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The head of the European Bank for Reconstruction and Development has reportedly raised concerns with Turkish authorities over Ankara’s “aberrant” policy of trying to boost economic growth with low interest rates.
Odile Renaud-Basso, President of the EBRD, spoke to Reuters on October 7 in Istanbul after talks she described as “frank and transparent” with Turkish Finance Minister Nureddin Nebati and Sahap Kavcioglu, Governor of the country’s central bank.
“I expressed some question marks about the fact that he [the policy] creates inflation, with a high level, and it is not necessarily the best environment for long-term investments,” she said in an interview at EBRD headquarters in Turkey, the largest market. from the development bank.
The next day, however, at a rally, Turkish President Recep Tayyip Erdogan, at the start of a re-election campaign, showed no sign of rethinking his unorthodox “erdoganomic” policy of providing more and more monetary stimulus despite official inflation at 83% and the collapse of the Turkish lira, which lost 44% against the dollar last year before losing another 28% this year so far – in fact Erdogan, s addressing a crowd in the western province of Balikesir, appeared to be doubling down on politics by saying, “As long as your brother is in this position [as Turkey’s leader]the interest will continue to decline with each passing day, each passing week, each month.”
With Turkey’s benchmark rate reduced to 12% in September from 19% a year ago, Turkey underscored its reputation for having the highest negative real interest rates in the world. The pound has continued to slide amid no signs that monetary policy is having a significant impact on the country’s chronic current account deficit, especially given the energy crisis which has driven up oil import bills and gas from Turkey.
Since 2009, the EBRD has invested 16.9 billion euros ($16.5 billion) in hospitals, roads, green projects and other efforts in Turkey.
“It’s a rather absurd strategy,” added Renaud-Basso in his interview with Reuters, referring to Turkey’s monetary approach. “I don’t know if it can work or not. But it creates challenges in anchoring inflation expectations and creating a safe and stable environment.”
The latest economic program of the Erdogan administration, adopted in September last year, posed risks of further depreciation of the lira and depletion of foreign exchange reserves, leaving the country in need of a way to finance its current account, she also reportedly noted, saying, “It can create a high level of uncertainty,” she added. But, said Renaud-Basso, the authorities “are convinced that their policy is the right one”.
The EBRD chief also reportedly observed that Turkey’s private sector and its export capacity were “very resilient”, as the country gained ground as supply chains shifted back to China. But the future situation will depend on cooling demand in Europe, Turkey’s biggest export market, she said.
