By THO Nonresident Fellow, Andrew Carpenter
The Turkish Finance Ministry made an about-face back to mainstream monetary policy after two years of using antiquated methods to stabilize the lira. Finance Minister Berat Albayrak who oversaw a series of rate cuts over the last two years, abruptly stepped down Nov 8. Son-in-law of and prospective next in line to President Erdoğan, Albayrak relied on unorthodox policies and measures to fight inflation. Allowing banks to provide credit at rates below inflation and disregarding the importance of interest rates plagued Albayrak’s tenure in government service.
When the Central Bank’s former governor Cetinkaya was fired in July of 2019 for resisting rate cuts, Albayrak was allowed to hand-pick his replacement. Essentially a move to double down on heretical monetary policy, this ended the remaining limited autonomy of the Central Bank from the Finance Ministry. Valuation of the lira continued to decline after this move.
Berat’s refusal to raise interest rates sank the lira’s value over 40% in the last two years. This past summer showed a final effort to relieve pressure off the Turkish currency by dumping over $100b in foreign currency reserves. These unorthodox policies proving ultimately unsuccessful, President Erdoğan pulled the plug. Once staunchly against high interest rates, Erdoğan now says Turkey must swallow “a bitter pill” with a bit of reform to more popular methods of controlling inflation. The Central Bank and Finance Ministry are now being led by officials who are showing signs of a return to traditional policies that should allow the lira to level off, the principal signal being a benchmark interest hike to 15%, up from 10.25%.
While an overhaul of Turkish finances was needed for years, there is undoubtedly more pressure on the government to act quickly ahead of President-elect Biden’s inauguration on Jan 20. While Washington and Ankara have had their fair share of disagreements in the past four years, such as engagement with Russia and strategy in Syria, President Erdoğan may have a rockier American relationship without President Trump in the White House. Biden’s rhetoric towards Turkey indicates a tougher approach and a harder line on Turkey’s role in the Nagorno-Karabakh conflict and rejecting Trump’s laissez-faire stance on the conflict. Along with heightened aggression towards Greece in the Eastern Mediterranean, Turkey’s recent military activity has been cause for growing concern among NATO allies.
The incoming Biden administration is sending signals for plans to act coercively to change Turkey’s behavior, particularly in regard to the Turkish military’s purchase and use of the Russian-made S-400 missile system. Under the 2017 Countering America’s Adversaries Through Sanctions Act (CAATSA), the White House is required to impose sanctions on countries that buy defense equipment from Russia. Sanctions in Aug 2018 that placed a 50% tariff on Turkish aluminum and steel proved effective by devaluing the lira and changing Turkey’s behavior to meet U.S. interests. While not an ideal way to resolve these policy disagreements, imposing sanctions may end up leading to a better relationship if both countries can come to a consensus on how to cooperate. Such a strategy would likely find bipartisan support in the U.S. in 2021 but will undoubtedly be seen as awkward infighting between NATO allies.
Despite disagreements over Turkey’s military behavior, there is still a great deal of room for more cooperative relations, both bilaterally with the U.S., and institutionally with the whole of NATO. Turkey’s use of the Russian missile system is not a signal of realignment with Russia. In fact, Turkey has since found itself in opposition to Russia with proxy conflicts in both Libya, Syria, and Nagorno-Karabakh. Erdoğan has been deeply invested in his personal relationship with President Trump. It’s time for the Turkish government to reinvest in the institutions that have backed Turkey for decades, such as NATO and the U.S. Congress. A more cooperative approach to the American relationship would yield more stability in Turkish foreign policy, and perhaps a much needed boon to the economy.