Turkish right-wing, allied with Mafia, holds back economic reform

President Recep Tayyip Erdogan has committed the Turkish government to economic reform, but his alliance with the right-wing nationalist MHP party — which is closely allied with the Turkish Mafia —  appears to be holding much-needed changes back.

Erdogan was supposed to announce major economic reforms at the end of January, but this effort appears to have stalled. Devlet Bahçeli, the leader of the MHP, has announced opposition to such reforms, calling for a  “new and just” monetary policy.

“Bahceli is close to Turkish Mafia boss Alattin Çakıcı,” explains Dr. Yektan Türkyılmaz, a research fellow at the Forum for Transregional Studies in Berlin. “The Mafia in Turkey, which strongly opposes changes in economic and monetary policy, is experiencing a growth in stature, and has become an important influence in politics due to the weakening of the state by the current government. The Mafia has started presenting itself as a political power.”

As a result, analysts raise serious questions about whether much-needed economic change will go forward in Turkey.

“The opportunity for the much-hyped economic reset is limited,” writes analyst Baris Soudan. “Assuming that Erdoğan is sincere when he signals reforms, he still remains constrained by his alliance with, and reliance on, the far-right Nationalist Movement Party (MHP) that fiercely opposes political liberalisation.”

The Turkish lira has held steady close to 8.80 to the euro since the central bank raised the key interest rates to 17 per cent on December 24. But the next monetary policy announcement by the central bank will be critical to maintaining the lira below 10 to the euro.

At the last policy announcement, a further badly-needed increase in interest rates to control Turkey’s 14.6 per cent inflation and spiralling food prices was not forthcoming at the last policy announcement of the central bank on January 21.  Turkey’s central bank Governor Naci Agbal tried instead to talk up the lira, promising to control inflation with rate hikes promised in the future, although he admitted growth is slowing.

“A mistake in my mind by Agbal,” complained  BlueBay Asset Management economist Timothy Ash said. “This was an opportunity to get ahead of the curve and remember inflation increased in December and is expected to increase in the first quarter.”

The International Monetery Fund has said that “any premature easing of interest rates should be avoided … to better anchor inflation expectations, sustain capital inflows and address dollarization,” in which Turks have bought record amounts of hard currencies.

In 2020, Turkish residents’ foreign-exchange deposits rose by about 22 per cent to $235.7 billion, following a 20 per cent increase the previous year, the IMF noted. Strong demand for dollars weakens the lira, creating additional rounds of inflationary pressures.

Agbal announced that he forecasts inflation at 9.4 per cent for this year, although most economists see it dropping to about 11 per cent in a best-case scenario. For now, the interest-rate increases have not had any significant effect on inflation.

But further rate increases will face government opposition.

The move follows statements by Erdogan that he would “fight against high interest rates to the end.” Erdoğan’s economic advisors Yiğit Bulut and Cemil Ertem have harshly criticised Ağbal’s management.

“The biggest question still though is whether Erdogan will stick with Agbal or look to appoint someone who is willing to deliver short term growth – at the expense of inflation,” said Tim Ash of BlueBay Asset Management.

According to a recent survey conducted by Istanbul’s Kadir Has University, the cost of living is by far the most prominent concern of Turks as 51 per cent of the respondents say that they cannot make ends meet.

Food prices climbed by 20.6 per cent over the past year, according to the Turkish Statistical Institute, but analysts say that is a low estimation. The government has fined some food distributors and called for reductions, but the overall picture has not changed.

Eray Yucel, an economics department faculty member at Ankara’s Bilkent University, said many challenges lay ahead for Turkey’s economic recovery plans.

“A glance at international investment positions for Turkey reveals an increase in net liabilities … so this means the fragility of the Turkish economy against the global economy is still there,” Yucel told Al-Monitor.

Turkey will have to take measures to manage its public finances, as the country’s Turkey’s gross external debt stock was at $435.1 billion at the end of September. That figure is 59.1 per cent of the country’s gross domestic product.

“The outlook for Turkey depends on Erdogan’s tolerance for high rates and slow growth, given the economy has  underperformed in recent years, chipping away at public support for his ruling political alliance,” commented analyst Berna Bayazitoglu of Credit Suisse.

Such tolerance, however, cannot be expected while Erdogan’s AKP party is allied to the MHP.