Between a rock and a hard place

Before that weekend when two key Turkish officials in the economy lost their seats, on the evening of Nov. 6, Turkey’s position was a threshold where either capital control would be declared so that we would become a closed economy or we should immediately approach the IMF. Both of them are the least preferred options for Erdoğan within the context of politics and past discourses.

With the “presidential government system” introduced in 2018, foundations were laid for a pathetically weakening “common sense” and the strengthening of a “one-man rule.” As seen in the recent crisis, this system has started its self-destruction as in accordance with its nature.

A system based on “one mind” while nepotism was accompanying inevitably resulted in “unprecedented” ineptitude and it imploded.

President Recep Tayyip Erdoğan suddenly faced a crisis in the system he founded.It was obvious that the government, which was not able to manage the crisis that erupted in 2018, actually deepened it. The more the government became authoritarian the less it was able to see its consequences. Apparently, the authoritarianism that was created has also silenced a possible technical mind within themselves that might have been able to alert them that the course of events was wrong. 

It is unimaginable that the political power that allowed all of this to happen has been unaware that, in general, bad management, and particularly the minister in charge of economy policy have dragged the country to the edge of an economic collapse.

The economy was on the brink of collapse due to cluelessness, inexperience, unlimited power based on being a family member of the political will with absolute power, and on top of that a boosted self-confidence. When the country’s international ratings were lowered, that minister had said, “I don’t mind.” When he was removed from office with a “toned down dismissal,” he did not even hold a proper handover. What he left behind from the economy and treasury was wreckage.

This is exactly what poor management is; it is a system based on one man, nepotism and incapable technical staff. 

In those days when the crisis was triggered in 2018, from the way the crisis was managed it was obvious that Turkey was rapidly plunging into a deep crisis of payments. Several analysts, including myself, pointed out that given the course of events we would soon be knocking at the door of the IMF.

However, the minister with the unlimited self-confidence became engaged in an effort to defeat the syndromes of the problem with “domestic resources.”             

In those days, a huge gap became apparent in the balance of payments. In other words, when the outbreak erupted in March, it became certain that only due to the fall in tourism revenues, we would lose roughly 25 billion dollars. At that time, in an environment of negative real-interest, a giant Turkish Lira credit boost was occurring through public banks. One needs to be extremely illiterate in the economy not to know in advance that this would lead to dollarization and exchange rate boom. Also, insistence on low interest rates would cause giant foreign currency reserve losses.

In early 2019, the Central Bank had a gross foreign currency surplus of 100 billion dollars and a net foreign currency surplus of 50 billion dollar. While we are nearing the end of 2020, as a result of credit growth based on “domestic resources,” we have a gross foreign currency reserves of 79 billion dollars and 50 billion dollars net foreign currency deficit. There are also swift entries and exits of foreign currencies that are barely recorded.

Countries that face a crisis in their balance of payments and that have scarce foreign currency reserves, knock on the doors of the IMF. This post-2018 picture has taken Turkey one step closer to the IMF. It was not the “foreign powers” that took us there; it was Ankara itself with the policies it took.

President Erdoğan’s direct dismissal of the Central Bank (CB) Governor Murat Uysal on Nov. 7 and the appointment of a new CB Governor on November 8; also, his son-in-law Berat Albayrak’s resignation – which was obviously a “toned down dismissal” – all suggest that they have entered a rough path.

Which was the last straw?

What I gather from various sources is this: President Erdoğan was trying to be convinced that an interest rate increase was a must due to the situation where a balance of payments crisis was imminent as well as a looming debt crisis. Erdoğan learned of the loss of foreign currency reserves during this. Moreover, he was informed of the possibility of the fact that with a possible end of swaps taken into consideration, our reserves were negative.

Most probably, Erdoğan learned that week that Central Bank’s reserves were eroded through foreign currency sales and that policy belonged to Minister of Treasury and Finance, Berat Albayrak. He was told that we have been dragged to this grave situation because of this policy.

Apparently, economic decisions were entirely left to Minister Albayrak. The seriousness of the situation, the correct evaluation of the condition concerning the erosion of foreign reserves had not reached Erdoğan; the President was not fully informed.

All of this does not alleviate the responsibility of the trusted minister. Turkey watched all of these unfold as if we were in a “train accident in slow motion.” Analysts including this writer wrote and warned about this. If not even one person among those dozens of advisors has not conveyed this to him or was not able to do so, then this is a bitter example of the collapse of this institution, right?

The third way, a break

At this time when foreign sources are not pouring and domestic sources took us to the brink of the abyss, Beştepe had to change the CB governor and the finance minister to give the impression that “a new window” has been opened.

Before that weekend when two officials in the economy lost their seats, on the evening of Nov. 6, Turkey’s position was a threshold where either capital control would be declared so that we become a closed economy or we should immediately approach the IMF. Both of them are the least preferred options within the context of politics and past discourses.

Now, President Erdoğan has drawn a third option from the hat of these two options: It is a promise to return to “law” with a technocratic economy management; some kind of a chill out, a break.

Even this state, itself, of “giving instructions to return to law” demonstrates how institutions and rules have been blown up.

Nevertheless, this discourse was like a medicine for the financial markets to take a break and chill out - exhausted from the fluctuations of the Turkish Lira, its loss of value reaching record levels.  

What is defined as “Financial markets have settled,” is the decline to the 40 percent increase level from the 50 percent increase level of the forex rate in the last 12 months. In other words, the exchange rate is still relatively high. There is no environment anyway that foreign currency will flow in in abundance and that even a portion of the 120 billion dollars of loss of the reserves would be replaced.

More importantly at this stage is the expected slowdown in total demand, -i.e. real economy- that will be brought by the second and stronger pandemic wave. It is the fact that there is no real economy landscape that would illuminate the approximately 8 million unemployed (all inclusive, registered and unregistered). Beyond that, in this new wave of recession, the likelihood is rising that numbers of those who appear to be working but are on unpaid leave or on short-time working will increase.   

Our past memories of several milestones we had to experience come back; the feeling of “déjà vu” pops up.

This, in turn, brings to mind the past recoveries from past economic crises of Turkey. It was a change in the main cause of the crises, the politics. It has always been the politics that was in crisis. Returning to normal has always been the key. This is also the way out from the lack of option state of “being stuck between a rock and a hard place.” There is no way out in short breaks…


January 19, 2021 Turkish economy at low tide