It Is Time for the IMF in Turkey

If ever a country needed an IMF economic program to stabilize its economy, it has to be Recep Erdogan’s Turkey. It is not simply that his country has an inflation and balance of payments problem. It is that years of Erdogan’s erratic economic policy management has considerably undermined both domestic and international economic confidence. 

The IMF could help Turkey restore economic stability not only by providing much needed foreign exchange support. It could also help design a coherent economic stabilization program and provide its seal of approval for that program. By doing so, the IMF could bolster economic confidence and serve as the deus-ex-machina that allows the country to get on a better economic path. 

It would be a gross understatement to say that Erdogan has a major economic credibility deficit. For many years, he clung to the eccentric view that high interest rates were not a cure for inflation, but were rather its cause. At a time when the rest of the world was raising interest rates to fight inflation, he pressured the central bank to cut rates. He also established for himself the reputation of firing central banker governors on a whim and had the penchant for imposing his will on his country’s ministry of finance as underlined by his son-in-law’s appointment to be Turkey’s finance minister. 

As a result of these unorthodox policies, over the past few years, Turkey’s economic performance has left much to be desired. Inflation took off, the economy overheated, demand for dollars went through the roof, the currency plumbed record lows, the country’s international reserves were depleted, and foreign investors headed for the door. 

To be sure, last June events forced Erdogan to make a politically embarrassing policy U-turn and adopt a more orthodox monetary policy. Inflation was on the rise, the Turkish lira was on the ropes, the country had a gaping current account deficit, and local citizens were fleeing to the dollar. With his back to the wall, he appointed an orthodox central bank governor and minister of finance who were respected in economic circles both at home and abroad. He also gave them license to follow a more rational economic policy path. 

Since June 2023, the Turkish central bank has hiked interest rates by more than 40 percentage points to their current level of 50 percent. However, this is yet to make a dent on price and wage inflation. Over the past 12 months, inflation was 67 percent. High interest rates have also failed to stabilize the currency. Since the start of this year, the Turkish lira has fallen by over seven percent and now stands at a record low of over 30 Turkish lira to the dollar. Not so long ago, as of September 2021, the Turkish lira was below 10 to the dollar. 

Turkey’s prospects for stabilizing inflation any time soon do not appear to be good. Even at 50 percent, interest rates are considerably below inflation at a time when the economy still appears to be overheated. Meanwhile, the country is at risk of entering a wage-price spiral. As if to underline this point, the minimum wage was recently increased by 49 percent ahead of the local elections at the end of the month. 

A normal country in Turkey’s current economic circumstances would turn to the IMF for a stand-by arrangement to lessen the pain of fighting inflation and strengthening the balance of payments. The fly in the ointment for Turkey is that this would be politically very difficult for Erdogan given his past vocal opposition to any dealings with that organization. It also hardly helps that Turkey has poor relations with the United States, the IMF’s largest shareholder. 

All of this suggests that Erdogan will be forced to try to stabilize the Turkish economy without IMF support. That is a pity since it will all too likely involve a greater degree of pain and a longer time to do than if the country were able to get the IMF’s support it so desperately needs.