After several meetings, two individuals with starkly contrasting perspectives managed to reach a consensus. The tireless efforts of the Bayraktar family, coupled with a comprehensive presentation, played a significant role in facilitating this agreement. Mehmet Simsek met with Turkish President Recep Tayyip Erdogan he did not rely solely on words. During their two-and-a-half-hour meeting, the economist and former finance minister presented an extensive array of data on the Turkish economy.
Simsek navigated through various points, providing the president with a comprehensive overview of the nation’s current state. However, sources familiar with the meeting revealed to Middle East Eye that the presentation made Erdogan uncomfortable. They disclosed that the president maintained his position, insisting that Simsek’s words alone were sufficient.
Maintaining Low Interest Rates
As a seasoned member of previous AKP administrations, having served as deputy prime minister for economic and financial affairs from 2015 to 2018, he called for a comprehensive restructuring of the Turkish economic framework, one that directly challenged Erdogan’s core unorthodox monetary policies.
Erdogan’s unwavering focus on maintaining low interest rates and an economic approach reliant on credit expansion, wage hikes, tax forgiveness, and subsidized energy played a significant role in securing him another term during the recent elections, despite rampant inflation. Nonetheless, this approach poses ongoing challenges. To stabilize the lira prior to the polls, the government resorted to covert measures and depleted the central bank’s reserves.
Since 2021, Erdogan has also relied on a series of currency swap or deposit agreements with neighboring countries such as Qatar, the UAE, Russia, and Azerbaijan to support his economic program. However, even with a recent $5 billion deposit from an undisclosed foreign entity, the central bank’s reserves, including domestic borrowing from local banks, have plummeted to a historic low of minus $5 billion as of 2 June. Experts express concerns over the potential for a balance of payments crisis if Ankara continues down the same path.
Standing Their Ground
Erdogan and his allies have staunchly defended their policy, asserting that it will foster economic growth, employment, and reduce the trade deficit. Proponents of the policy point out that unemployment decreased from 12 percent to 10 percent last year, and the country’s gross domestic product experienced 5 percent growth in 2022.
However, inflation remains high, standing near 40 percent as of May, and the trade deficit has surged to $57.8 billion in the first five months of 2023, representing a nearly 30 percent year-on-year increase. Turkish exporters have voiced concerns about losing their competitive advantage, prompting many to explore alternative production bases in countries like Egypt, where labor costs are significantly lower.
During their meeting last month, Simsek repeatedly stressed the unsustainability of Erdogan’s foreign-funded monetary policy. Using an idiom, Simsek emphasized that managing the economy solely with external assistance is not feasible. However, Erdogan remained steadfast in his stance against interest rates, viewing them as incompatible with Islamic principles, a position that contradicts the core message of the Quran. Simsek attempted to convince the president that acknowledging the realities of the world we live in was crucial.
Simsek’s spokesperson declined to provide any comments, while the Turkish presidency continues to adhere to its established policy of refraining from commenting on personal exchanges involving Erdogan.
According to a source familiar with Simsek’s negotiations, there was a deluge of phone calls from current and former ministers, Members of Parliament, and various individuals urging him to accept Erdogan’s offer and serve as the economy minister. Ultimately, the source revealed that Simsek had to acquiesce, as there are limits to how many times one can refuse Erdogan’s requests.
Simsek Was Not Alone
Nevertheless, Simsek was not the sole advocate in persuading Erdogan that his monetary policy would not produce the intended results. According to an additional source, Selcuk Bayraktar, Erdogan’s son-in-law, and his older brother Haluk, who together hold leadership positions in the esteemed drone manufacturing company Baykar, also made efforts to convince the president that his viewpoint on low interest rates was misguided. And that Simsek’s expertise was necessary. The source asserted that they succeeded in their endeavor.
In particular, Haluk Bayraktar took to Twitter following Simsek’s appointment, openly and enthusiastically congratulating him, along with expressing support for the new choice of central bank governor, Hafize Gaye Erkan.
Rival in the Team
Sources revealed to Middle East Eye recently that Simsek presented Erdogan with a proposal outlining an 18-month plan to gradually raise benchmark interest rates from 8.5 percent to potentially as high as 25 percent.
Another source, familiar with Erdogan’s discussions with Simsek, stated that the president agreed to provide whatever resources were necessary to rectify the economy, indicating a willingness to accommodate Simsek’s demands.
There are growing concerns among international investors and local economists that Erdogan may dismiss Simsek in the near future if an aggressive interest rate hike negatively impacts economic growth and job creation. Erdogan is determined to regain control of key cities such as Istanbul, Ankara, and Antalya from the opposition.
The decision to transfer the controversial central bank governor, Sahap Kavcioglu, to the Banking Regulation and Supervision Agency (BRSA), which plays a crucial role in managing credit flow, heightened worries among many. However, the source mentioned that Simsek presented Erdogan with three recommendations for the BRSA position, ultimately leading to the selection of Kavcioglu. Nevertheless, Erdogan affirmed his commitment to complying with Simsek’s requirements.
Erdogan has a reputation for appointing rivals to key positions as a means of establishing checks and balances. Those close to Simsek also disclosed to Middle East Eye that shortly after assuming office, the new finance minister conveyed to his inner circle that the economic situation was even more challenging than he had anticipated.
Another individual close to Simsek stressed the importance of not fixating on minor details when the finance minister has made significant strides in convincing Erdogan to follow his lead on interest rates and the choice of a new central bank governor, likening it to crossing an ocean in terms of achievement.