Correspondent of the Department of Economics Tatyana Edovina about the new course of the Turkish government

Re-elected in the second round, Turkish President Recep Tayyip Erdogan on Saturday announced the formation of a new cabinet of ministers. One of the most important appointments was the return to the post of Minister of Finance Mehmet Simsek, who held this position in 2009-2015 (then he was appointed to the post of Deputy Prime Minister, who left him in July 2018). The Minister is an economist with experience in investment banks and a supporter of a moderate fiscal policy.

The appointment can be considered more than timely: the weakening of the Turkish lira accelerated – its rate against the US dollar approached 21 lira per dollar. The current crisis can be counted from the autumn of 2021, when inflation reached 20%, but the Central Bank of the country, under pressure from Mr. 14%, in 2022 – up to 9%, now 8.5%), which is at odds with the conventional economic policy, which involves raising rates to reduce the rate of price growth. As a result, the gap between rates and inflation began to widen: in early 2022, it exceeded 50%, and in October, price growth accelerated to 85%. After that, the annual figure began to slow down due to the effect of a high base and lower energy prices – in April, inflation slowed to 43.7%.

According to Mehmet Simsek, now the government will seek to reduce inflation to single digits in the medium term and adhere to “fiscal discipline”. “Turkey was left with no choice but to return to a rational approach – a rule-based and predictable economy is the basis of prosperity. To achieve the goal, we will use such fundamental principles as transparency, consistency, predictability and adherence to international norms,” the minister emphasized during the transfer of powers.

How traditional the policy of the new cabinet will be will be shown, oddly enough, by the next meeting of the country’s central bank, if by that time a change in its leadership is announced. According to media reports, the post may be taken by Hafize Gaye Erkan, who also worked at Goldman Sachs. Mehmet Simsek has already promised to “help the Central Bank in the fight against inflation.”

We can hardly expect a sharp increase in rates and a slowdown in lending that could stop the growth of the economy – such an approach runs counter to the established model (cheap lira and loans at below real rates stimulate growth) – but even weaker signals of a tightening policy could support the lira and soften pressure on inflation.