Türkiye’s ruling party, the Justice and Development Party (AK Party), has criticized the opposition bloc’s pledges to end or reverse the current government’s economic policies in case it wins the upcoming elections, saying its promises would backfire and just add a burden to the budget.
Set for May 14, the presidential and parliamentary vote will see President Recep Tayyip Erdoğan, also the head of the ruling party, face Kemal Kılıçdaroğlu, the leader of the Republican People's Party (CHP), who has been named by the disparate opposition parties as their joint candidate.
The six-party Nation Alliance – known as the “table of six” – has pledged to reverse many of Erdoğan’s signature policies. The bloc promises to return to parliamentary democracy, roll back the current government’s economic policies and introduce a major shift in foreign policy.
It has promised to end policies that interfere with a floating exchange regime, including a government scheme that protects Turkish lira deposits against currency depreciation.
The bloc also looks to reverse the policies under the government’s economic program that prioritize low-interest rates to boost exports, production and investment and create new jobs. The program aims to lower inflation by flipping the country’s chronic current account deficit to a surplus.
Halting the state-backed scheme, known by its acronym KKM and aimed at curbing lira depreciation, would encourage a shift to foreign currency and eventually cause the price of the U.S. dollar to “blow,” said Nurettin Canikli, a deputy head of the AK Party.
“In such a case, the table of six has no choice but to increase interest rates so that the price of the dollar does not get out of control,” Cankli wrote on Twitter on Monday.
Unveiled in late 2021, the scheme sought to keep dollarization at bay by encouraging people to keep their savings in lira through guarantees to compensate for losses from the decline of the Turkish currency. The lira depreciated 30% against the U.S. dollar last year and 44% in 2021.
Besides Kılıçdaroğlu’s CHP, the opposition alliance is made of Meral Akşener’s nationalist Good Party (IP), Temel Karamollaoğlu’s conservative Felicity Party (SP), Gültekin Uysal’s Democrat Party (DP), the Democracy and Progress Party (DEVA) led by Ali Babacan and the Future Party chaired by Ahmet Davutoğlu.
Canikli maintained that the KKM, to a large extent, managed to curb people’s demand for foreign currency, eventually helping to lower the pressure and volatility in the exchange rate.
“In fact, it has significantly relieved the pressure on foreign exchange by converting some of the foreign currency deposit accounts to lira. So far, it has made an important contribution that should be taken into account in the transition to reverse currency substitution (reverse dollarization),” he noted.
Canikli further suggested that the end of the scheme would see all the money that has been accumulated being directed to foreign exchange.
“The table of six would raise the interest rate to a rate that will prevent households from turning to foreign currency, at least above the inflation rate,” he noted.
Canikli said the coalition’s post-election program signals that the opposition would pursue a positive real interest rate policy, which means the bloc would favor an increase in borrowing costs to the level above inflation.
In contrast, Erdoğan has called for lower borrowing costs in a bid to boost economic growth, investment and exports, insisting that interest rate hikes cause inflation.
Türkiye now has a real interest rate of negative 46.68% when adjusted for inflation, which fell to 55.18% in February, marking a notable regress from the peak of 85.5% – a 24-year high – registered last October.
The Nation Alliance has promised to lower inflation to single digits within two years and restore the stability of the lira.
It also pledged to ensure the independence of the central bank and roll back measures such as allowing the Cabinet to select the governor.
Last month, the central bank lowered its policy rate by 50 basis points to 8.5% to support growth after the last month’s devastating earthquakes, saying the cheaper borrowing cost would bolster recovery efforts. That brought the overall easing trend to 550 basis points since August last year.
Canikli insisted that the negative real interest rate enables borrowing at much lower costs and eases the pressure on the budget.
He said the Treasury was currently borrowing at an extremely low interest rate of 10%-11%. “Considering that the inflation rate is at 55%, it can be seen that the Treasury borrows with a large advantage of negative real interest.”
Had the Treasury sought to borrow with a positive real interest rate, the cost would be at least 56%, Canikli suggested.
“That is, the interest rate would have been increased to at least 1 percentage point above the inflation rate. An increase in the interest rate would most negatively affect the Treasury, that is, the budget, and the Treasury's interest burden would increase,” he stressed.
“The Treasury would be faced with a huge amount of additional interest burden.”
Canikli pointed out that the gap between the interest costs of borrowing and the interest rate policy with the opposition’s potential actions would be about TL 284 billion ($14.97 billion).
“The 2023 budget does not have any funds set aside for extra interest payments of TL 284 billion. The question that should be asked here is: How will the table of six get this money?” Cankli said, citing what he said were two possibilities.
First, he said, the central bank could directly or indirectly fund the extra interest payment, yet he suggested the bloc cannot use this option.
“(Because), according to the pledge under the monetary policy heading in their agreement, they have committed themselves to not doing anything that would cause monetary expansion,” Canikli stressed.
Also, Canikli considers the bloc would look to agree to a standby deal with the IMF, which, he said, would not allow any measure that would cause the money supply to increase because monetary tightening is a key part of the 190-country lending organization’s programs.
The other option, according to Canikli, would be for the Treasury to opt for loans for the extra interest payment.
“The table of six doesn’t have the chance to use this option either,” he said. “At a time when a monetary policy that emphasizes monetary tightening is in place if the Treasury comes into the money market as a buyer of TL 284 billion, interest rates will go through the roof,” he explained.
Considering that the opposition would follow an IMF program, Canikli said this would only mean a reduction in spending on investments, social programs and social security.
“Social programs are the resources that go to those in need. Social security spending is the resources that go to the SGK (Social Security Institution) for pension payments,” he said.
Canikli suggested that higher costs that would come with the high-interest rate policy that the bloc vows to implement would end up in a reduction in social spending.
“That means the table of six won’t be able to afford the pension payments of the EYT citizens,” he said, referring to an acronym of an arrangement put forward by the AK Party that eliminates an age requirement and offers early retirement to millions of citizens.
Approved by Parliament earlier this month, the measure that will allow over 2 million workers to retire in the first stage has been one of the key election pledges of the ruling party.
“The risk of not being able to afford pension payments and even public servant salaries is something that also came to the agenda in the past,” Canikli said.
“When a significant part of the budget appropriations (as high as 43%) was transferred for interest expenditures in periods when the share of interest payments in the budget was high, the state had difficulty finding resources for investment, social areas and social security,” he explained.
