Debate, but no turning back for the team driving Turkey’s economy

• Two years of Şimşek reforms
• Criticism from within ruling party
• Outlook clouded by İmamoğlu arrest

Two years after reversing a policy of fiscal unorthodoxy, Turkey’s economy and its finance minister are at a crossroads. 

Criticism has mounted that the reforms put in place by Mehmet Şimşek since mid-2023 have either not gone far enough to restore stability or gone too far in clamping down on inflation, causing a slowdown in growth and investment.

Şimşek, a respected investment banker, had held the posts of finance minister and deputy prime minister for economic and financial affairs in the 2010s.

His return to the government in June 2023 marked an end to policies based on President Recep Tayyip Erdoğan’s belief that “interest rates are the mother of all evils” and – contrary to economic orthodoxy – that high interest rates are the primary cause of inflation.

When Şimşek took up the reins, the central bank’s policy interest rate was 8.5 percent, GDP growth was 4.5 percent and inflation had climbed to 38 percent. 

Seeing little in the way of returns, international investors had left the market and consumer borrowing added to debt levels. 

Two years on, the reserve bank’s key rate is 46 percent. Growth eased to 2 percent in the first quarter and inflation for May edged down to 35.4 percent, according to data released this week.

After the inflation figures were announced, Şimşek said the fall in the consumer price index showed the Turkish economy was on track for a rebound.

Government policies meant “predictability, financing opportunities and the investment environment will improve along with the ongoing disinflation, productivity will increase, and welfare will increase with sustainable high growth,” he posted on social media. 

Not everyone agreed. Even some pro-government media outlets called for a return to the policy of low interest rates and higher growth launched by Şimşek’s predecessor, Berat Albayrak, who is the president’s son-in-law.

The outlook for the Turkish economy has also been clouded by political events. In March the mayor of Istanbul, Ekram İmamoğlu – the opposition’s preferred candidate for the 2028 presidential election – was arrested on allegations of corruption. 

İmamoğlu’s arrest prompted a sharp fall on the stock market and for the Turkish lira. It also weakened investor sentiment, prompting the central bank to reverse recent interest rate cuts and raise its policy rate. 

Analyst Timothy Ash has a more positive take on the performance of Turkey’s economic managers over the past two years, crediting them with rebuilding FX reserves, pushing up interest rates and avoiding a systematic crisis.

“Şimşek and his team at the central bank have done a much better job than anyone expected,” he told AGBI.

“Şimşek rebuilt investor confidence but that evaporated again with the İmamoğlu situation – foreigners left. But given the central bank hike and now the hawkish, ‘higher for longer’ messaging, I think we are seeing foreign inflows returning and reserve accumulation again.”

The biggest challenge for Şimşek and his team does not come from the opposition but from within the ruling party itself, according to Burak Arzova, an economist at Marmara University in Istanbul. 

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“The job to establish financial stability and lower inflation is the duty of the government, but two years on it is hard to see the full backing of the government for the programme,” Arzova said. 

“Trying to fight inflation by monetary measures alone has fallen short and with the March 19 incident [İmamoğlu’s arrest] a threat to financial stability was created as well.”

Despite the pushback, Şimşek’s position is not at risk, according to Ash.

“The reality for Erdoğan is there is no choice but to back Şimşek and his team, especially given the difficult political backdrop,” he said.

“If he tried to sack Şimşek and go back to unorthodoxy I think we would see a systemic crisis happen quite quickly.”