Turkey’s new finance chief faces uphill task to turn economy round
Turkish president Recep Tayyip Erdogan’s new economy chief has a daunting in-tray.
Lutfi Elvan, who was appointed Turkey’s treasury and finance minister on Tuesday to replace the president’s powerful son-in-law Berat Albayrak, inherits a currency in crisis and an economy badly in need of reform at a time when the world is reeling from Covid-19.
But in Turkish corporate circles, even as many acknowledged the challenges ahead, there was relief to see the back of Mr Albayrak.
“Everyone is very happy,” said one influential business figure. “Because now we can talk to, and meet with, the minister of finance.”
During his two years at the helm of Turkey’s $740bn economy, Mr Albayrak — who abruptly announced his resignation on Sunday after an apparent falling-out with his father-in-law — gained a reputation for haughtiness, refusing to meet even with senior executives used to having easy access to holders of his office.
He also spearheaded a succession of highly contentious policies, curbing foreign investors’ ability to trade the lira and encouraging the central bank to burn through an estimated $140bn in a failed currency intervention over the past two years.
“We are left with a central bank whose credibility is significantly weakened, double-digit inflation, few foreign exchange reserves, and the threat of a second wave of the pandemic,” said Selva Demiralp, director of the Koc University-Tusiad Economic Research Forum. “This is a rather challenging starting point for the new minister.”
Mr Elvan, 58, is a former bureaucrat with degrees in mining engineering from Istanbul Technical University and Leeds University, and a masters in economics at the University of Delaware.
He joined the ruling Justice and Development (AK) party and entered parliament in 2007, before serving as transport minister, deputy prime minister and development minister. Most recently, he was head of parliament’s budget and planning commission.
“He’s a decent choice: hard working, market friendly,” said a former cabinet colleague. “He speaks up and backs what’s sound and rational.”
“He’s a serious person,” added a senior Turkish business executive. “Confidence will improve.”
In his first public statement, Mr Elvan said on Tuesday that he would pursue a market-friendly approach “based on international norms, transparency, predictability and accountability.”
Yet he is likely to encounter the same challenges that previous market-friendly ministers faced before him. “Much depends on whether he is allowed to design and implement sound policies, put together a decent team [and] push a few structural reforms through,” the former colleague added.
Mr Erdogan is notorious for his unconventional views on economics, especially the belief that high interest rates are a cause of inflation rather than a brake on it.
Over the past decade he has persistently prioritised cheap borrowing and fast growth over structural reforms that would tackle Turkey’s over-reliance on foreign financing, its trade deficit, low savings rate and chronically high inflation.
He has meddled in the workings of the central bank, pressuring governors to keep interest rates low and threatening to fire those who refuse to do so.
That approach has plunged the Turkish lira into fresh turmoil in recent months. The currency is down almost 30 per cent against the dollar since the start of the year. Prior to this weekend’s shake-up in the country’s economic management, it hit a succession of record lows.
Mr Erdogan’s decision to appoint a new central bank governor, which triggered his son-in-law’s angry departure, was interpreted by the financial markets as an indication that the president had finally grasped the scale of the country’s problems — and the possible ramifications for his own political future.
The lira enjoyed its strongest rally in two years on Monday as investors bet that Mr Erdogan would allow a more mainstream approach to economic management.
The ratings agency Fitch said that change at the top of the central bank “brings the possibility of an improvement in monetary policy credibility”.
Pessimists warn that Mr Erdogan, who has accrued unprecedented power over Turkish institutions in recent years and demands loyalty and subservience from his ministers, is unlikely to have changed his methods.
Those who know Mr Elvan said that, while the new minister would speak openly with Mr Erdogan, he would ultimately defer to his wishes. “He will tell the truth to the president. But he will not say no,” said the influential business figure. “Whatever the president says, that’ll be the final decision.”
He also inherits a ministry and a set of related institutions that have been packed with figures appointed by Mr Albayrak. Naci Agbal, the new central bank governor, faces the same scenario.
Bahadır Kaleagasi, a former general secretary of the Tusiad business association, described Mr Elvan as “credible and respected” but said the country’s problems ran much deeper than the question of who occupied any given ministry at a time.
“Even if you had an algorithm which put the 20 best economists in the world in charge of Turkey, it would not work,” he said.
“It’s not about temporary macroeconomic policy. It’s about the system itself.”