Turkey needs an independent central bank — not Erdoğanomics

His brand of thinking was dismissed as "Erdoğanomics" owing more to a Koranic verse prohibiting usury and to cherry-picked ideas by economist Irving Fisher than to mainstream economic thought.

However, his ideas have found some supporters.

Ghana's finance minister is among them. Ken Ofori-Atta echoed Erdoğan's thinking at a recent summit on green finance in Paris, saying: "I really wonder if classical theories are the way forward. We must reduce interest rates to sustain growth."

But he, too, overlooked a key problem with this approach: the stimulus it provides is short-lived but has the potential to create longer-lasting inflationary pressure.

Economists compare the effect to a sugar high and recall an example from the UK in the 1980s when then-chancellor Nigel Lawson cut rates under similar circumstances.

China and inflation

Erdoğan's call for rate cuts in the face of high inflation seeks to emulate the Chinese model by boosting exports in the same way that Beijing did. Success in the East led to an era of low rates and rising competitiveness, stimulating both investment and consumption.

But there was also inflation, which eroded the purchasing power of incomes and the value of savings. China avoided public discontent by regularly raising the minimum wage and pension payments, but this left inflation lingering.

In Turkey, by comparison, inflation is already so high that people often cannot meet day-to-day living expenses. Many have resorted to credit cards to pay bills, raising the risk of a debt bubble because of the high interest rates.

Around 114 million credit cards have now been issued in a country of 85 million.

Protecting energy supplies

Inflation makes imports more expensive — especially energy.  Turkey refused to join the West in sanctioning Russia for its invasion of Ukraine in 2022, in part to retain its energy supplies from Moscow.

Russia responded by exporting oil and gas to Turkey at discounted prices, with extended repayment periods. Ankara failed to capitalise on this by re-exporting these products to Europe, as India did.

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Turkey's current account deficit expanded with the decline in tourism, impacted by the pandemic and the war in Ukraine. Its debt more than quadrupled during Erdoğan's first presidential term, while growth dropped in the last two years. The instability of the lira meant that Western companies' investments contracted, leading to a massive capital flight.

There are now fears that Turkey could default on sovereign debt payments, with all the damage to its credibility and attractiveness to investors that this would inflict.

Central bank credibility

Support for the current governor of the central bank, Hafize Gaye Erkan, has now also become a credibility issue.

Arbitrarily dismissing yet another governor would cause concern over the independence of the central bank, which should be guaranteed to shield it from political pressure.

There were hopes that Erdoğan might return to economic orthodoxy after his re-election last year. He appointed Mehmet Şimşek as the new finance minister, and then Erkan.

One of her first decisions was to raise the main interest rate to 40% to battle inflation (which was then at 62%) in what felt like a promising start. But without guarantees over independence, the prospect of political pressure looms.

Like its equivalents around the world, including the European Central Bank, Turkey's lender of last resort should be protected from interference and overseen only by a clear constitution and the courts.

That would at least help pave a path to prosperity.