Tough decisions await President Erdoğan on Turkey’s economy

A new era in Turkish politics will be launched on July 9 as President Recep Tayyip Erdoğan takes his oath, announces the new governmental structure, and appoints vice presidents as well as ministers and other senior officials. 

In an address to his Justice and Development Party (AKP) colleagues on July 6, Erdoğan underlined that the new government will be composed of non-AKP figures on the principle of merit and eligibility, who can look into issues in a more objective way.

This statement contradicts with expectations that at least three or four ministers from the outgoing cabinet, including from the economy and diplomacy team, will find places in the new governmental structure. Either way, speculations over the composition of the government will soon end as Erdoğan is due to announec it late on July 9.

Two main issues will be on the immediate agenda of Erdoğan’s new government: Foreign policy and the economy. They are in fact interrelated, as both are about the main political choices of the government regarding how Turkey integrates with the outer world and how these choices will help it repair its broken image in the eyes of the international community.

In fact, some relatively positive moves have been observed in foreign policy in the last six months. Ties between Turkey and the United States are seemingly improving through continued intense diplomacy and high-level engagement, though serious problems still need to be addressed. Turkey and the European Union have already long been working closely on transactional issues, with little mention of Ankara’s accession process. That will continue to be the case in the foreseeable future. The upcoming NATO Summit next week would give additional chance for Turkey to balance its policy in Syria between Russia and the U.S.

However, the economy needs more radical and urgent actions. There are three top challenges facing the Turkish economy: The impact of trade wars in the global scene; additional regional instabilities stemming from the U.S.’s anti-Iran sanctions, and ineffective, unsuccessful management of the national economy.

Turkey’s last 10 years have long observed a major debate between the supporters of a growth-based economy and financial discipline, which has obviously resulted in the victory of the former. Taking advantage of low interest rates for more than a decade, Turkey has been able to borrow cheap money to boost its economy, (though mainly through the construction sector). That secured high growth rates, but at the expense of a skyrocketing public deficit.

An economy with at least 15 percent annual inflation, with around $200 billion debt and only net $26 billion in Central Bank reserves, as well as with a national currency in constant and sharp depreciation, should therefore prepare for some very stringent measures. Furthermore, borrowing is now much more expensive following the U.S. Federal Reserve’s decisions to hike interest rates, which will likely be followed by the European Central Bank.

Economy experts say the new Erdoğan government is running out of options. To prevent a future major crisis and to stop the further devaluation of the Turkish Lira, he should slow down the economy and abandon the intense high-growth economy. That would mean canceling major investment projects like Canal Istanbul, second and third nuclear plants, major transportation infrastructure, and costly defense industry procurements, while at the same introducing painful measures in the name of financial discipline.

Experts underline that Turkey’s case is no longer really about who will be in the driving seat of the economy, but whether these hard choices will be taken.