Both Lutfi Elvan and Naci Agbal are experienced hands who understand the lira’s vulnerability and other challenges confronting the economy.
Turkey has brought in a new team of finance managers as its economy reels under the impact of the Covid-19 pandemic, which has scared off tourists, and hurt exports of goods such as automobile parts.
President Recep Tayyip Erdogan has appointed Lutfi Elvan, a former transport minister, to head the ministry of treasury and finance. The change comes after Berat Albayrak, who headed the finance ministry for two years, resigned over the weekend citing health reasons.
Naci Agbal, a former finance minister, has stepped in as the new central bank governor, at a time when the Turkish currency, the lira, has lost almost 30 percent of its value against the US dollar this year.
The lira is among several emerging market currencies such as the Brazilian Real that have been hit hard as the novel coronavirus has battered businesses and left millions of people jobless around the globe.
In his first post-appointment remarks, Elvan said he’ll pursue “market-friendly” policies that encourage domestic and foreign entrepreneurs to invest while also keeping an eye on the double-digit inflation.
Erdogan puts full weight behind the central bank
If there was any doubt about how much freedom the new team would have, Erdogan put it to rest on Wednesday saying he completely supports Elvan and Agbal.
In a speech in Ankara, he spoke about introducing policies that create a “favourable environment for long-term savings and investments.”
In what indicates a shift in his outlook on economic matters, he said the government wanted to increase return for investors and that the central bank will have complete freedom in determining the future course of action.
“Turkey will implement bitter pill policies if needed,” Erdogan said. “It is the central bank’s job to determine policies that will achieve price stability. I will support every step that they take.”
Elvan faces multiple challenges on domestic and international economic fronts.
Turkey’s current account, basically the difference between the amount of money that comes in and goes out of a country, is running at a $27 billion deficit.
The government has seen an increase in its budget deficit after being forced to keep the economy’s wheels turning. Governments around the world have allocated $10 trillion in stimulus spending to support people who have lost jobs and businesses unable to pay their debts.
A particular challenge facing Elvan and Agbal is the gradual depreciation of the lira - something that often has a knock-on effect on prices in other parts of the economy such as rental payments.
Foreign investment fund managers and analysts have long called for the increase of the interest rate, which right now is fixed at 10.25 percent.
Turkey is among the few places where investors sitting on piles of unspent cash can earn a good return. In developed economies, such as Germany and the US, interest rates are in the negative or near zero.
At the same time, President Erdogan has up until now argued against high interest rates, which increase the cost of borrowing for businesses, hamper domestic production and consequently leave the country more reliant on expensive imports.
Some of Turkey’s economic woes can be traced back to the cheap liquidity that was available with international banks in the years after the 2008 global recession.
For years, Turkey’s private sector loaded up debt denominated in foreign currency because it was cheap. Now they need more US dollars to repay those loans, adding to the pressure on the lira.
The new team, especially Agbal, might not favour a growth model fuelled by short-term foreign investment.
“Consumption-based growth is not sustainable, it is not healthy. We have to increase private sector investment and our exports. Therefore we have to change our industrial structure and create new value-added sectors and products, otherwise [such growth] is not sustainable,” Agbal told the Financial Times in a 2016 interview when he was the finance minister.
In recent months, Turkey’s foreign currency reserves have depleted as the central bank tried to prop up the value of the lira. Finding a way to inject more US dollars in the economy must be a pressing concern for the new minister and central bank governor.
Tourism revenue, an important source of foreign exchange earnings, is expected to drop to $15 billion this year from the $34.5 billion earned in 2019.
But Elvan and Agbal have also taken up the economic reins at a time when Turkey has discovered huge gas reserves in the Black Sea - something that will help reduce its import bill in years to come.