narrow the current account deficit. 

The six parties have agreed to undo Turkey’s executive presidency system, which was introduced in 2018 and is today widely regarded as Erdogan’s one-man regime. They pledge a return to parliamentary democracy with enhanced safeguards, where respect for the rule of law, transparency and accountability could further revive the flow of foreign investments to Turkey. Such reforms, they hope, will help lower the country’s risk premium and its external borrowing costs.

The alliance pledges that economic growth would average at least 5% over five years and GDP per capita would at least double to about $18,000 under its rule. That would entail the creation of at least 5 million new jobs and significantly curb the 10% unemployment rate. 

In sum, the opposition paints an economy that is guided by orthodox policies and integrated with the Western economy, while pledging also to revive Turkey’s bid to join the European Union. 

Yet its plans are already in need of revision due to the earthquake disaster, which claimed more than 50,000 lives and destroyed or severely damaged 650,000 homes and businesses. The estimated cost of reconstruction ranges from $100 billion to $150 billion.

Moreover, the disaster rekindled alarm for Istanbul, Turkey’s most populous city and economic hub, which scientists expect to be hit by a big quake in the near future. In a megacity rampant with substandard construction, preparing for such an event is a costly task, though officials have yet to utter the sum of the required funds.

Post-quake recovery and future quake minimization are bound to dominate Turkey’s agenda, regardless of who will govern the country in the next five years. In the Nation Alliance, senior economic officials acknowledge that they have to revise their economic vision accordingly. In conversations with Al-Monitor, Ibrahim Canakci of the Democracy and Progress Party and Bilge Yilmaz of the Good Party conceded that the prospective surge in quake-related public spending and the means of financing it — whether taxing or borrowing — would reshape any economic planning. 

Whoever wins the elections, the new government will face various quake-related tasks, chief among them the rebuilding of ravaged regions and minimizing the risk posed by shoddy buildings in other quake-prone areas.