Erdoğan positions himself as saviour of Turkish economy after two years of

In the two years that followed, Erdoğan worked hard to turn Turkey into a regional powerhouse – intervening in Syria and Libya and sending survey ships into the Mediterranean to challenge the sovereign rights of neighbouring Greece. He bought S-400 air defence missiles from Russia in defiance of the United States. He challenged Saudi Arabia over the murder of a dissident journalist while cementing his own control over the country’s media.

But the past two years were also characterised by a series of economic missteps that threatened to undermine Erdoğan’s regional ambitions and his status as Turkey’s most powerful leader since the death of its founder Mustafa Kemal Ataturk in 1938.

Erdoğan’s attempts to centralise and personally take control of economic decision-making with the help of Albayrak, a former energy industry CEO married to his daughter Esra, helped spark a currency crisis in the summer of 2018 and a second bout of severe financial turmoil this year.

At the centre of the troubles were a set of economic policies termed by many analysts as Erdoğanomics. This ‘magical thinking’ sought to depict interest rates as an evil tool of foreign powers seeking to skittle Turkey’s ambitions of becoming one of the world’s top 10 economies. Higher interest rates, Erdoğan claimed, were inflationary and were being used by foreign financiers and their local allies to control his government and the wealth of his people.

Through his depiction of a looming foreign threat to Turkey, Erdoğan sought to exploit the vulnerabilities of Turkey’s less educated and poorer conservative classes and rally them with the promise of impending victory against these so-called shadowy plotters.  

In July last year, Erdoğan sacked the governor of the central bank for failing to lower interest rates. Following classical central bank procedure, former Governor Murat Çetinkaya had hiked borrowing costs substantially and kept them elevated to reverse sharp losses for the lira and ensure the 2018 currency crisis was not repeated. But he paid for those efforts with his job.

In late 2018, Erdoğan appointed himself chairman of the country’s sovereign wealth fund, which was established two years earlier, and made Albayrak his deputy chairman. The fund, made up of Turkey’s largest public industrial enterprises, had also assumed control of Turkey’s state-run banks. Erdoğan set about using the banks’ funds to help prop up companies closest to his party and to engineer a borrowing boom by businesses and consumers.

The lending splurge by Ziraat Bank and Halkbank was underpinned by the policies of Erdoğan’s new hand-picked central bank governor Murat Uysal, who slashed interest rates by almost two-thirds to 8.25 percent within 10 months of his arrival.

But the boom in borrowing led to a surge in demand for imports just as the outbreak of COVID-19 began to hit Turkey’s export sales. The country’s current account deficit widened markedly and the lira started to spiral downward once more.

The central bank had begun spending billions of dollars of its foreign currency reserves to defend the lira as ordinary Turks switched their savings into dollars, euros and gold. It was also engaging in cross-currency swaps with the state-run banks to the extent that its foreign exchange reserves, net of liabilities, started to turn negative.

In September, Uysal was forced to increase the benchmark interest rate to 10.25 percent to support the lira, but then kept it unchanged at a meeting the following month, confounding economists’ forecasts of a substantial hike. Most analysts put the decision down to Erdoğan and his opposition to higher borrowing costs.

As of last Friday, the lira’s losses against the dollar since the start of the year had ballooned to more than 30 percent. The currency had lost almost half of its value since Erdoğan and Albayrak took up the reins of the economy in July 2018.

Albayrak’s…