Turkey's governing AKP scrambles to revive collapsing economy

Turkey's economic outlook is getting gloomier as the ruling Justice and Development Party (AKP) adopts 'sand in the wheels' policies spread doubt among consumers and companies across Turkey's economy, adding to a picture of pessimism in the country.

Turkey posted a record budget deficit in March and the second-highest deficit on record in April. The combined gap in the budget for those two months of 86.9 billion liras was equal to more than two-thirds of the total deficit for 2019 of 123.7 billion liras.

Meanwhile, the Turkish central bank has transferred billions of liras to the Treasury from its contingency reserves to help fund budget spending at a time when it is spending tens of billions of dollars of its foreign exchange reserves defending the lira.

The government is trying to "save the day" through making use of the central bank’s cash reserves to bolster the budget, economist Güldem Atabay told Ahval. This process did not start with the coronavirus pandemic, which erupted in March, she said.

"We have been doing this for the last two elections. Especially after the currency crisis of 2018, it was done to boost economic growth, to reduce unemployment and to prevent the government from losing electoral support," said Atabay, a former economist for UniCredit and Raymond James Securities.

During the first years of AKP rule, which began in 2002, the party focused on Turkey's democratic reformation and enhanced its economic relations with the West. Stellar economic expansion, lasting almost a decade, was the catalyst for President Recep Tayyip Erdoğan's political success.

But that economic growth slowed this decade then reversed during the turmoil in Turkish financial markets in 2018. A stunning local election setback for Erdoğan followed last year, when he lost control of Turkey’s two biggest cities.

"I think the AKP is history. Fiscal discipline was the only thing left from the AKP's success, and that is over now. Erdoğan makes all the decisions alone - hands just go up and down automatically in parliament," economics professor Eser Karakaş told Ahval.

Both experts said that it was uncertain to what extent the measures Turkey has implemented to combat COVID-19, which have included restructuring the loans of Turkish corporates and delaying tax payments, will help the economy, but it was clear that the outbreak would continue to ravage economic growth - the country's key tourism and export industries have been hit particularly hard.

Erdoğan's hard-line foreign policies are also taking their toll on the economy, said Karakaş, who is an expert on EU relations, public spending, tax and privatisation. Turkey has been seeking to bolster its finances by securing currency swaps from Western central banks, but the initiative has so far proven unsuccessful.

Political tensions with Europe over Erdoğan’s expansionary policies in the eastern Mediterranean, which have added to already soured relations with the EU, are most likely behind Turkey's failure to secure swap deals with European countries, Karakaş said. Turkey has sparked consternation in the EU by exploring for natural gas off Cyprus and for signing a maritime deal with Libya that Greece says infringes on its sovereign rights.

In a sign that Erdoğan may now be seeking to reduce European anger over his regional policies, he removed Cihat Yaycı, the chief architect of the so-called "Blue Homeland" doctrine that claims an extensive maritime jurisdiction in the Aegean and Mediterranean seas, from his position as active duty rear admiral and naval chief of staff this week.

"I think the West is very uncomfortable with Blue Homeland. They said, 'We will not conduct currency swaps with you unless this issue is resolved.' A message may have been given on the matter by removing Yaycı," Karakaş said.