President of Turkey bets strong economic recovery after pandemic will remain on track despite soaring inflation that has reached living standards and triggered protests in major cities.
The $ 750 billion economy is set to grow 9% this year following the return of tourism andan increase in demand for exports which pushed industrial production to pre-pandemic levels.
However, declaration of a "war of economic independence has pitted him against many members of his own party and the technocrats in the country who fear a rate of 20% inflation does not create further social unrest.
"Some people who wanted to convey the opinion to the president that a different policy should to be followed did not succeed, "a senior official of the ruling AK party told Reuters, on condition of anonymity.
Three governors of central bank that opposed Erdoğan's demand to lower interest rates have been sacked since mid-2019, leaving the way openre the governor since March, Şahap Kavcıoğlu, to lower the base rate in three separate cuts from 19% to 15%.
Rather than revive the foreign investment, falling interest rates confirmed to investors the government's lack of determination to tackle inflation, causing the currency to fall again.
Small protests in Istanbul and the capital Ankara on Tuesday called for an end to policies that have led to an inflationary spiral and the pound this year to fall 40% to less than 8 cents US.
Police erected roadblocks i In parts of Istanbul, the commercial capital, as protesters expressed fury at the coalition government led by the 'AK, Bloomberg reported.
Erdoğan, however, remains defiant. On Wednesday he sought to distract from himselfs economic problems with the visit of the de facto leader of the United Arab Emirates, Crown Prince of Abu Dhabi Mohammed bin Zayed al Nahyan.
A series of deals between the two sides, including a $ 10 billion investment fund, pushed the pound up 6%, ending the longest losing streak in two decades.
Paul Jackson, global head of asset allocation research at Invesco, said any respite would likely be short-lived, with the currency falling further in the coming months.
"There are worrying signs of instability due to strong monetary growth, an inflation rate that has reached 20% and a growth in house prices which jumped to 35%.
"And even though the money supply has fallen lately, successive cuts in interest rates mean that the rate inflation will remain high.
"This means that what the president is doing is dangerous and damaging to the economy.
Erdoğan came to power as Prime Minister in 2003 and devised a change in the constitution which transferred most powers to the president in 2014. In the same year he was elected president and was re-elected in 2018.
In both roles, Erdoğan has always prioritized employment and growth. Fearing that the country's young population will be restless without a job, it has given huge tax breaks to international companies seeking to build manufacturing bases outside of Europe at high cost.
After the 2008 crash banking, he relied on figures such as Finance Minister Mehmet Şimşek, a former banker of UBS and Merrill Lynch, to rebuild the economy.
Galip Dalay, associate member of Chatham House inktank, said that the period when Erdoğan surrounded himself with experts to define economic policy is long gone.
"The whole economic team that he had assembled in 2011 has left. The most important qualification now is loyalty, "he said.
The president's version of economic independence is based on a theory that low interest rates will stimulate investment to boost jobs and growth.
Jason Tuvey, a Turkish expert from the consultancy firm Capital Economics, said that as the 2018 election campaign approached, interest rates fell and the economy exploded. , yet the pound fell, bringing in high inflation.
After the economy was allowed to overheat, there was a return to more policies. orthodox bank centrale. But the president's erratic policies discouraged foreign investment, and the pound continued to decline, paving the way for further surges in inflation due to high import costs.
Tuvey said:" Turkish banks are in better shape than in 2018, when a wave of foreign currency borrowing left them vulnerable to a lira meltdown. But if households lose confidence, there could still be a run on the banks.
Dalay said the president's situation was becoming precarious. Elections are scheduled for 2024, but could be brought forward if the economy appears to deteriorate further.
"What you are seeing now is not part of 'a great strategy, but a huge bet that could be unlocked, ”he said.