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14 August 2018

What the Turkish lira crisis means for President Erdogan’s hold on power

Erdoğan built his supporter base by promising economic stability. Can he withstand a crisis?

By Yörük Bahçeli

The Turkish lira has lost nearly half of its value this year. Ironically, it has occurred under the leadership of a man whose 15-year rule has relied on the stability his administration brought to Turkey following a turbulent decade of coalitions and economic mismanagement.

Currency crises often force leaders from seemingly impregnable positions of power – former Italian prime minister Silvio Berlusconi withstood all manner of personal scandals before finally resigning in 2011 at the height of the Eurozone crisis. Could Recep Tayyip Erdoğan face a similar threat?

Erdoğan has always held unorthodox views on monetary policy, in particular his opposition to interest rate hikes favoured by economic experts. His advocacy was amplified ahead of June’s elections, a key step in the transition towards a presidential executive system which gives the leader sweeping powers – after claiming victory, Erdoğan pledged to bring the presidential system in “rapidly”. The election campaign was dominated by a spending spree, despite market concerns around rising inflation. Following the election, Erdoğan appointed his son-in-law to the new ministry of treasury and finance, and gave himself the right to appoint the central bank governor, bringing the already worn-out bank’s formal independence to an end. All of these factors pushed the lira lower and lower as the country’s monetary policy lost credibility in the eyes of investors.

These missteps come in stark contrast to Erdoğan’s rise to power, which followed back-to-back financial crises in 2000 and 2001. Traditionally, Islamist parties had shunned markets and called for a state-regulated, interest-free economic system. Under Erdoğan’s leadership, the Justice and Development Party broke away from the politics of its predecessors and embraced a liberal economic model. For years, foreign investors praised its consistent implementation of International Monetary Fund reforms, which stabilised the Turkish economy and pulled down inflation and borrowing costs. Since then, Erdoğan has promoted the narrative that his administration stabilised a country that once grappled with financial crises owed to weak coalition governments. Indeed, this mantra formed the backbone of his campaign to shift the country’s executive system to a presidential system, underpinning the argument that this would lead to more efficient decision making. 

Erdoğan is known to have been opposed to higher interest rates throughout his leadership, labelling them “the mother and father of all evil” dictated by an “interest rate lobby”. In his earlier years, however, officials around him were able to convince him to allow them to act in line with market demands, while he was also bound by IMF requirements. But once IMF programmes came to an end and interest rates fell following the great recession, Erdoğan was able to become more vocal and staunch in his opposition to higher rates.

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Since the lira crashed, the price of food and fuel has soared. While the current crisis is a blow to Erdoğan’s raison d’etre as a leader, there is no question over whether he will maintain power. In the June election, when the opposition reached the heights of its power since 2002, it still ultimately made little gain against the president, who, despite the weakening of his own party, managed to take power with the help of his far-right allies and a playing field that disproportionally advantaged his campaign. Now, the opposition is marred by divisions and leadership struggles.

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Economic mismanagement failed to dominate the recent election campaign. While opposition parties addressed it, like Erdoğan they chose to focus on promising various handouts to constituents: the main opposition even criticised the government’s spending plans for offering too little. Now, there is little they can do in a weakened parliament. Meaningful opposition isn’t currently coming from the business community either, with the chairwoman of one of Turkey’s largest conglomerates having expressed full confidence in the government’s financial policy, seemingly ignoring the huge debt stack of Turkish banks and corporates in foreign currencies. 

Repercussions against Erdoğan are also dampened by ordinary Turks’ access to impartial news. Turkey had the world’s highest number of jailed journalists in 2017 and the vast majority of media is controlled by the president’s allies. Any criticism of the country’s financial governance is labelled an “attack”, or even “treason”. On Monday, prosecutors initiated proceedings against social media accounts accused of threatening economic security.

As such, the current lack of public protest is no surprise, but it is uncertain what will happen once inflation and a plummeted currency take further hits at basic necessities. Another source of discontent is likely to be businesses, particularly those with close links to the government, who are also said to be among the most vulnerable in the face of a weak lira.

It is worth remembering that it was an economic crisis that pushed a whole class of politicians out of Turkish politics in 2002, replacing them with a party that was founded a mere 15 months before that election: Erdoğan’s very own. Now he awaits his next test: a local election in March 2019.

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