Economy becomes main ground in Turkey’s cabinet reshuffle

After the new cabinet was announced in Turkey on May 24, any dramatic change was unseen at first glance, rebutting some earlier rumors about potentially radical revisions. We needed to wait for a few days to see the main area of change until the announcement of the division of roles and responsibilities in the new cabinet late May 25. This area has, for sure, been the economic administration, which has seen a series of significant changes that have given some crucial signals about the cabinet’s future moves. 

Deputy Prime Minister Mehmet Şimşek, long a favorite of investors and a strong advocate of reforms, has been dealt reduced responsibilities in the new cabinet. He will continue to oversee the Treasury, Central Bank and state-run banks in the new cabinet, but his portfolio has shrunk, with the regulation of banks and capital markets given to another deputy prime minister, Nurettin Canikli. The responsibility for the Banking Regulation and Supervision Agency (BDDK), the Capital Markets Board (SPK) and Savings Deposit Insurance Fund (TMSF) was given to Canikli, who is known among investors to be close to President Recep Tayyip Erdoğan. 

Canikli will also be responsible for liaising with parliament, as well as focusing on topics of investing and insurance. 

In the new cabinet, there will be no sole person who is fully responsible for economic coordination. Ali Babacan had this authority in the past before he transferred this role to Şimşek last year. 

These appointments have fueled discussions about a dual structure in the economic administration, although some officials have refuted such claims, including an adviser of Erdoğan, Cemil Ertem. 

He said on May 26 that the new system would bring about an effective decision-making process thanks to a fair division of roles and responsibilities between Şimşek and Canikli. 

There are, however, some “buts,” which are of crucial importance here. 

Under the new system, Canikli seems to have a larger area of authority than Şimşek, who was long praised by international investors for his strong emphasis on structural reforms and good record of maintaining fiscal discipline in years. 

While Canikli will have the authority to make crucial decisions about the banking system, the financial sector or companies thanks to his authority over the BDDK, SPK and TMSF, Şimşek’s main authority will be no more than public finance. Şimşek will also be the main addressee of any rate cut demands by several circles as the Central Bank is under his area of responsibility. 

There is also another, but quite crucial side of the coin. Although Turkey’s progress on reforms, mainly aiming at improving its labor market, boosting its savings rate and attracting more foreign investment, has slowed down, Şimşek is seen as one of relatively few remaining names committed to a reform agenda. He is in the cabinet along with some other reform supporters, such as Finance Minister Naci Ağbal, but to what extent Şimşek will have a say in realizing reforms will be of great significance. 

PM Binali Yıldırım vowed to maintain fiscal discipline, protect the independence of the Central Bank and fight structural problems hindering price stability. This is good news for the Turkish economy. He also pledged to implement economic policies focused on boosting growth, employment and production. This is good, too, but some crucial differences must be made immediately. 

Turkey needs to adopt a healthier growth model by increasing its productivity through a series of key reforms and boosting its savings, rather than sustaining its consumption-based model.