The Turkish economy is still facing new turbulence Sudden fall of the central bank governor By President Recep Tayyip Erdogan, who added another chapter to years of unpredictable economic policy, aroused fears of foreign investors and possibly put the seeds of a financial crisis in the horizon, according to an analysis by the American Wall Street Journal.
Last Friday, Erdogan replaced Nasi Aghbal with Shehab Qafcioglu, a former member of Erdogan’s Justice and Development Party and the He publicly endorsed the president’s call for a rate cutDespite inflation at 15.6% in February.
Erdogan, who laid off three central bank governors in less than two years, prefers low interest rates as part of a strategy to fuel growth.
He opposed a policy put in place by Mr Abal who raised interest rates to fight inflation and help Turkey avert an economic crisis. Mr Aghbal’s policies have encouraged investors to pour billions of dollars back into the country since his appointment in November.
The Turkish lira
Aghbal’s layoff on Monday resulted in one of the worst one-day sales of Turkish lira-denominated assets as investors reduced their exposure to the currency. The pound fell 7.5% against the dollar in one day. Kavcioglu tried to calm the markets by saying it would curb inflation but did not say if interest rates would change.
Erdogan defended his policies during a speech at his party’s summit on Wednesday, saying that this week’s market volatility did not reflect the strong fundamentals of the Turkish economy.
He added: “We have proven time and again that we can withstand all types of shock.”
Erdogan, who has ruled Turkey as Prime Minister and later President since 2003, oversaw years of rapid economic expansion during his first decade in power as the government invested in infrastructure and adopted measures to encourage growth. Over the past decade, however, Turkey has suffered from mounting instability, including popular protests against Erdogan, the influx of millions of refugees from neighboring Iraq and Syria, and terrorist attacks by ISIS and Kurdish militants.
Regardless, the Erdoan’s government’s adoption of low interest rates and other unconventional economic policies has at times resulted in international investors pulling money out of Turkey over concerns about the country’s stability.
Turkey plunged into a currency crisis in 2018 after former President Trump doubled tariffs on steel and aluminum during a dispute over an American priest detained in the country. At the height of the crisis, Erdogan appointed his son-in-law Berat Albayrak to head the Treasury, which heightened investor concerns about the narrow circle of advisors surrounding the unqualified president.
The currency only stabilized after the central bank was forced to hike interest rates to 24% in September 2018, where it stayed for about 10 months.
The increase in the interest rate for 2018 stabilized the economy and reduced cheap credit, which helped Turkey reduce the current account deficit and create part of the current account surplus in part of 2018 and part of 2019.
Balance of payments crisis
The fall of the central bank chief trusted by many foreign investors has rekindled fears over the balance of payments crisis as Turkey cannot pay the value of basic imports or its external debt. Turkey relies on funding from foreign investors to finance the current account deficit.
Erdogan is unlikely to seek a bailout from the International Monetary Fund. During the 2018 crisis, government officials said the deal with the International Monetary Fund was not on Turkey’s agenda.
Investors say the most likely route for Turkey is to seek a deal with Qatar.
Central bank instability has made it difficult for the Turkish economy to recover from a series of external shocks.
In recent years, Turkey has had to deal with the wars in Syria and Iraq, terrorist attacks and the coronavirus pandemic. The Turkish army also launched a violent coup attempt in 2016, which was unsuccessful.
Erdogan has also expanded his influence within the Turkish state in recent years, suppressing local opponents and marginalizing rival leaders within his party. He has repeatedly rejected advice from other Turkish officials such as Aghbal, who have advocated a more traditional approach to the economy.
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